Bitcoin Fund

An investment thesis in search of a fund.

INTRODUCTION

UNFORGEABLE COSTLINESS

What do antiques, time, and gold have in common? They are costly, due either to their original cost or the improbability of their history, and it is difficult to spoof this costliness. [..] There are some problems involved with implementing unforgeable costliness on a computer. If such problems can be overcome, we can achieve bit gold.

โ€” Nick Szabo

Thesis

Bitcoin's price is a function of it's Stock-to-Flow (SF). In May 2020, Bitcoin will undergo the third ever of it's quadrennial halvings. Halvings are when Bitcoin's block rewards (flow) are permanently reduced in half. This means that Bitcoin's SF (stock-to-flow) will rise to 50 (from 25) in 12 months time. As was the case in the two previous halvings, Bitcoins price is poised to make steep movements upward.

Present Snapshot (May 2019)

Market Capitalization $100B
Coins Outstanding (Stock) 17.6M
Annual Production (Flow) 700K
Stock-to-Flow (SF) 25

2nd Halving (2016) Before & After

Pre (2016) Post (2017)
Market Capitalization: $23B $327B
Coins Outstanding (Stock): 15.5M 16.7M
Annual Production (Flow): 1.4M 700K
Stock-to-Flow (SF): 11 24

3rd Halving (2020) Outlook

Market Capitalization TBD
Coins Outstanding (Stock) 18.3M
Annual Production (Flow) 350K
Stock-to-Flow (SF) 50

3 REASONS

STOCK-TO-FLOW (SF).

A Bitcoin SF (stock-to-flow) valuation model puts fair value for BTC at around $6k today. In one year, the Bitcoin SF model's valuation will rise to indicate a price of $50k. The market has historically overshot SF fair value by as little as 3x and as much as 10x.

The price of Bitcoin has extremely tight correlations with its SF. What makes Bitcoin unique, from say, commodities, is that its future flows are known.

MONEY; NOT CURRENCY

Bitcoinโ€™s fundamental strengths are misunderstood. It is an improvement on money; not currency. The term Cryptocurrency is itself a misnomer that clouds the bigger picture.

Bitcoin represents an upgrade to gold. Gold investment represents some $8T in US Dollar terms. If Bitcoin achieved only 1/10th of that market cap (which it is on its way to doing) BTC price would be $50K.

ASYMMETRIC

The exponential nature of Bitcoin's price action is a feature, not a bug. As with any asset, there are bad times to buy Bitcoin. In December 2017, the market overheated and mania took hold completely. Bitcoin's price got ahead of the SF model's price by 6x. The SF valuation model indicated $3k during the last all time high.

And yet, after the prolonged bear market, Bitcoin still has enormous upside, especially when taking into consideration the imminent halving. This makes it the best asymmetric investment available to investors.

CONCLUSION

Bitcoin has been the best performing asset of the last ten years. Investors should, at the very least, take a look at it. The following chart, while cheeky, illustrates this point very clearly.

Take note of 2012 and 2016, the years in which the first two halvings occurred.

Bitcoinโ€™s code tells us that the SF (stock-to-flow) will double every four years. The SF valuation model appears to explain Bitcoinโ€™s exponential price action as it relates to the halvings.

The SF valuation model gives investors something to hold on to. In the event of another bull market, an investor could utilize SF valuation to appraise the market price for Bitcoin.

You've got your table all set up, your fork, your knife, your A1 sauce... you just need the steak.

โ€“ Rounders (1998)