SLP325 PlanB – Is the S2F model still on track? What about the supercycle and floor model?

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Plan B (pseudonymous quant) rejoins me on the show to talk about how the S2F model is going and whether it will be a problem if Bitcoin does not hit $100k by the end of 2021. In this conversation we get into:

  • Spelling out the different types of models PlanB uses and talks about
  • Failure conditions for the model
  • The Floor model
  • Are we going to supercycle? 
  • When does the S2F model fully break down? 

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Stephan Livera links:

Podcast Transcript:

Stephan Livera:

PlanB, welcome back to the show. So PlanB, lots of things have happened since we last spoke and I thought it was time to get an update and hear from you how things are going. I know there’s been a lot of confusion around the different models that’s going on and people are having this whole conversation about whether everything’s on track or whether it’s dead, it’s over, or maybe it’s not on track anymore? Maybe you want to just clarify for people, maybe for the newer listeners, what’s the difference between the different models that you’ve put out?

PlanB:

Yes. So the first model I published is the S2F model, and I guess that’s where people know me from—that’s PlanB, S2F, et cetera. So people are mentioning S2F and are connecting everything I say to S2F. But in fact I use three kinds of models. And S2F and the S2FX cross-asset model that came later, those are what I call fundamental models. They try to, on a fundamental level, not on a price level or based on something else, but based on some fundamental thing—scarcity in this case—say something about the value of Bitcoin. So S2F is the the center, the core of all my modeling—that’s true. But there are other models. For example, the well-known technical analysis models which are price-driven. They’re based on the Bitcoin price, only—maybe some volume data, but I don’t use that. So for example, an RSI (relative strength index) would be a technical indicator. Or a moving average—so the 200-week moving average is something that I use a lot and Tweet a lot about. And my favorite technical analysis thing is my floor model that got a lot of attention lately as well, because it nailed three of the last months to the dot, but it’s a bit in trouble right now—we’ll probably talk about that later! But that’s the floor model. And a third kind of model that I use is on-chain models—and that’s something very specific for Bitcoin because Bitcoin has the blockchain and all the transactions are in there, so everybody can analyze all the transactions and all the blocks that come in every 10 minutes and see if it’s big transactions or small transactions, old wallets selling or new wallets selling. And those kinds of patterns are very, very interesting. It takes a big computer, it takes a lot of data analysis skills to do it, but it’s very exciting. And I must say I spend most of my time—maybe 80% of my time—in that on-chain data analysis area. So yeah—I’m an investor, I like models. I use all those three kinds of models. So (1) a fundamental model—S2F, for example, (2) the technical models, and (3) the on-chain models. And I think that’s where a bit of the confusion comes from sometimes, but yeah—that’s how it is.

Stephan Livera:

I see. Yeah. And so I think for people who get confused, they think everything is just S2F, where maybe that’s not true, right? Because you’ve got the different kinds of models and I guess in terms of what is public or out there, it’s probably fair to say you’ve put the most out there about Stock to Flow modeling, because that’s probably what you’re known for. That’s your claim to fame, so to speak. And your floor model obviously has been recently very popular amongst people out there. But I think the on-chain stuff, that’s maybe a little bit more of a private thing you’re doing, even though arguably, as you just mentioned, that’s 80% of your time.

PlanB:

Yeah, that’s right. Those are proprietary—the things you find in the on-chain stuff are so amazing and so useful for investing and trading that I’m constantly in a dilemma. Should I put it all out there like I did with the S2F? Or should I first use it and see if it’s working and deploy it in the market instead of publish it? I’d like to publish later on some more about the on-chain stuff, but for now it’s a pretty proprietary entity indeed.

Stephan Livera:

Yeah. And in many cases it’s like if these things were to be published out there, well then maybe everyone would use it and price it in at that point. And obviously we’ve all had that conversation about “pricing in” has been a big one in years gone by—maybe not as much nowadays. Also I wanted to touch on one of your comments—before we get into, Are we on track, off track?—you mentioned this idea [of] price discovery on the open market and that it reminds you of a prisoner’s dilemma. What were you getting at with that comment?

PlanB:

Yeah. well, it was the thought that in the prisoner’s dilemma, the prisoners cannot talk to each other and then they have to make a decision. If they both say the same thing they both go out free. But if they say different things, they’ll sit in jail. But you don’t know what the other is going to say, so you’re forced to not trust the other. And if they would, they would both win and go out free. And that’s the same in the markets—if the sellers would be able to communicate to each other and decide not to sell at all, or if they must sell—for a much higher price—then the price would instantly go higher. So the very act of selling is influencing the price and the fact that you’re punching in the low number—because if you punch in at too high a number then the trade won’t go through and you won’t sell it—so you punch in a low number. But if you would communicate with all the other sellers like, Okay, right now, we’re not selling below $100K, for example, then the price would instantly go to that $100K. But of course sellers cannot communicate with each other, so they’re caught into the going rate and not going too far from the current sell price. But the fact that you can influence it—the theoretical situation—that if every seller would decide, I will not sell below $100K, then the price would be $100K instantly.

