Digital Currencies All-Time Highs, Now Overbought :: Blockchain Letter, March 2017

Dear Community,

Bitcoin’s volume-weighted price on the Bitstamp exchange rose 24.4% in the month of February. Year-to-date, bitcoin has appreciated 23.9%. An investment one year ago would return 2.7 times one’s investment.

We will be visiting several cities over the next few months to discuss the blockchain ecosystem. Some of our dates include:

  • Princeton, March 22
  • New York City, March 23–24 and April 4–5
  • Seattle, April 10
  • Los Angeles, April 28
  • New Orleans, May 2–4
  • Europe, June 12–16

If you are interested in scheduling a meeting, please contact Pantera’s investor relations team at


As the price of bitcoin surpasses all-time highs, we feel it is important to consider how the overall health of the bitcoin network compares to the previous high in 2013. One of our favored metrics — transactions per day on the Bitcoin network — is up 4.6 times the level in late 2013, as shown on the below graph.

With the notable exception of the bubble in 2013, the price of bitcoin has appreciated apace with the growth in transactions.

(The growth rate in the number of transactions is being curtailed as the smallest transactions are being forced off the blockchain. Our intuition is that the value of transactions is still growing at roughly the same rate. This warrants further research, which we will publish in coming months.)


The digital asset markets generally have been performing very well over the past six months. In particular, the price of Ether has been one of the best performing during this period. Ether is up 388% year-to-date with a total market capitalization of $3.6 billion.

As with bitcoin, the value of the protocol’s native currency is closely correlated with the usage of the technology. The graph below displays the price of Ether compared to daily transactions on the Ethereum network since inception of the protocol.


In March 2015, after a fifteen-month decline, we felt the price of bitcoin had reached the lows and was likely to begin to rise due to improved fundamentals. We issued one of only two trading recommendations Pantera has made — BUY at $270 /BTC. We published our rationale in our Blockchain Letter and a special Forbes article.

We felt the price may be displaying the telltale signs of a bottom with extreme bearish sentiment, ignored improved fundamentals, and indications of selling exhaustion.

In the article, we discussed the relationship between the bear market bottoms of the S&P 500 in 2009 and the NASDAQ in 2002, and the similarities they may have had with the bitcoin bear market over the preceding 15 months.

“Six years ago this week, the question heading Nouriel Roubini’s weekly Forbes column — and the question on the mind of virtually every investor — was “How Low Can The Stock Market Go?”. You all remember it. On March 9, 2009, the S&P 500 fell below 700 for the first time in 12 years. Goldman Sachs published a research report warning that it could fall as low as 400.”

We go on to describe the performance from those lows to March 2015.

“The NASDAQ composite topped 5,000 on March 2nd, up 350% from its 2002 low. The S&P 500 is up 210% from its 2009 low…today bitcoin presents an even more compelling opportunity than it did 16 months ago.”

Pantera’s recommendation proved prescient. Bitcoin has returned over 350% since we published the recommendation (similar to the price appreciation experienced by the NASDAQ and the S&P 500 off their lows).

“I work with bitcoin every day, and I’m the first to admit that it is still an awkward teenager — maybe even an ornery toddler. After all, it is just six years old. But when I look at Bitcoin’s venture capital investment — more than the internet at a similar age — increased developer interest, its growing merchant and user adoption, and generally favorable comments by regulators, it’s clear that its long-term prospects are stronger than ever. There is no proven way to time markets. But if time travel were possible, wouldn’t we all like to go back to invest in equity markets at historic lows? The question is, if we had a crystal ball to allow a peek at the world in 2025, would we kick ourselves for not investing in bitcoin today?


The reason to mention our penultimate recommendation is that we have a sense that digital assets are overbought right now. Today’s euphoria over bitcoin, ethereum, and every token sale is the (bi-?)polar opposite of the dejected depression when bitcoin was at $270. Each counterpart to the bullish signals in our Forbes article is maxed out the other way — wild bullishness at the highs, the price well above the fundamentals, and dozens of new tokens surging simply on the announcement of their vaporware.

Let’s check fundamentals. The relationship between bitcoin price and underlying transactional use has been so close that the ratio is fairly stable. (In 30 years of trading currencies, I can’t recall many currencies where the fundamental drivers are so clear and stable.) The graph below shows the ratio bitcoin price per 1,000 daily transactions — essentially what the market is willing to pay to own a share of the protocol for every 1,000 transactions. This may be a helpful guide to determine the short-term valuation in relation to fair value. Currently the price is trading above the high-end of this range, which has predominantly traded between $3.00 and $5.00 per 1,000 daily transactions. At a price of $1,257 it is 2.8 standard deviations from the mean.

