Bitcoin Letter Archives

The Strong Breadth of Crypto

The price of Bitcoin (BTC) trending lower to $57,000 is still an extension of the taproot upgrade that saw traders take profits recently.

An 18% pullback has already happened two times earlier this year, but each time Bitcoin came roaring back.

A clear uptrend on the chart means the price of Bitcoin is making higher highs and higher lows reinforcing that Bitcoin is still forcing itself in an upward direction.

So this isn’t that big of a deal in the bigger scheme of things.

Bitcoin, by its very nature, is a highly volatile asset to begin with, so we will see wild upswings and cruel selloffs.

In fact, bullish corrections are indicative of healthy behavior.

Many need to understand that Bitcoin won’t just go up in a straight line even if they want it to.

What’s more interesting is that even though Bitcoin has had a tough time lately, altcoin capital flow has been highly encouraging.

Various altcoins have done well this year with Ethereum (ETH) returning 600%, Solano (SOL) up 9,300%, and Cardano (ADA) up 1,050%, and these are just a few.

Many more have had great degrees of success.

What we are seeing is bitcoin starting to somewhat mature even if it is still in the early innings.

However, many of these altcoins are still at the top of the 1^st inning and the lunging growth can be found at the inception of its growth phase.

Broad-based strength of secondary coins was just a pipedream a few years ago, even Bitcoin was a suspicious word, yet the participation of a wider swath of cryptocurrencies means that money which would have been earmarked for Bitcoin a few years ago has now gone into more obscure coins looking for a quick 10X bagger.

I still do believe there will be major buyers in the upper $50,000 levels unless a black swan really tanks crypto.

Another reason for the retracement of Bitcoin is the US dollar (UUP) rally that has taken many by surprise.

Traditional markets indicate potential for a deeper drawdown. The reappointment of Jerome Powell as Chairman of the Federal will get a lot of Fed speak for controlling inflation even if rates won’t go up soon.

The US dollar has been on fire with it strengthening across all currencies and even though Bitcoin is a digital currency, it’s still fighting for the same capital flow as the US dollar.

It’s plausible that Bitcoin traders with big profits, are skimming off profits and reducing their crypto positions, and spinning them into US dollar funds to take advantage of the more than bullish momentum.

The pullbacks in parts of the emerging world have been quite stark with the Turkish Lira falling as much as 15%, even in safer financial waters of Poland, the Polish Zloty is down 5%.

The last bit that could incite negative sentiment for investors is fears that creditors of the defunct Mt Gox exchange could finally liquidate their payments – seven years after the cryptocurrency exchange collapsed.

Trustee Nobuaki Kobayashi confirmed last week that 141,000 BTC ($8 billion) under custody would soon be distributed among those impacted by the Mt Gox fiasco.

Mt Gox coins represent more than 3% of the 4.2m bitcoins in constant circulation. If all of them were to be cashed in at once it would cause the price to crash, at least over the short term.

If these losses are to happen, it wouldn’t translate into a longer-term bear market, but it will deepen the current correction and delay the dip-buying.

I am still encouraged about bitcoin’s direction and the continued spread of adoption has been a massive feather in the cap for this asset.

Major corporations like Tesla and MicroStrategy continue to pour cash reserves into bitcoin, while several countries look set to join El Salvador by introducing bitcoin as legal tender.

I do believe that 2022 will generate a bountiful array of bitcoin and crypto bullish events in a year where stocks will have a hard time replicating the same gains as this year.

Quote of the Day - November 23, 2021

Bitcoin Letter

"Bitcoin was created to serve a highly political intent, a free and uncensored network where all can participate with equal access." – Said British-Iranian programmer Amir Taaki

November 18, 2021

Bitcoin Letter

Mad Hedge Bitcoin Letter
November 18, 2021
Fiat Lux

Featured Trade:

(A LEVERED BET ON BITCOIN)
(BTC), (MARA)

A Levered Bet on Bitcoin

Bitcoin Letter

Like gold and gold miners, bitcoin miners are also a levered play on the price of bitcoin.

