Bitcoin: Religious Zealots Make an Easy Trade
Bitcoin is a different form of money. Instead of being controlled by the government, it is controlled by a combination of the internet, networks and math. Normally the government can print as much money as they please, and they have historically abused this privilege. Bitcoin is decentralized, so it’s not controlled by any authority. All transactions are recorded by a network of computers on a digital ledger. The supply of Bitcoin is predetermined, so Bitcoin can be considered a potential hedge asset long term (i.e. similar to Gold). If you need an overview on the technical end, I recommend THIS video.
Why Bitcoin?
The clearest base case for Bitcoin is to be digital gold. As the chart below shows, Bitcoin has many of the same strengths as gold and also a number of other advantages as well. If we were just going off this chart, investing in Bitcoin would be an absolute no brainer, but this chart tip toes around one of the major stumbling points investors have around Bitcoin.
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Where does the value come from for Bitcoin? For gold, it comes from a rich history and some amount of intrinsical value. Bitcoin doesn't have that intrinsical value, it has no physical form. For fiat, the value comes from being issued by the government. Once again, Bitcoin doesn't have this. So where does the value come from?
Bitcoin is the currency of trust. Without any intrinsical value or a central force backing it, many investors don't understand how Bitcoin has any value. What these investors are missing is that you don't need to have a central force if you have a fervent and growing following who believes Bitcoin has value.
Religious Zealots:
Stanley Druckenmiller eloquently explained the simplest Bitcoin bull case (from 2020): "Do you know that when Bitcoin went from $17,000 to $3000 that 86% of the people that owned it at $17,000, never sold it?” Druckenmiller replied: Well, this was huge in my mind. So here’s something w/ a finite supply & 86% of the owners are religious zealots."
How long wallets are holding their Bitcoin is publicly available information, but not something that is talked about enough. Due to the public blockchain, you can tell how long wallets are holding Bitcoin (given everything is recorded on a publicly available ledger). HODL waves are a form of chart that show how long wallets have been holding their Bitcoin. While the numbers have varied quite a bit from what Druckenmiller referenced, you can still see a significant holding pattern (despite significant downward pressure on price).
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It's important to remember when looking at Bitcoin price charts that the crypto industry has an extreme amount of leverage. When you see extreme run ups and draw downs in Bitcoin, often times it is due to the extreme amount of leverage.
Wrap It Up:
What happens to the price of an asset that has a strong and growing base of investors who aren't willing to sell through 90% dips? Every day new Bitcoin believers enter join the cult. When you have this kind of long term asymmetry (with publicly available data to support the thesis), you don't need to overthink it. Bitcoin is my favorite asymmetrical trade. Beyond the cult, Bitcoin has a ton going for it that I wasn’t able to talk about here (lightning network, growing corporate support, etc…).
I believe the mental framework around trust is the key to making sense of a crazy crypto market. It’s a little over simplistic, but directionally accurate. When in doubt, keep it simple!
Bitcoin is hard to value, but if we use gold as the base case, Bitcoin has 30x potential to its base case. Crypto is a crazy, risk filled asset class, but I do believe we are still early in the story of Bitcoin. To support this write up, I’ve linked my recent additional purchase of Bitcoin and proof of my skin in the game (via common stock profile)!
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Nathan Worden's avatar
I know bulls like @jensen, and skeptics like @valuabl (both very smart people by the way)— Bitcoin is a divisive one!

Would you say that the fact that it's not scalable hurts the digital gold thesis? Is it ok if the main transactions that happen on Bitcoin are $100k+?
Fat Baby Funds's avatar
@nathanworden scalability/energy consumption is definitely a concern. I don’t think it’s as big of a concern to the digital gold thesis though.