This may be helpful to a short-term trader for timing when to buy or sell — or for those entering a long-term position.

The graph below can put the current price in prospective. It displays a linear regression of the price of bitcoin to the number of transactions in the Bitcoin network per day. Since January 2015 the price of bitcoin has a stable positive relationship with confirmed transactions per day. At the current transaction rate (222,994), one would expect the price to be $986 /BTC.

For this relationship to move back in line with the expected values based on the regression line either the price would need to fall 22% to $986 or drift until transactions have grown 33% to reach 295,509. Based on the average annual growth rate, daily transactions are expected to reach a level corresponding to the current price on June 21, 2017.

Disclaimer — For many years I’ve said bitcoin’s going to $25,000+. When it gets there, don’t go saying “You were bearish at a thousand, man.” This is a short-term trading view that the market is ahead of itself — it’s likely to stagnate for a period of months.

Annual transaction growth has compounded at an average rate of 105% for the years 2012 through 2016. Bottom line: the honey badger of money will get right back up. Mt.Gox, multiple dramas, ETF rejection, etc.

“The honey badger doesn’t care!
Look at this! Like nothing happened! The honey badger gets right back up and continues eating the cobra.”


In our July 2016 Blockchain Letter we discussed the risks of investing in GBTC. The price of GBTC can vary dramatically from the performance of bitcoin. The risk associated with GBTC lack of tracking can easily wipe out all gains attained by bitcoin.

Since the middle of 2016 bitcoin has returned 78%, an investor who bought GBTC have actually lost money since this time. The price of GBTC has fallen from a price of $119.55 to $117.05.

The graph below shows the performance of bitcoin and GBTC over the past eight months.

The below chart shows the relative outperformance of bitcoin compared to GBTC for the past six-, twelve- and twenty-four-month periods.


On March 10th the Security and Exchange Commission denied the application for the Winklevoss Bitcoin Trust ETF. In the order, the SEC found that the proposed fund was too susceptible to fraud, due to the unregulated nature of bitcoin. An ETF allows its investors to invest in the underlying assets of the fund; it requires approval from the SEC prior to offering to the public. Given that the SEC has yet to even rule (publicly) on whether bitcoin is a security, it is not surprising that they denied the application.

The last asset class to receive ETF certification was copper. Copper has been in use for 10,000 years. It was the first metal smelted by humans circa 5000 BC and the first traded on the London Metals Exchange in 1877. Centuries later, and after a many-year effort by a U.S. bank, they won regulatory approval by the SEC for a copper ETF in December 2012. If it took this long for the inert atomic element #29, it’s going to take a long time for a bitcoin ETF to win SEC approval.


Bitcoin is often referred to as “digital gold” or Gold 2.0. Well, digital gold just surpassed old school gold — in price terms. One bitcoin is now worth more than one ounce of gold.

For those of you scoring at home:

  1. Quantitatively-easible paper money — bad.
  2. Fixed-quantity, dense gold — better.
  3. Fixed-quantity, electronic, free, real-time, infinitely-dense, easily-divisible bitcoin — best.

For 5,000 years, gold has been the gold standard of currencies/stores of value. It’s the paper imitations that have eroded in value. In 1970, $1,000 bought over twenty-eight ounces of gold, now it purchases less than an ounce. One bitcoin now purchases more than an ounce of gold.

Over the coming decades, keep an eye on that little gold line! The new gold standard.

Egypt’s ruler Pharaoh Khufu used 20,000 workers/slaves over a 20-year period to build the Great Pyramid — 400,000 man-years invested to build the 6-million-ton pyramid. Then they buried a bunch of gold underneath. Every elementary school kid has snickered at how Neolithic those massive, primitive efforts were.

Forty centuries later, Americans bury an even more staggering amount of gold underneath a stone pyramid in Kentucky. The U.S. has 8,134 metric tons of gold reserves buried at Fort Knox. That’s $340 billion — with a “b”. The U.S. median personal income is $30,240. Do the math: the U.S. stores the equivalent of 12.3 million years of our citizen’s labor under a stone pyramid.

That’s going to be hard to explain to our grandkids.


We tweet Bitcoin news and insights on Twitter and Medium at @PanteraCapital and @Dan_Pantera.

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