In layman’s terms, when the price of bitcoin goes up, the miners go up more.

The largest scale Bitcoin miner in the US is Marathon Digital Holdings (MARA) and readers should take notice.

The stock is up over 1,100% in the past 365 days as the miner has ridden the elevator up with the price of Bitcoin.

Marathon has legs and doesn’t live in fear of them if you are a believer of Bitcoin like I am.

Deploying resources in this stock has some weight especially after we received a 27% discount when the stock dropped after they announced a $650 million convertible senior notes offering to fund its purchases of additional Bitcoin miners.

Almost as important, they disclosed a Securities and Exchange Commission (SEC) subpoena that requested documents related to its data center contracts in Hardin, Montana.

Last year Marathon reorganized itself as a Bitcoin mining company and placed a long-term order for more than 100,000 high-end ASIC miners from Bitmain.

At the end of 2020, Marathon only held 126 Bitcoins. But in March it purchased an additional 4,813 Bitcoins for $150 million at an average price of $31,168.

This brilliant move in hindsight means they are playing with house money now.

Marathon operated 27,280 miners at the end of October, and it expects to expand its fleet to 133,000 miners by mid-2022.

But those miners cost more than $10,000 per unit each, and Marathon expects to remain unprofitable as it takes on more debt to fund those purchases.

Last year, Marathon only generated $4.4 million in revenue and posted a net loss of $10.4 million.

Marathon's $650 million senior convertible debt offering gives a chance for the company to grow out of its loss-making model.

It’s hard to run away from the exorbitant costs to expand its mining fleet, but once the scale is realized, they will be able to focus on earnings growth.

As for the SEC subpoena, it's related to Marathon's deals with Beowulf Energy and other parties to build a data center in Hardin last October.

In particular, the agency is investigating Marathon's issuance of six million shares of restricted common stock to fund those deals and might trigger problems for Marathon, since it relies on Beowulf's lower energy prices to mine Bitcoin at cost-efficient rates.

Even if something were to come from this, I doubt it will be a deal-breaker and maybe even a possible fine.

The silver lining is that Bitcoin must drop significantly for Marathon to become unprofitable.

They are doing everything they can to scale their business as fast as possible.

Taking on more leverage to corner the bitcoin miner supply market is scary for some people but after the pandemic, much of this activity is normalized.

After factoring in energy and hosting costs, the breakeven rate on Bitcoin for Marathon is around $6,500.

Even though the company is levered, they are insulated by their unit economics.

Certainly, it’s expensive to scale in a fragmented market and it’s not a guarantee that energy costs will be advantageous for Marathon for the long term.

As many have read, there are various breakdowns in the global energy market that could reverberate onto Marathon’s balance sheet even if not yet.

The breakeven estimate serves as a reminder of how this is just a numbers game and reducing the cost of energy makes it almost unfair to compete against.

Daily miner revenue is hovering near record highs and Marathon has among the lowest mining costs per coin.

The stock has iron-clad support around $37 and I would be buying MARA stock incrementally all the way down to $37 if we ever get there.

I have a hunch that we will never dip below the low $40s.

Quote of the Day - November 18, 2021

Bitcoin Letter

“Every secret creates a potential failure point.” – Said American Cryptographer Bruce Schneier

November 16, 2021

Bitcoin Letter

Mad Hedge Bitcoin Letter
November 16, 2021
Fiat Lux

Featured Trade:

(TRADERS TAKE TAPROOT PROFITS)
(BTC), (ETH)

Traders Take Taproot Profits

Bitcoin Letter

Bitcoin (BTC) has rolled out another upgrade called Taproot — the first since 2017.

At a technical level, engineers should be in a celebratory mood because the latest upgrades always make crypto more efficient and with smoother transactions.

