Cryptocurrency: 2019 Update (w/ Tuur Demeester)


My name is Tuur Demeester i’m founding partner at Adamant Capital out of Austin, Texas to understand what happened in
2018 in the land of cryptocurrencies
I think you have to go back to 2017 really maybe even a little earlier
Just to understand what this this bull market was that now is correcting
So strongly and in several cases, we’re seeing assets just evaporate that that were really not not viable at all
and so the the bottom of the previous bear market was
2015 with Bitcoin at
$150 to $200 and so what happened in the next?
30 months was Bitcoin rallied all the way up to $20,000
so that’s a hundred x in in value and many other assets were created during that time and
those assets also rallied in value and
then since
late
2017 we’ve seen this massive correction
Bitcoin
As of as of today is down 83 percent from the all-time highs
But if you look at it from the start of the bull market the bottom of the previous market were still up
14x and even in Bitcoin and
2017 I think what happened was first of all
there was a lot of misunderstanding about how Bitcoin should scale and how block chains in general should could or should scale and
A lot of better bitcoins were created. I don’t think these projects were actually better than Bitcoin
But they they were focused on short-term results and on chain scaling those kind of things and then also this idea of smart
Contracts even though it’s been around since the late 80s all of a sudden the market thought
We can do it and we can do it now and I think that was by and large flawed
I think there’s a lot of concepts that are it’s just way too early or even just
impossible to achieve but if it’s one thing that you know, 2017 has shown is that
Bitcoin can withstand a lot of pressure
It’s you know, we’ve seen the exchanges grow and mature
It’s caught the eyes of very large institutions that are now building
Custody that our financial izing Bitcoin
but really I mean
2018 it’s something that we saw coming pretty much like we wrote an Outlook
in January 2018 about the year to come and and
We we thought it was gonna be a shakeout year and then we did a follow-up in August
2018 as well
thinking that the prices were
gonna go sideways or down because a lot of people were
Naming the six thousand dollar price level as you know support for Bitcoin
It would bounce up and we would see the end of the year maybe even with new all-time highs
I think that’s that was premature and and the basic thesis there for me is just that if you have this this enormous
You know bull market that
Happens over a span of 30 months and you have lots of retail involvement and there’s exuberance
The Hangover is gonna take a little longer than eight months and so so far
It’s been you know, 11 12 months and now evaluations are starting to look really interesting. So so that’s kind of my view on 2018
So my outlook for 2019 that comes from looking at what’s happening now and 2018
we’ve seen a lot of people that held Bitcoin for three four or five years that finally
Decided to sell and and take some profits off the table
especially I think when
Last summer when prices went above five six seven thousand
there was a lot of selling and I think most of that selling is now getting exhausted and we’re seeing
Accumulation happening, like people who want to be in this market for the long term right now are really ramping up accumulation
That doesn’t mean that the bottom is here. I mean accumulation can happen throughout a bear market
but it is what eventually is going to
Kind of build a bottom in the price and then on the other hand, we just need to see the selling being exhausted
there’s gonna be icos that are going to keep selling their Treasuries because
in in
Many cases. I think that we forced some kind of do some kind of refund to their customers
there’s also hedge funds that maybe unwinding that need to be selling and
And so it’s for it’s hard tell where exactly the bottom is
I think Bitcoin cycles are lengthening like we are moving towards Bitcoin as being
Just another commodity like copper and gold very large market slower moving cycles
And so that could mean that this bear market is going to last a bit longer than previous ones as well
But but that being said if I look at the value indicators that we’ve built
You know, they are showing that right now Bitcoin is is a fair value
It’s it’s you you can no longer say that Bitcoin is overvalued and I see it in the sentiment as well
Whereas like a few months ago
there was a lot of hope still there was excitement about where we were gonna go towards the end of the year and
That’s turned into
Some what I would say somewhat, you know disgust people feel betrayed to some extent
I’m getting the Twitter equivalent of like hate mail, which I don’t think is because people hate me I just think that you know
They’re reminded of Bitcoin because they they see something that I posted and so that to me means capitulation
I think we’re in the capitulation phase and so this is this is where I feel best
this is the the time for me to accumulate to do business and a lot of the noise has been stripped away and
Whoever is you know with the tide that’s receded. Whoever is still standing
Those are the people I think worth looking at and and ideas worth exploring
So, where do I see real value in this market today I see it in Bitcoin I think Bitcoin is
Showing that it is a very liquid market. It is a valid
Asset to be diversified into if you think about long term store a value like it has a cap supply
predictable monetary policy
it’s extremely secure its censorship resistant all those all those features and it’s actually
Decentralized because I think that’s what we’re learning now, is that a lot of projects that were kind of?
