Regarding Bitcoin.pdf - AJC

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Hello friend or family member. I’m sending these analyses and information to you so that you might be more informed on this particular topic. This should not be construed as financial advice, but rather as merely a presentation of information that I have collected. References to sources are included. I am not omniscient, and I cannot predict future events over which I have no control. Bitcoin's expected appreciation--technical and fundamental analysis 1. Bitcoin as a commodity-property with an associated cost-of-production—The chart below shows the price of Bitcoin alongside its cost of production and a similar metric called Bitcoin's "Energy Value," both of which were calculated and developed by quantitative analyst, Charles Edwards of Capriole Investments [1] [2]. The oscillating indicator at the bottom portion of the chart shows the price as a multiple of the Energy-Value metric. Arrows indicate the expected range of the oscillator based on historical precedent as well as the corresponding expected price range. A dashed line extrapolates the Energy-Value metric based on projections by experts within the mining community who predict that the total hash-rate of the Bitcoin network is likely to double by the end of this year [3]. Based on the extrapolated Energy-Value and the historical limits of the Energy-Value oscillator, the expected end-of-year BTCUSD exchange rate is $32,000 to $400,000. At its current price of ~$41,000, that's an expected appreciation of -22% to 975% by the end of 2022. 2. Bitcoin as an intangible, scarce money that is "backed" merely by the confidence of its users—The chart below shows the price levels corresponding with an indicator known as Bitcoin's "Reserve Risk," developed by a quantitative analyst, Hans Hauge of Ikigai Asset Management [4]. The Reserve Risk is a metric which measures the attractiveness of the price of Bitcoin relative to the sum total of the confidence accumulated by the network over time [5]. After extrapolating using historical precedent, the expected year-end BTCUSD exchange rate using this metric is between $26,000 and $418,000, which corresponds to an expected appreciation of -37% to 1020% from it’s current value of ~$41,000. 3. Bitcoin as a medium-of-exchange technology—The chart below shows the BTCUSD exchange rate along with its calculated fair value as determined through the use of the Equation of Exchange [6] by consulting firm, SwissRex AG [7] [8]. The end-of-year fair value of the BTCUSD exchange rate as calculated by this firm is $83,000. Note that this model is sensitive to real interest rates, and the expected fair value of $83,000 is based on current real interest rates of approx. -3%. 4. Bitcoin as a globally accessible, open, permissionless store of value for individuals, corporations, institutions, nation-states, as well as an emerging market currency, settlement network, and remittance network—Cathie Wood's firm, Ark Invest, with $50 billion AUM, is one such firm that has explicitly described most of the potential use-cases for Bitcoin and has provided conservative estimates for Bitcoin's potential share of each addressable market [9]. Her firm's research shows the USDBTC exchange rate could exceed $1 million by 2030. An exponential interpolation between the current price and a price of $1 million on January 1st, 2030 implies a fair value price of $60,000 by the end of 2022. Additionally, a certain Canadian fixed-income trader and asset manager, Greg Foss, is well-known within the Bitcoin Twitter community for his simple evaluation of Bitcoin's current market price based on a Bayesian-probability assessment. His simple reasoning is that Bitcoin could, potentially, capture a mere 5% of total global assets. Given a 10% probability that it does so, and a 90% probability that it does not and instead declines to a value of $0, the current fair-value price of Bitcoin is $210,000 per BTC as shown in the diagrammatic image below. Mr. Foss doesn’t provide any explanation for why he suggests these probabilities to derive a fair value for the BTCUSD exchange rate; I believe his assessment is just an example of how one can reasonably evaluate the current price. For instance, using this Bayesian probability evaluation, the market could be described as one that values Bitcoin based on a 2% probability that it will capture 5% of total global assets, and a 98% probability that it never will and instead will