December 2024 Newsletter: The Rise of Digital Assets

For almost 16 years now, Bitcoin has been the dominant cryptocurrency network despite thousands upon thousands of competitors and several forks. Anyone can copy it, but like copying Wikipedia or Ethernet or any of these other examples, those copies start with a nearly infinite disadvantage due to not sharing in the existing network effect. Bitcoin’... See more

When bitcoin is in a raging bull market, its market capitalization tends to stretch way beyond its on-chain cost basis. When that happens, it pays to be cautious. Nobody can tell you what market capitalization to cost basis ratio it will peak at for the cycle, and so it’s not a top-signal per se, but when it’s historically high it should cause an i... See more

When bitcoin surges to a new high, that’s like a “pioneer price.” That’s like the first couple houses on a street selling for new highs. And then over months and years, as more and more bitcoin trades hands at those higher prices, it raises the average cost basis and makes that price more real, more liquid, with a substantial market depth at those ... See more

The first point is that in a world of closed-source centralized ledgers, an open-source decentralized ledger is valuable. Specifically how valuable is hard to say, but right now at $2 trillion it’s only worth about 0.2% of global capital. It would have to approximately 10x in price from here to reach the market capitalization of gold, which is itse... See more

When bitcoin is in a deep bear market, its market capitalization has historically dipped a bit below its on-chain cost basis. When bitcoin is near or below its cost basis, that has historically been an excellent buying opportunity, and in the past I’ve pounded the table on it when it reached those levels. There’s no guarantee it’ll reach those lows... See more

Technologies like Ethernet, Internet Protocol, Simple Mail Transfer Protocol, and Universal Serial Bus are among the key communication standards of our day. Of those, USB is the youngest at 28 years, while some of the others on that list are over 50 years old and still going strong. When a protocol wins out over competition in its adoption phase, i... See more

The second point is that these open-source decentralized ledgers have network effects, and thus the largest and most robust one is the most valuable by far. If someone expects it to get completely disrupted at some point, then they might rationally avoid investing in it. If they instead expect that it’ll keep updating and remain in the lead with it... See more

Back in 2013, there was a point where 48.3% of the coins hadn’t moved in over a year, even though the network was still relatively young. The resulting bull market unlocked a lot of those coins, and the ratio fell to 35.7% in 2014. This was a 12.6% reduction in the ratio.

In early 2016 after a long bitcoin bear market, 61.5% of coins had not moved o... See more

After the latest bear market toward the end of 2023, over 70.7% of coins hadn’t moved in over a year. That figure is down to about 63.2% now, and so about 7.5% of previously locked-up coins have moved. I expect that this bull cycle still has room to run, although nobody can be sure. I consider it useful to monitor these waves of distribution to see... See more