Running on that wave of, you know, we are decentralized or we are blockchain
I you know, it’s becoming clear that that’s not easy to actually make your your token or ass
Decentralized and secure. We’re seeing a lot of
51% attacks on on the smaller coins
Starting to happen now and the regular regulator’s cracking down on the more centralized projects
So I think bitcoin is really shining in this adversarial environment
There’s a metric called Bitcoin dominance, which is it’s pretty straightforward. It just shows the percentage that Bitcoin has
as
part of the entire cryptocurrency pie
So right now that’s at 55% So it’s about sixty billion right now
Total market cap is a little over a hundred I think
but if you adjust that for liquidity
If you take out the tokens that are totally illiquid that might have artificially inflated their market cap
then you’re more talking about a 70 percent dominance for paconne already and I think long-term that’s gonna go to
85 90 percent and that’s just because the network effects
That comes into play I think is very very strong and money even historically speaking
If you look at non-ferrous metals we could have had you know six different
Commodity currencies but the market decided over time that it only needed one. It was only gold and so that’s why I think
long-term the value of Bitcoin is going to keep
Growing relative to to the entire space and I think a lot of projects when you think about scaling
Can be built on top of Bitcoin
I think Bitcoin is very much the dark horse when it comes to privacy issuing assets
a lot of features that people like about blockchain smart contracts those can all be
become part of the Bitcoin ecosystem
So how Bitcoin could be a base layer on top of which a lot of functionality could be built
This is a crucial concept, I think this idea that
You cannot cram all the functionality into the same protocol like the word the world doesn’t work like that
the world works in in terms of division of layer labor
Different functionality is built in different modules that then click together
kind of like a DUPLO
System and if you look at how the internet functions that’s how it works
there’s layers of protocols that
kind of sit on top of each other like a cake or a pyramid and they all interact with each other and I think some
of the the flawed
Ideas of
2017 was we’re gonna build a different protocol for every different function rather than trying
Integrate everything in the same ecosystem
And so people are building a blockchain for X or for Y or for privacy or for smart contracts
And and I think that was by and large flawed
Maybe similarly to how in the 90s people thought you would need a different search engine for every different
Function so when it comes to Bitcoin, for example, people often say oh well the Bitcoin blockchain is not private
But it turns out that you can build in very high performance privacy functions on a different layer. For example
the liquid sidechain that blob stream is launched recently is
Extremely private and it allows you to even issue new assets that can be backed. It could be equity type assets
It could be backed by
Commodities and the transfer of these assets is highly highly private and it’s still all
transacted in a Bitcoin environment
so that’s that’s one example of how
You have to kind of look beyond the main
Blockchain of Bitcoin because the capacity that is always mentioned by pundits on television is like all three or four transactions per second
But that’s like saying, you know
International shipping is never gonna go anywhere because a cargo ship can only carry 200 containers like well, yes, that’s true
But you can break it down a lot further
And just like in the gold market the wholesale settlement
Has a different pace to it
then once
Retail starts interacting with it or once you’re talking about the fund level
Then people interact much more with derivative products and that’s gonna happen with Bitcoin
That’s the financialization of Bitcoin that’s happening now with futures options
I think by 2020 we will probably see a Bitcoin ETF
All those kind of things that are deepening the liquidity of Bitcoin and actually strengthening that decentralized
Anchor that it’s built upon
So, I think the question of how to invest in this space is a really important one
And there’s some lessons I think to be learned from the dot-com era
The dot-com bubble and then afterwards the how Internet companies were were traded a lot of the funds that started in
2017 their function was to give investors access to the market like in many cases the tokens were stored by the asset manager himself
and
And and so that was you know a valid proposition
but now we’re seeing
that is kind of being streamlined and you’ve seen these kind of index products where you can buy a mix of
crypto so to speak and I think that’s
You know, obviously that’s better than not being exposed at all to the sector, but if you really soom in to the
How these indices are put together
Say like a top 10 or top 20 of crypto products
to me
I just see a concerning amount of projects that I don’t think are gonna go anywhere and and just because of this
massive Network effect of Bitcoin and so to me those indices often are a little bit similar to
imagining having an index of the top 10 search engines
you know an equity portfolio of the top 10 search engines in in in
1998 like obviously that’s going to perform well
But but you would do a lot better if you just had some some Google equity
And so I think that’s why investors
Should really have a separate bucket for Bitcoin like you if you want to do these old coins or experiment watching projects
I think that’s you know, that’s a valid
investment proposition, but but
Consider that perhaps Bitcoin is really already
established as a
Standard and and if you just look at the pedigree of the developers involved if you look at how deep the market is
if you look at the the quality of institutions that is building on top of
Bitcoin I think that’s that’s at least that’s that’s the direction that I’m going and I would go even further and say that
If you’re gonna judge performance of assets in this space
I would suggest to use Bitcoin as a benchmark because that’s the other question is, you know
If you if you consider investing in a fund or something, what what?