continue to decline in value until it is completely worthless, i.e. 2% × $2.1𝑀 = $41,000. Of course, one can calculate a completely different expected value of bitcoin based on one’s own expectations. I, for one, think a more reasonable evaluation is ($2.1𝑀 × 50%) + ($0 × 50%) = $1,050,000. In case you’re wondering how the producers (the miners) of the bitcoins themselves are managing their own corporate balance sheets, have a look at the recent accumulation by these public Bitcoin mining companies during the 2021 calendar year [10], 5. Bitcoin subject to the Quantity Theory of Money—And, finally, one young man’s suspicion is that hyperbitcoinization is inevitable due to the very simple fact that both Bitcoin and digital fiat currency, fundamentally, are approximately equally convenient to use (they’re both digital ledgers of account), but one is potentially infinite in quantity whereas the other is fixed in quantity and practically infinitely divisible. If one considers human economic activity as a natural process in which good money is hoarded, and bad money is quickly spent (Gresham’s Law), then a perfect money of a strictly finite supply would be maximally hoarded and therefore its price, denominated in a money whose supply is unbounded, is unbounded. Therefore, if human economic activity and decisions are primarily motivated by faith and logic (λόγος), rather than reflexive behavior or unintentional behavior (see “praxeology”), then it is most reasonable to believe that the BTCUSD exchange rate will continue to increase for as long as there is still fiat currency in which to price the bitcoins. This has been modeled as an inverse hyperbolic tangent function on the price-quantity axes, fitted to Bitcoin’s historical price data, and is shown below. Bitcoin gaining popularity as accepted money 1. Some data—One of the most popular and successful blockchain analytics firms, Glassnode, does forensic analysis of the raw blockchain data to do a gross identification of individual "entities" (users, individuals, etc.) that use Bitcoin. The chart below shows the 90-day moving average of the daily net growth of the count of these entities. Recently the data shows a net growth of about 14,000 entities per day. Notably, this is a very low, conservative estimate of the actual growth of Bitcoin users/investors because it only identifies entities that actually take personal custody of their bitcoins; it does not account for those entities that leave their bitcoins in the custody of a 3rd party service provider, e.g. Coinbase. This latter category of Bitcoin investors likely represents the bulk of the total number of users, which, if true, means the actual net growth is significantly greater than 14,000 per day. The following chart is from the same analytics firm, and it shows the total daily transfer volume that is transacted via Bitcoin. Currently there is about $6 billion of value that is being transferred every day via Bitcoin. Notably, this transfer volume has been growing rapidly during the past couple of years, and the troughs within this set of data have been increasing during the past year. This indicates a rapidly growing amount of utility being realized using Bitcoin as a medium of exchange, as explained in the firm's commentary in this YouTube video: https://youtu.be/Xd00nBoFZHM?t=1194 Additional data of total settlement volume indicates that Bitcoin settled more value in 2021 than the spending volume that occurred over the VISA network during the same time period And, Ark Invest was quick to note that the $13.1 trillion in transfer volume that occurred on Bitcoin was performed at a lower cost than the cost extracted by the VISA network: 2. Anecdotes—Here is some anecdotal and survey evidence of Bitcoin’s growing popularity, not only as a speculative store-of-value, but also as a commercially accepted medium of exchange. For example, a restaurant chain, Everbowl, is moving to a Bitcoin Standard [11]. This does not only mean that they are accepting Bitcoin as payment for their food, it also means they've converted the fiat currency in their treasury into Bitcoin and will retain profits not needed for operational expenses in Bitcoin. They will also be offering the option of being paid in Bitcoin to their employees. A retailing corporation in Mexico, Elektra, with over 1,000 points of sale throughout Mexico and Latin America, announced in December that it will accept Bitcoin for payment in all of their retail stores [12]. Elektra's founder sat for a