Keeping it Simple
It’s easy to overcomplicate things. When it comes to crypto, it’s almost impossible not to overcomplicate things. The technology is new and rapidly evolving, the industry moves at lightning pace, and there are a whole host of financial, economic, regulatory, political, and ideological rabbit holes to dive into. And when you add in the FUD (fear, uncertainty and doubt) that gets reported in the news and is often times covered at a very superficial level, it becomes really easy to miss the forest for the trees.
That’s why I find it helpful to focus on the most basic, fundamental principles. With bitcoin in particular, it always comes back to supply and demand.
Let’s start with supply. We know there will only ever be 21 million bitcoin. To put that in context, there are currently somewhere between 46 and 56 million millionaires worldwide depending on what data source you use. That means its mathematically impossible for every millionaire today to own an entire bitcoin (and that assumes bitcoin is evenly distributed and none of the bitcoin are ever lost). The bottom line is that supply is fixed and there isn’t that much of it.
But it’s more than just fixed, the supply issuance is constant, predictable, and inelastic. The Bitcoin blockchain produces a new block, on average, every ten minutes and each time a new block is mined, we know exactly how many bitcoin will be released. As the recent Chinese ban has proven, regardless of how much computing power comes on or off the network, the mining difficulty level adjusts to maintain a constant output. Thus, supply is inelastic.
Bitcoin is the only asset in the world whose supply has absolute scarcity, perfect transparency in its production and maintains a constant output regardless of the level of resources poured into creating it.
Understanding all of that, it follows then that if demand rises, price MUST rise over the long term. I’m not talking about day to day, week to week or even month to month. But the fact of the matter is bitcoin has averaged a 3x return per year for over a decade. Like I said, if supply is fixed and demand increases, there is only one direction the price can go.
It therefore stands to reason that we should follow demand for bitcoin very closely. At the end of the day, it’s the one variable that matters more than any other over the long run.
I’ve argued in the past that every person, corporation, asset manager and government will eventually own bitcoin in the future. We are seeing that play out in real time.
- Corporations — At least 33 public companies including Square, MassMutual, Microstrategy and Tesla, hold crypto on their balance sheets. There are far more privately held companies doing the same. There are even rumors that Apple has purchased $2.5 billion worth of bitcoin to hold on its balance sheet. Corporate adoption of bitcoin is growing and it’s not going to stop anytime soon.
- Asset Managers — Over the last 12 months, some of the most well respected capital allocators in the world have started investing in bitcoin. Paul Tudor Jones recently upped his personal stake from 2% of his portfolio to 5%. Earlier this year I put together a deck showcasing a number of the most high profile investors and institutions who have begun investing in crypto. It turns out that was just the tip of the iceberg as Fidelity Digital Assets plans to increase its headcount by around 70% in anticipation of growing institutional demand for crypto services. According to the WSJ, 14% of RIAs already are recommending bitcoin to their clients which is up from 1% a year ago.
- Governments and Lawmakers — Most people do not realize that there are several governments that already hold and transact in bitcoin. Then, last month, El Salvador became the first country to officially adopt bitcoin as legal tender. There are numerous other countries around the world rumored to be following suit. Here in the US, Texas, the 9th largest economy in the world, is rapidly embracing bitcoin and bitcoin mining. So are Wyoming, Florida, Ohio and many other states. Even senators and congress members are now publicly disclosing that they hold crypto in their personal portfolios.
However, it’s easy to dismiss bitcoin as nothing more than speculation in the US because our financial system, while far from perfect, does work relatively well for a large portion of the population. However, the story is very different globally.
That’s why the adoption in El Salvador and many other Latin American countries is so momentous. And while much of the attention in the last couple of weeks has focused on adoption in Latin American, I’d like to turn our attention to other corners of the world where bitcoin use is skyrocketing despite, and partly fueled by, government crackdowns and anti-BTC campaigns.
Let’s start with India. According to crypto data firm Chainalysis, investments in crypto grew from about $923 million in April 2020 to nearly $6.6 billion in May of this year in India. More than 15 million Indians are now buying and selling digital coins which is quickly catching up with the 23 million traders in the U.S. All of this despite the fact that in 2018, the Reserve Bank of India (RBI) banned trading of cryptoassets. This ban was later overturned by the Supreme Court, but the RBI has maintained an antagonistic stance towards cryptoassets today, even as it develops its own digital currency.
And then there is Africa where Bitcoin is used on a regular basis, typically to carry out international currency transfers. The country leading the charge in this part of the world is Nigeria. In February of this year, Nigeria’s central bank banned financial institutions from performing bitcoin services. Despite the ban, the volume of P2P transactions in Bitcoin grew to $38 million dollars in the month of June alone. This growth was spurred in part by the usefulness of bitcoin to bypass banks that were preventing funding from reaching anti-brutality protestors late last year. Other African countries that are seeing a surge in use of bitcoin include Kenya, Ghana, and South Africa.
All these developments across the world are not just subjective anecdotes, we can see the adoption happening in real time using on-chain data. The number of total bitcoin addresses on the Bitcoin blockchain is rapidly approaching 1 billion.
Because wallets create new addresses when they transact, total number of addresses can give us a high-level indication of the amount of activity on the network, but it doesn’t tell us the total number of users. For this, we need to look at a metric called “Entities” which is different than “Addresses.” The Entity metric uses blockchain forensics and proprietary algorithms from Glassnode to cluster and identify what appear to be unique users. Thus, the Entity metric can give us a clearer picture of the number of users, not just total usage.
The chart below is the net growth of new users which is currently at an all-time high. With over 50,000 new entities are coming on-chain every day, the estimated user count seen on Bitcoin’s blockchain is growing faster now than any other time in its 12-year history. Bitcoin’s price action may have been trading sideways for the past two months, but usage is exploding.
Crypto analyst Will Clemente recently put out this chart below comparing net user growth to price. Each of the last market tops have corresponded with a decrease of new users but as we just showed, new users are currently growing faster than ever. Remember supply is capped and new issuance stays constant, so as long as usage continues to increase and the relationship between supply and demand holds true, it’s illogical not to be bullish on the future price of bitcoin.
This is exactly why I’m not focused or concerned about short term price movements. I honestly do not care what bitcoin’s price does day to day. That’s nothing but noise. What I track rigorously are the fundamentals. How are adoption and usage trending? What are the on-chain metrics telling me? Those are the signals. This strategy has proven to work incredibly well over the last 7 years during numerous peaks and crashes and I have no doubt it will continue to do so going forward.
