Bitcoin Bubble Trouble

BitcoinPrivacy.net June 23-27 data (I have a number of questions about this data but for the purposes of this note its not that important) showed 17.8mn wallets have at least a few cents of Bitcoin in them. Most people I know have at least 5-6 wallets so lets say roughly 3mn “active users” or at least “users”. The same data also showed 4.4mn wallets with more than $27.5  of bitcoin value in each wallet and 1.8mn of these with more than $275. If we take the mid point of these then lets assume the data also implies 3.1mn~ active users. I will come back to that number in a minute but first observation is that I came into Bitcoin like many after reading some of Satoshi Nakomoto’s original visions;

“what is needed is an electronic payment system based on crytographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”

Now call me stupid but if you still think Bitcoin with all its current headwinds could still be 5%~ of “money”, this user base & the US$43bn~market cap seems wrong by a a factor of maybe 30-40x. Even if we assume digital currencies more broadly achieve 5%~ of the worlds physical money then maybe we are wrong by a factor of 13x~ assuming Bitcoin maintains its current % of the crypto market cap. Again very rough numbers but assuming we know the end point (5% of cash with no other killer applications which again seems unlikely) this still doesn’t sound like the end?

Whilst I understand that there has been huge growth and a bubble like euphoria in the crypto space recently, much of that bubble mania has focused on the Ethereum network and ICO’s. But what about Bitcoin? Back at the end of Q1 2017 pretty much every expert was claiming the pending hard fork(A matter of days away!) was about to split the Bitcoin network into a contentious hard fork that could spell the end. A few days later and the experts went quiet & it started a rally that would end near $3000~ despite very few obvious catalysts apart from some excitingh growth in the user base aka Coinbase;

IMG_3467

Once again does 40,000 new users in one day characterize a bubble? Its easy to quote the guy that sells his house for Bitcoin & the Uber driver that wants to give up his job to trade Bitcoin as fitting that bubble narrative, but do the numbers support a bubble or just some impressive growth. When Facebook was adding 500k users/day back in 2016 did we call it a bubble & sell it?(No it went up another 40%~ so far). Even if Coinbase only adds another 15k users/business day over the next 12months, that still implies another 3.675mn users from one company alone. Thats another number I will come back to.

Its also worth remembering when talking about bubbles that Bitcoin & other crypto assets still regularly have their 25-30% falls unlike the central bank supported equity markets. This helps remind everybody including the Uber driver, not to bet the the house(or car) on it & overall serves to maintain a healthy trading environment (Which we certainly cant say about the S&P right now).

So is this a bubble? It could be if Bitcoin’s development ends here. It could if Bitcoin gets completely supplanted by technologically superior alt coins but if you believe that Bitcoin will keep honey badgering along then its probably not the bubble you are looking for.

Now finally back to that 3mn~ daily active users. When I read that number it took me back to some analysis I had read in March 2015 shortly after I had first started to dig into Bitcoin. At the time I was wondering about how to value Bitcoin and came across this blog post:

http://wefivekingsblog.blogspot.com/2015/03/thoughts-on-valuing-bitcoin-as-network.html

I suggest reading the original post but basically it talked about using a traditional method for valuing networks. Know as Metcalfe’s law it states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). Metcalfe’s Law is related to the fact that the number of unique connections in a network of a number of nodes (n) can be expressed mathematically as the triangular number n(n − 1)/2, which is proportional to n2 asymptotically (that is, an element of Θ(n2)). I am a trader not an analyst or computer scientist but the blog gave 3 proposed valuation methodologies. Whilst there are many limitations of this methodology, notice the predictions (Remember this was written in March 2015) for 2016 & 2017. The model predicted 3.2mn daily active users by August 2017 with a US$2,770 value/bitcoin!(Currently $2620). Prior to that Dec 2016 price/coin prediction was $713(Mid Dec was $780).thoughts-on-valuing-bitcoin-as-network.html.jpg

Whilst I am in no way saying that this necessarily implies that the next prediction of US$10,776 will hit by April 2018 based on a prediction of 6.4mn users, but given the other number above that I promised to come back to (3.675mn users Coinbase would add on a 15k/day basis) then we are already at a 6.5mn~ total by April next year vs the formula predicting 6.4mn. Once again these predictions of user base are impressive but not near the 500k users/day Facebook was adding in 2016. Maybe Bitcoin is never as successful as Facebook, but given the potential market size & the progress so far is it really worth betting against it right now? I will leave you with recent words from Wences Casares in his June Xapo posting because these wise words are as relevant today as they were back in 2015 when I first bought my first Bitcoin;

“First, own only what you can afford to lose. I believe there is at least a 20% chance that Bitcoin fails. And it may fail very quickly – even overnight – without much time to react. If you remember one thing from reading this post, remember not to own more bitcoin than you can afford to lose. For most people, this is 1% of your net worth.
Second, own bitcoin. I believe there is a 50% chance that one bitcoin is worth more than $1,000,000 in the next 10 years, or over 300x more than it is worth right now. The potential reward is so big that it makes sense to own some and to hold it for a long time. Even a small amount can change your life”.

 

 

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