long interview about Bitcoin (in English), which you can watch here: https://youtu.be/CvnZvdgPdww?t=682. An article out of Hartford, Connecticut reports that an HSB survey indicates that 36% (+- 4.4%) of small- and mid-sized businesses in the United States accept cryptocurrency as payment [13], quote: “Zogby Analytics was commissioned by HSB to conduct a survey in October 2019 of 505 small to medium-sized businesses across the United States. Seventy-five percent of the sample had annual revenue under $5 million and less than 100 employees. The final sample contained 41 percent of the businesses with fewer than 25 employees. Based on a confidence level of 95 percent, the margin for error is plus or minus 4.4 percentage points.” Of course, you may already be aware that AMC theaters started accepting Bitcoin, and a few other cryptocurrencies, as payment for online purchases of movie tickets [14]. Then there's famous singer songwriter, Gene Simmons, who is selling his Las Vegas estate and is accepting cryptocurrency as payment for the estate [15], worth $13.5 million. His recent tweet (his tweet) indicates that he's been holding cryptocurrency for some time and doesn't intend to sell. Finally, a Cincinatti-based sports restaurant chain is accepting Bitcoin for their franchising fees [16]. Bitcoin driving innovation in the energy sector This is one of the most interesting aspects of Bitcoin that has just recently started to become a mainstream idea within the mining and energy industries. It turns out that Bitcoin mining operations can act as a balancing electrical load to a nation's energy grid. Due to the fact that Bitcoin mining equipment can be turned on and off quickly and easily, and also because Bitcoin mining is the most profitable use of energy, there is greater incentive for energy companies to expand their operations and provide more power to their community and to local Bitcoin miners. As a result, the frequency of blackouts can be greatly reduced, if not eliminated, by turning off the Bitcoin mining equipment during times of peak demand from the local community. Now, this is not just a theory that has been proposed, but it is now implemented in the state of Texas [17] [18]. In case you aren't aware of the size of these mining farms, here is a photo of one of the mining farms in Texas whose power was curtailed in order to prevent a blackout in Texas due to the recent winter storm: Nic Carter, a reputable personality in the cryptocurrency space and a self-reported Christian [19], wrote an article for CoinDesk about how Bitcoin mining is reshaping the energy sector [20] writing, “Recently, I was invited to give a talk at the Texas Blockchain Summit on the topic of the growth of bitcoin mining in Texas. Not knowing anything about bitcoin mining in Texas, I interrogated around two dozen mining entrepreneurs, wholesale energy traders, academics and energy experts. What I discovered would completely alter my views on bitcoin mining. Put shortly, bitcoin mining is converging with the energy sector with amazing rapidity, yielding an explosion of innovation that will both decarbonize bitcoin in the medium term, and will dramatically benefit increasingly renewable grids. What’s more, it appears that only bitcoin – rather than other industrial load sources – can actually achieve some of these goals. ... I now firmly believe that bitcoin mining is suitable for and beneficial to renewable energy, both on a first order and second order (indirect) basis. ... Bitcoin miners represent “interruptible load,” which means that they can deal with power outages without suffering adverse impacts to their business. Of course, they prefer to have power all of the time, but nothing catastrophic happens when they lose power, unlike other industrial consumers such as hospitals, high-end data centers, factories and smelters. This makes them perfect for so-called “demand response” programs, which refers to formal or informal agreements to curtail their demand when the grid is overtaxed and prices are high. This means that when energy is in short supply, bitcoin miners can turn themselves off and get power to the households that need it most.” The merging of Bitcoin mining with the energy sector has become such an important topic that it was recently featured in Project Finance NewsWire [21], a publication of Norton Rose Fulbright, the second largest law firm in the United States. "Cryptocurrency mining for power suppliers" was the first topic of their December 2021 