Benchmark, should you look at?
and
And III think that the most straightforward one is just to compare it to the Bitcoin performance
So what my view is on etherium a
Theorem I think is is stuck
I think aetherium from 2014 onwards when they got started
Had a flawed view on how to architect a blockchain
their idea was to to
Kind of compromise when it comes to security and decentralization and choose to do more operations on the chain
Which I think is a really bad idea
And so now they’re kind of stuck with a bloated chain and they’re really having trouble trying to figure out how to scale
how to scale this this project
Because if you don’t scale it properly
Transaction is gonna be very slow
And then your all your startups are just gonna abandon you so a rough
comparison that I think kind of works is to
compare
Aetherium to Yahoo! Back in the day. Like Yahoo! Was considered to be the blue chip of the dot-coms
They were printing money because all the other dot-com startups were advertising on Yahoo
And so, you know investment analysts could show real data that that showed the success of Yahoo
But they’re not a technology company. They were a media company
And so when Google came around with really cunning Tec that was really scalable
They blew Yahoo out of the water because Yahoo! Was never scalable to begin with it was all
You know a human muscle and trying to index the Internet by using human eyeballs, which is impossible
And so that’s that’s where I see ether right now
the CFTC is looking at aetherium to see if it’s
You know possible to allow for futures contracts to be built on top of it or I mean to be issued
in ether or in the ether market, I think that’s
That’s showing some of their doubts about whether this is actually a commodity whether it’s actually decentralized
What’s up with all these hard Forks?
And and then when it comes to the smart contracts that was always the main use case that was touted for a theorem
It’s like you can build all these smart contracts. Well, you can do that in Bitcoin too, especially now with liquid
The liquid side chain anyone can issue
Assets very easily. That was the main use case for smart contracts anyway, and so I think that’s kind of
Undermining the value proposition of ether right now. It’s like, you know, it’s much more expensive to use than AWS Amazon
like a centralized server, I mean
It’s it’s very convoluted. It’s difficult to run your own nodes
and
The code is just not solid
like there’s a lot of smart contracts that have had a lot of problems and that will probably continue, you know to
To happen like that. And so I don’t think you theorem is gonna die tomorrow, but I think it’s slowly
Going to be on the decline
versus bitcoins market cap
Yeah my thoughts on on XRP on ripple
I’ve I like triple very early on when it was actually a decentralized protocol and then later
a company came in and they assumed the
The the branding of it and and really changed
Quite radically how everything was set up and the way it operates now as far as I understand it is is really it’s a centralized
Operation and so to me that’s a lot less interest because then you know if it’s centralized it can be shut down at any time
We can have clawbacks from one address to another
the supply of the currency can be
Changed all of a sudden so anything can be rewritten and to me is that’s we already have that right
That’s the fiat money system. And so that’s why
Even if ripple, who knows maybe they will do well. I’m a little bit
Worried about their legal status because it does seem like you know
the ripple token could have
Could be seen as equity like and and then ripple could have been violating all these laws. So that’s that’s to be seen
But I don’t see it as a threat against Bitcoin at all. It’s not a digital gold
It’s just an experiment with centralized money that also have some kind of a blockchain
But to me, it’s it’s not I would not call it a cryptocurrency
Where do I see things going in the next three to five years?