At the investor level, this usually serves as a liquidity event in so far as investors buy the digital gold until the upgrade and sell once the upgrade has been announced because we essentially remove the psychology of the anticipation of the new upgrade.

Removing that anticipation makes Bitcoin unattractive in the short-term, but it does no value damage to the long-term narrative.

Taproot’s new tech is coined as Schnorr signatures.

These signatures will mean transacting in Bitcoin has become more secure, efficient, and less expensive.

Most importantly, the upgrade will better enable bitcoin to execute smart contracts on the blockchain.

A critical change from Taproot is the potential for smart contracts.

Smart contracts are digital agreements written in code and stored on the blockchain.

They’re essential in powering decentralized finance, or DeFi, applications and nonfungible tokens, or NFTs.

Compared to Ethereum, Bitcoin has historically been much more limited in accommodating smart contracts.

This will likely lead to more day-to-day applications for bitcoin.

Taprooted Bitcoin will wield better security by enabling multi-signature transactions, or those that involve multiple addresses, to appear as a standard, single transaction.

Multi-signature transactions are often used to enable smart contracts.

As a result, multi-signature transactions will be indistinguishable from simple transactions translating into, meaning greater anonymity.

Schnorr signatures will limit the amount of data required for multi-signature transactions, which are more complicated to process than standard ones.

With less data involved, transactions will become more energy and time-efficient.

Consequently, transactions will be cheaper to process, leading to lower cost of transaction fees.

Taproot will effectively make the digital currency into a better all-around currency and encourage higher adoption rates.

The last major upgrade in 2017, the Lightning Network, helped facilitate much faster and cheaper bitcoin payments than before.

Clearly, the increased Bitcoin volume will take time to materialize, but the positive results from the Lightning Network is one of the main catalysts to higher Bitcoin prices that elevated to north of $60,000.

If developers can keep churning out a major upgrade every 4-5 years, it’s just a matter of time before the currency becomes frictionless, feeless, ubiquitous, and positive for the environment.

At a broader level, Bitcoin is still in the teething stages of its evolution, but it’s safe to say, it’s come a long way since its inception.

Making it more palatable for developers to create apps on will also suck away value and volume from Ether.

On the negative side of the ledger, there are a few potential drawbacks to the upgrade, but they’re minimal in the face of the benefits and only reveal themselves sometimes because Taproot is only partially adopted by network participants (only 54% of Bitcoin nodes enforce Taproot right now, a number which has ticked up in recent days).

The second negative is that it’s not entirely certain how the smart contracts and the functioning for decentralized apps (dApps) will work itself out.

Ethereum is well established on this front, and a few developers have told me that this new upgrade for the dApps and smart contract angle of it, is somewhat misleading.

It will take time to work out the kinks and not all upgrades go without issues.

As we barrel towards the launch of the Metaverse, it’s still a few years out, cryptocurrencies are basically fighting against each other to be the first of the bunch to be adopted as the payment of choice for the Metaverse.

That’s why these upgrades are highly necessary for a de facto digital arms race.

Being able to build apps on top of the crypto leads to what the Metaverse will be about.

Imagine your avatar entering the Metaverse and buying a Metaverse real estate property in Ether or Bitcoin and that transaction goes through instantaneously in real-time and 100% secure.

That is the world we are trending towards, even if we are a long way off now, and many of these developers for Ethereum and Bitcoin are skating towards where they think the puck will be in 5 or 10 years.

I believe we will hold the $58,000 support level after this dip, and we will take a run past the new all-time highs.

It’s only a matter of time before we close in on $100,000 even if traders took profits from the Taproot upgrade.