issue. Another real-life example of Bitcoin reshaping the energy industry is the innovation that's being planned in Vancouver, Canada. In short, Bitcoin miners will act as "digital boilers" and will provide another source of heat for their entire city [22]. Bitcoin's resistance to government action 1. Fundamental incapability—Fundamentally, governments are incapable of preventing people from using and participating in the Bitcoin network. This is because Bitcoin is merely an informational protocol for reaching consensus on the ownership of the bitcoin units. The protocol is open-source, which means anybody and everybody is allowed to download the software and use it for free. From Wikipedia: “Open-source software (OSS) is computer software that is released under a license in which the copyright holder grants users the rights to use, study, change, and distribute the software and its source code to anyone and for any purpose. Open-source software may be developed in a collaborative public manner. Open-source software is a prominent example of open collaboration, meaning any capable user is able to participate online in development, making the number of possible contributors indefinite. The ability to examine the code facilitates public trust in the software.” Therefore, the source code to this software is no longer centralized; it’s distributed throughout the globe, which means eliminating this software is practically impossible. Some websites track the approximate locations of the computers that publicly run this software. The map shown below is from one such website. This map only shows the locations of those computers that run the software in a public and reachable manner—it doesn’t show those computers that run the software privately, and that number is likely several times larger than what’s shown here [23]. It’s evident, though, that the Bitcoin software is enabled by tens of thousands of computers distributed throughout the globe. Also, these computers are not special-purpose computers to run the Bitcoin software. Rather, they are very simple, low-cost, general-purpose computers that are owned and operated by individuals and corporations alike. An author for Forbes magazine reported in 2019 [24] [25] that, “…the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on cryptocurrency and blockchain technology regulation. During that hearing, Senate Banking Committee Chairman Mike Crapo (R-ID) shared his belief that the United States would not be able to succeed in banning Bitcoin. ‘If the United States were to decide — and I’m not saying that it should — if the United States were to decide we don’t want cryptocurrency to happen in the United States and tried to ban it, I’m pretty confident we couldn’t succeed in doing that because this is a global innovation,’ said Crapo. This statement came in the form of a question to Jeremy Allaire, who is the co-founder and CEO of global financial services company Circle. In his response, Allaire explained the new reality created by the creation of Bitcoin. ‘I think the challenge that we all face with this is some of these cryptocurrencies — they’re literally just a piece of open-source software,’ said Allaire. ‘There’s nothing else. It exists on the internet, it’s open-source software, anyone can implement it, it runs wherever the internet runs, and these have a monetary policy where these assets are algorithmically generated . . . That is a challenge that every government in the world now faces — that money, digital money, will move frictionlessly everywhere in the world at the speed of the internet.’ ” Likewise, the same author wrote about the legal difficulty that the United States government would face if they tried to ban Bitcoin, “Although there are indeed technical reasons that make it difficult to shut down Bitcoin, there are also legal constraints related to a potential bitcoin ban... While Barhydt indicated Bitcoin bans could potentially happen in places like China and India, he also noted that such a ban would not be possible in the United States due to court rulings that date back to the previous Crypto Wars back in the 90s. ‘It’s not possible,’ responded Barhydt when the panel was asked how the U.S. government would potentially try to implement a Bitcoin ban. ‘The government can’t stop — the United States Supreme Court has already opined on this. You can’t prevent people from holding ones and zeros on a device in their pocket. That ship has sailed. We already know that. The question is: What can they do at the edge of the network — the onramps and offramps, the places where they exert control over the banking system, the exchanges, [and the] stablecoins.’” 