I think more aggressive ideas around Bitcoin being used beyond digital gold is where things get really tough. The lightning network helps a ton, but I lean towards digital gold as the easiest way to imagine bitcoin.
Nathan Worden's avatar
@fatbaby I know you probably didn’t get to discuss the Lightning network as much as you might have liked due to the 750 word count limit— any insights or updates on how things are going in Lightning Land? What’s the latest there?
Fat Baby Funds's avatar
@nathanworden some cool stuff being done by Jack Mallers via Strike app. Some adoption via ElSalvador. Hoping more support comes via companies like Square to help support easier transacting on the lightning network.
Leon's avatar
The big question is if all these people are really HODL‘in or they just lost their private keys and weren‘t able to sell 😅
Fat Baby Funds's avatar
@mavix either way reduces supply 😅

No doubt tho, a large amount of bitcoin is just dead
Jensen Butler's avatar
Great write up. My favorite part- "What happens to the price of an asset that has a strong and growing base of investors who aren't willing to sell through 90% dips? Every day new Bitcoin believers enter join the cult. When you have this kind of long term asymmetry (with publicly available data to support the thesis), you don't need to overthink it. Bitcoin is my favorite asymmetrical trade. Beyond the cult, Bitcoin has a ton going for it that I wasn’t able to talk about here (lightning network, growing corporate support, etc…)."

No matter sentiment, there will ALWAYS be someone willing to give their arm and a leg to acquire as much bitcoin as they possibly can. Is this level of devotion the extreme end of the bell curve? Of course. But the growing size of a base with such conviction speaks volumes when complemented with examples you mentioned like wallet holding duration, and strong hands during frequent drawdowns.

I will also add that similar to human beings truly having a difficult time processing and conceptualizing very large numbers (most recent example being COVID and really processing what these large #s mean at scale), do we struggle effectively thinking in long time horizons. We say we invest for long term, but often times really struggle thinking that far in advance. If bitcoin is to succeed, whether as a powerhouse asset or as simply a collectible novelty one day, you have to be able to place your chips and think decades out. It is a "what can be" bet, as it has been for the entirety of the last 13 years. But as you mentioned, an asymmetric one.
Joshua Simka's avatar
@jensen Nice post. Your thoughts about human nature/tendencies really resonate with me. Something that sometimes crosses my mind when thinking about this is--look at the type of junk people value--and so ferociously! Sneakers? Trading cards? No offense to folks who like that stuff. I'm just trying to make a point here: It's not so difficult to imagine an economy for crypto, even if we aren't quite there yet.
Zack Morris's avatar
I agree with the thesis! And, thus, BTC is my largest position (not reflected on commonstock as I have a majority of my holdings in cold storage).

Have you thought about owning $GBTC vs. spot BTC? It's currently trading at a 34% discount to NAV.

I have to believe that at some point, likely within the next 18 months, the SEC will finally come to their senses and approve the fund's conversion to a spot bitcoin ETF. If you're a long-term bull and holder of BTC and you think this will happen before the government tries to freeze or confiscate your coins, and you're willing to give up ownership of your private keys, this can be a nice trade to boost your returns by 34% when the conversion happens.

Flipping from spot into GBTC can also allow investors to realize gains or losses as desired in 2022 and 2023.
Fat Baby Funds's avatar
@zmo it’s hard to guess what the SEC will do. People have been talking about a bitcoin ETF for a long time, but doesn’t seem close.
Conor Mac's avatar
With the sentiment so low, and the chatter dying down, it's probably a great time to pitch this asset if history is any guide. Nice job!
Fat Baby Funds's avatar
@investmenttalk yep, history doesn’t always repeat, but now is the time to dive deep.
Dividend Dollars's avatar
How does $BTC.X have huge price drops if 86% of owners never sold? I feel like it shouldnt be that volatile if so many people refuse to sell.
Fat Baby Funds's avatar
@dividenddollars huge amounts of leverage play a big role.
Rihard Jarc's avatar
Thanks for this. Very interesting the holding pattern. Some people are really crazy religious about holding and owning it so it's a fair point to ask what the actual supply is. Probably a lot of people also lost access to their wallets, so again the question is how much of that has been lost forever.

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