Quote of the Day - November 16, 2021

Bitcoin Letter

“Bitcoin actually has the balance and incentives center, and that is why it is starting to take off.” – Said Julian Assange, founder of Wikileaks

November 11, 2021

Bitcoin Letter

Mad Hedge Bitcoin Letter
November 11, 2021
Fiat Lux

Featured Trade:

(BITCOIN HOARDERS AREN’T SELLING)
(BTC), (CPI)

Bitcoin Hoarders Aren't Selling

Bitcoin Letter

Bitcoin, lately, is resting and the good thing is it’s not too choppy.

It hit around $69,000 before retracing back to the mid-$60,000 levels and it’s just the sign of things to come.

We are at the tail end of the asset purchase program and many outsiders believe there will be an awkward transition.

That’s probably not the case.

We want it orderly which helps an inherently volatile asset like Bitcoin, and I believe that is what we will get.

The 6.2% CPI number sets the upper limit precedent and if later numbers come in at 4% or 5%, Bitcoin prices will react positively.

As the price of Bitcoin has persistently maintained its north of $60,000 status, the talking heads and diva hedge fund managers have stopped criticizing its existence.

It’s about time.

That is a massive victory and stamp of validation for the fledgling asset.

At a broader level, I believe the Fed is stuck between a rock and a hard place.

Each fork in the road gives Bitcoin a higher price and they know it and the only deal breaker is uncontrollable inflation that will trigger a run on the US dollar.

Conversely, if the Fed prints more money, that’s an unambiguous green light for higher bitcoin prices cut and dry.

The second choice assumes what the Fed has somewhat admitted, inflation is permanently transitory leading to even higher levels of inflation which erodes the faith in the abilities of the Central Bank which will send Bitcoin prices higher as well.

This “liquidity event” has become a buy the rumor and sell the news follow through with Bitcoin prices trailing off.

Many were caught off guard by the strength of the CPI number and even if Bitcoin is lower today, this high inflation data strengthens the case for Bitcoin as a perceived store-of-value asset in the long term.

Sometimes we need to move 1-step backward to go 2-steps forward.

Triggered risk aversion which was accompanied by a strong dollar and weakness across the top cryptos would not have happened with a more moderate inflation number.

The little threads of doubt that inflation would be temporary have been shredded and the market has fully absorbed that a profound paradigm shift in the global economy is underway.

Another knock-on effect is near-term economic growth forecasts are trending towards that of “stagflation” — a period of stagnant demand and high inflation.

There are a lot of moving parts here, and this does move up a wall of worry for investors and retail customers.

It becomes psychologically harder to deploy large sums of capital into an alternative investment, real estate, and other large investments in this precarious environment.

That is why we are still in the $60,000 range and haven’t broken either side of $70,000 or $50,000.

On another positive note, the supply of bitcoin on exchanges continues to dwindle, which could indicate a preference among investors to hold Bitcoin in wallets instead of making their coins available to trade on exchanges.

This dovetails quite accurately with my prognosis that the crypto market is currently in a sit-and-wait mode observing to see how things shake out.

Basically, the crypto hoarders, who own 63% of the total Bitcoin supply, aren’t selling.

This short-term consolidation in the mid-$60,000 could be short-lived as I believe once the market stomachs higher inflationary numbers and strong dollar behavior, we will be barreling right into debt ceiling talks in December triggering another leg up to the Bitcoin story.

At the main street level, retail traders representing the middle class and their case to hold Bitcoin strengthens.

Living costs are up crazy and it's broad-based.

Increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles are among the larger contributors.

The case has never been stronger for the average Joe to protect themselves by investing in crypto as a bulwark against central bank money printing.

Traders in the market for futures contracts on the Federal Reserve’s key interest rate now see a 38% chance of a rate hike in June 2022, up from 28% prior to the CPI report.

My bet is that an orderly march up in rates will decrease the rate of change in higher rates giving a pathway to higher Bitcoin prices.

Ultimately, this type of news would have meant a 20% selloff if it happened a year ago, the asset has matured so much that it’s taking the stronger dollar reaction in stride.

This is highly bullish for the price of Bitcoin signaling that it’s here to stay.