2. Anecdotal evidence of Bitcoin becoming a mainstream domestic political issue—Due to this new monetary reality, it seems several US politicians are making strategic moves in favor of defending Bitcoin. Here is a short list of all the US politicians that I could find in 10 minutes that have publicly made it known that they either support Bitcoin as a legitimate asset or are financially incentivized to support it due to an ownership stake in a cryptocurrency company: Sen. Cynthia Lummis (R) Sen. Pat Toomey (R) Rep. Jeff Van Drew (R) Rep. Jake Auchincloss (D) Rep. Barry Moore (R) Rep. Marie Newman (D) Mayor Francis Suarez (R) Mayor Eric Adams (D) Mayor Scott Conger Sen. Ted Cruz (R) Rep. Pete Sessions (R) Former Rep. Ron Paul (Lib) Rep. Warren Davidson (R) Rep. Tom Emmer (R) Az. State Sen. Wendy Rogers (R) SEC Chair Gary Gensler (D) Rep. Darren Soto (D) Rep. French Hill (R) As another example, you can have a look at this debate between two leading US Senate candidates in which the first question of the debate was about digital assets and Bitcoin: https://twitter.com/Dennis_Porter_/status/1486888903642533888?s=20&t=fEP9GanviX5HHxqGtA3xZ w 3. Anecdotal evidence of Bitcoin’s game theory becoming an international political issue—Fidelity Investments Inc., one of the largest asset managers in the world, recently published a report that explicitly lays out this new reality of governments competing for Bitcoin [26] [27], “Time will certainly tell which path is more successful but given our view of digital assets, it isn't surprising that we think an outright ban will be difficult to achieve at best, and if successful, will lead to a significant loss of wealth and opportunity. History has shown capital flows to where it is treated best and embracing innovation leads to more wealth and prosperity. We also think there is very high stakes game theory at play here, whereby if bitcoin adoption increases, the countries that secure some bitcoin today will be better off competitively than their peers. Therefore, even if other countries do not believe in the investment thesis or adoption of bitcoin, they will be forced to acquire some as a form of insurance. In other words, a small cost can be paid today as a hedge compared to a potentially much larger cost years in the future. We therefore wouldn't be surprised to see other sovereign nation states acquire bitcoin in 2022 and perhaps even see a central bank make an acquisition.” Evidence of this “high stakes game theory at play” includes recent news out of Russia; President Vladimir Putin actually supported the Russian government’s proposal in January to tax and regulate Bitcoin mining and, in so doing, rejected the central bank’s proposal to ban cryptocurrency completely [28]. During a government meeting, Putin has been reported to have said that “[Russia has] certain competitive advantages” in the cryptocurrency mining industry. Most recently (in fact, just today, Saturday, February 5, 2022), in the middle of the Canadian Truck Convoy for Freedom movement, a long-time, conservative, professional politician by the name of Pierre Poilievre announced that he is running for Prime Minister of Canada (see his announcement Tweet). Pierre has gone on record as being a supporter of Bitcoin, going so far as to actually praise Bitcoin [29]. He is quite well-known within the Bitcoin Twitter community for having given so many speeches to the Canadian Parliament about money, its origins, and the effects of Central Bank money printing on price inflation. As an example, watch these two speeches that he gave to members of Parliament only 3 weeks ago from today. 1: https://twitter.com/PierrePoilievre/status/1482697895774076930?s=20&t=8TmX- sSwrXEX8EG9D_2SVg 2: https://twitter.com/PierrePoilievre/status/1483481771496853508?s=20&t=6mPcGVZJN5FjgoLlRXNbd Q It is my personal belief that Mr. Poilievre, if he is elected, will likely use executive power to the extent that it is constitutional in order to make Bitcoin a legal tender within Canada alongside the Canadian dollar. Some Quotes for Consideration [30] “History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours” “Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties” “While Bitcoin is a new invention of the digital age, the problems it purports to solve — namely, providing a form of money that is under