Right now we are in the infrastructure phase that’s that’s how I see it up to
2013 we had the the initial discovery phase and then 2013 came around with hardware wallets
specialized mining chips
And a lot more development efforts on really the core side of when it came to Bitcoin
and I think this infrastructure phase is going to keep continuing until
2020 2021 and then I think we’ll see
More mass market adoption and right now in the infrastructure phase the ASIC mining market is maturing
And and I think that’s a very positive thing rather than you know one company
That happens to have struck gold by having this one chip that performs really well
Which I think was bit main and then is able to kind of monopolize the market. I think chips are gonna be commoditized
and so we’ll see a plethora of
Mining activity around the world especially concentrated where electricity is cheap
And so I think that energy producers are gonna get more involved with Bitcoin mining over the next years
it’s it’s this incredible way in which it’s
disintermediating transaction clearing around the world
It’s it’s just a marvel to see and and it’s also a very clean revolution like right now 70. I think it’s
75% of all mining is happening with clean energy
Like hydro and and and so on and then the other trend that I see is just the continued financialization of Bitcoin
I don’t think that the mass adoption of Bitcoin is going to happen by baby boomers
Sending each other bitcoins over their phones. I think it’s going to happen through
Bitcoin being becoming a part of funds portfolio, so it’ll be part of
endowments pension funds
Large mutual funds and so many people will be exposed to naturally to Bitcoin without even realising I think that’s gonna be the main
Adoption which is kind of a behind-the-scenes type of adoption
But I think really Bitcoin is going to long-term shine as a reserve asset
And so yeah, I do expect to see the first central banks
Purchasing Bitcoin in the next five years. I see like I said like endowments pension funds acquiring Bitcoin
And of course many many more
Types of financial products built on Bitcoin ETF is the first one that comes to mind
There’s just some challenges there
That I think are understandable. There are similar challenges that the gold ETF had back in 2006
and this this liquidity is going to keep deepening and that’s going to just
continue to feed into the snowball effect of of adoption and then when it comes to
the kind of bottom-up adoption
in
Third-world countries developing economies and so on
I think that’s where the Lightning Network is really gonna shine
Lightning Network is growing at between 60 to 80 percent a month right now
It’s it’s been live for about a year and so it’s still an alpha
It’s very experimental, but there’s nothing fundamentally that’s not working
It’s all about just polishing and tweaking and building user interfaces that work
and so just to kind of you know recap for people who don’t know it the Lightning network is
A second layer on top of Bitcoin that allows for millions of transactions per second
It’s a little bit less secure, but it’s still fairly robust. And so that’s gonna be the equivalent of your checking account
You’ll have it on your phone
Millennials are going to send each other Bitcoin using the Lightning Network. It’s instant
It’s fairly secure. It’s more private than Bitcoin main chain transactions. And so I think when I think about
VC type investments in this space. I want to invest for example in in in in Bitcoin
startups that I think the Lightning startups are really going to
People are gonna notice them in the next three or five years so
What is monetary maximalism and how does it tie in to what’s happening today?
Monetary maximalism, it’s it’s this idea that
It’s reasonable to assume
That in a market that is truly without borders
That one money would emerge as being very dominant
Maybe you know 80 90 percent of of the value of all the money’s in the world
and and it’s interesting because
So far, you know, we obviously had monetary maximalism to some extent with gold that has a 6,000 year tradition
but you know ever since
government started to issue their own currency, especially
20th century money became very politicized. And so that’s why we have this patchwork of of different
currencies around the world, but when you think about
Cryptocurrency there are really no political boundaries
Like I can buy a light coin pretty much anywhere in the world if the local exchange offers it
and
The same with all the other coins
and so
To me. It makes sense that we yes
We will most likely have one dominant form of money
Like you even see it in in the world of languages that you know
The more interconnected the world economy is the more we are seeing that for business
There are particular languages that become dominant and it makes sense to learn those or in the world of programming
You see that too that there’s like four particular functions. You have very very dominant
protocols that are used and so I think for money because security is such a big issue and because bitcoin is leaning on proof-of-work
I think that the protocol with the most proof of work with the most mining the biggest firewall
So to speak is going to have this continuous
virtuous cycle of adoption that deepens the liquidity and that leads to more security and more
Confidence and more products being built on top of it and so on so so monetary maximum ISM for me. It’s not prescriptive
It’s not a dogma that you put on the world. It’s just it’s a possible conclusion. If you try to think rationally about where
This market is going
Bitcoin right now is in the accumulation phase like we are really in bear market territory
Down over eighty percent from the all-time highs
to me
this is the accumulation phase where value investors they come in and
And and the weak hands hand over their Bitcoin to the strong hands
There’s incredible amounts of developments happening
We are seeing more regulatory clarity, obviously because you know, we’re seeing this clean up process and in the market happening
Which is very positive. We’re seeing way better custody solutions who is seeing insurance happening
Just all kinds of things that you want to see for Bitcoin to become big and boring is is happening right now
And I think that’s what’s setting up
The basis building the basis for the next big rally in the markets
You

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