the full command of its owner and likely to hold its value in the long run — are as old as human society itself” “People’s choices are subjective, and so there is no “right” and “wrong” choice of money. There are, however, consequences to choices” “I like to call this the easy money trap: anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value” “For something to assume a monetary role, it has to be costly to produce, otherwise the temptation to make money on the cheap will destroy the wealth of the savers, and destroy the incentive anyone has to save in this medium” “The monetary media that survived for longest are the ones that had very reliable mechanisms for restricting their supply growth — in other words, hard money” “The choice of what makes the best money has always been determined by the technological realities of societies shaping the salability of different goods” “Human civilization flourished in times and places where sound money was widely adopted, while unsound money all too frequently coincided with civilizational decline and societal collapse” “Whether in Rome, Constantinople, Florence, or Venice, history shows that a sound monetary standard is a necessary prerequisite for human flourishing, without which society stands on the precipice of barbarism and destruction” “History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours” References [1] https://www.capriole.com/about/ [2] https://medium.com/capriole/bitcoin-value-energy-equivalence-6d00d1baa34a [3] https://www.cnbctv18.com/cryptocurrency/bitcoin-hashrate-what-is-it-why-is-it-important-where-is- it-expected-to-head-in-2022-12074972.htm [4] https://www.kanaandkatana.com/team [5] https://www.kanaandkatana.com/valuation-depot-contents/2019/5/30/exploration-of-bitcoin-days- destroyed [6] https://www.investopedia.com/terms/e/equation_of_exchange.asp [7] https://swissrexag.ch/ [8] https://swissrexag.ch/wp-content/uploads/11_Crypto-Research_Extended-SwissRex-Model_EN.pdf [9] https://research.ark-invest.com/hubfs/1_Download_Files_ARK- Invest/White_Papers/ARK_BigIdeas2022.pdf [10] https://cvs0346o2g7yb3063ojawvzr-wpengine.netdna-ssl.com/wp-content/uploads/2022/01/Viridi- Funds-Report.pdf [11] https://finance.yahoo.com/news/craft-superfood-chain-everbowl-announces-185900881.html [12] https://www.musictimes.com/articles/83642/20220107/bitcoin-adoption-progress-mexico-s- biggest-retail-store-accepts-bitcoin.htm [13] https://www.businesswire.com/news/home/20200115005482/en/HSB-Survey-Finds-One-Third- Small-Businesses-Accept [14] https://www.engadget.com/amc-theaters-start-accepting-cryptocurrency-113811626.html [15] https://www.thestreet.com/investing/cryptocurrency/rocker-gene-simmons-accepts-crypto-to-sell- his-vegas-mansion [16] https://www.nrn.com/franchising/wings-and-rings-allow-use-bitcoin-franchise-fee [17] https://www.cnbc.com/2021/12/04/bitcoin-miners-say-theyre-fixing-texas-electric-grid-ted-cruz- agrees.html [18] https://www.cnbc.com/2022/02/03/winter-storm-descends-on-texas-bitcoin-miners-shut-off-to- protect-ercot.html [19] https://niccarter.info/about/ [20] https://www.coindesk.com/policy/2021/10/11/bitcoin-mining-is-reshaping-the-energy-sector-and- no-one-is-talking-about-it/ [21] https://www.projectfinance.law/media/5690/pfn_1221.pdf [22] https://canada.constructconnect.com/joc/news/resource/2021/11/bitcoin-mining-to-heat-north- vancouver- buildings#:~:text=Bitcoin%20miners%20will%20soon%20be,100%20residential%20and%20commerci al%20buildings.&text=%E2%80%9CLEC%20will%20be%20recovering%20this,it%20into%20LEC's% 20heating%20grid.%E2%80%9D [23] https://thenextweb.com/news/bitcoin-100000-nodes-vulnerable-cryptocurrency [24] https://www.forbes.com/sites/ktorpey/2019/07/30/us-lawmakers-are-realizing-they-cant-ban- bitcoin/?sh=430acc93e31a [25] https://www.forbes.com/sites/ktorpey/2019/07/02/the-overlooked-reason-the-united-states-would- struggle-to-ban-bitcoin/?sh=609403d5344a [26] https://markets.businessinsider.com/news/currencies/bitcoin-adoption-countries-high-stakes-game- theory-central-banks-crypto-2022-1 [27] https://www.fidelitydigitalassets.com/articles/2021-trends-impact [28] https://www.bloomberg.com/news/articles/2022-01-27/putin-backs-crypto-mining-despite-bank-of- russia-s-hard-line [29] https://financialpost.com/fp-finance/cryptocurrency/the-political-polarization-of-crypto-is- underway-and-it-could-have-huge-consequences [30] https://www.resistance.money/research/library/to%20be%20organised%20better/The%20Bitcoin%20St andard.pdf Some Bitcoin memes