Stephan Livera:

Yeah, of course. And I guess at the end of the day, that is a theoretical, obviously, because there’ll be some people out there [selling] because some emergency has happened, they have to sell some et cetera—but as an idea, yeah. And I mean, arguably that could apply on the upside and on the downside. And also, I wonder the extent to which the existence of modeling out there that people are trying to [follow], it’s like a self-fulfilling prophecy that people think, Oh, okay, $100K, well that’s “fair value.” Or that they’re thinking of it in that way. Do you believe that any of your modeling is influencing the behavior of market participants out there?

PlanB:

No, no. Not really. Not really. By now I’m a pretty large account, but not large enough to move markets. In fact, I think I had more impact on the markets when the markets were a bit smaller like two years ago or something. I think it’s much more fundamental than just an opinion or a model that the market follows. There is greed and fear in people. That’s just human behavior and that will always be there. So it’s very interesting to see that people like to buy Bitcoin when Bitcoin is going up although prices are of course a lot higher than when Bitcoin went down. But when Bitcoin goes down, nobody wants to buy Bitcoin. So yeah, there’s always greed and fear, and you can model that, right? You can model that. And also there is momentum in the markets. That’s one of the basic things in all markets. I can see in markets—bull markets, et cetera—that once a trend starts, there is momentum in that. It goes on and on. And that could be because there’s a large buyer in the market that cannot buy the exposure they want in one day or one week so they need multiple weeks or months to build the exposure. And once that gets going and then it will continue. And so the momentum is a very real thing in markets, which of course a lot of technical analysis is based on. And then there are the really fundamental things. For stocks—modeling the cash flows, the dividend flows, is a very real thing. For derivatives markets—for example options, which is basically a volatility market—modeling volatility is very real and very fundamental. It doesn’t change.

Stephan Livera:

Yeah. And I think the momentum is a really strong point. And I think I’ve mentioned this before—I’m sure many others have—that humans are naturally momentum-chasing. So we see the thing going up and we all run in. Everyone’s running in to buy it. And then we see it going down and then we’re overly bearish. And so I think that might just be one of the best arguments against the supercycle, as it were, happening this time. But I’m curious—I’m sure listeners are curious—to get your thoughts? You also think it’s not the likely scenario. Do you want to explain how are you thinking about this idea of the supercycle? This idea that it’s not going to be a big drawdown, or the idea of four-year cycles might be gone. How do you think about that idea?

PlanB:

Yeah, I think you’re very right that the degree in fear is something that maybe is the best argument against the supercycle, because that will not go away. And indeed, I think we will not have a supercycle this halving cycle—next year or until 2024 before next halving—because of greed and fear. Because there will be FOMO. Once we hit $100,000, maybe we’ll go down a little bit, but once we really have crossed that $100K line then I think the FOMO will set in and people will just buy Bitcoin and Bitcoin would go up to unimaginable levels. But then some people will start to sell. They’re sitting on a huge profit and they want to see some of it in dollars, or they get scared, or something happens that scares the whole lot, and then we go south again, and then that will feed on itself—the fear. And we will have momentum to the downside going to the next bottom. I think that’s something in markets that is so fundamental that will not go away. Having said that, most people that are proponents of the supercycle are technical people, or have some experience investing in tech companies like Google and Amazon. And what we’ve seen in those prices is that there is a lot of volatility in the beginning after the IPO because there’s a lot of uncertainty about the company succeeding and adoption for the product kicking in. But once the adoption kicks in, it goes up in an almost straight line with some volatility, but not the volatility you see after the IPO. So I think a lot of tech investors have that mental picture, and they think Bitcoin will do the same thing—I don’t think that is true, because I don’t think Bitcoin is a company like Google and Amazon. I think the volatility in Bitcoin—which has been very high and still is very high—if you look at option prices, the implied volatility is around 100%. So between 90%-100%, which is huge! You can’t see that in any other markets. So a lot of risk/volatility in Bitcoin markets. And that is also of course where the return is coming from. You cannot have a high return without the volatility. So I think volatility is something that is not found in any other markets anymore in the same way it used to be. So for example, equity markets seem to be going up without any volatility, which is also logical because of all the money printing. Same for real estate prices—up, up, up. But the volatility has to go somewhere. The risk has to go somewhere, and central banks cannot print the risk away. So we’re seeing the risk sort of coming back in a concentrated way in Bitcoin. That’s how I see it. And that’s why we have these extremely high returns as well. If you can stomach this volatility, you can reap the profits of the 200% returns almost on average for Bitcoin, annually. So yeah, I think the supercycle is a very interesting concept, but the greed and fear stands in-between. And what I do see by the way is that once Bitcoin hits the stock to flow (a scarcity level) of higher than anything else on the planet—higher than real estate with a stock to flow ratio of 100—once we hit that and Bitcoin becomes the most scarce asset on the planet, I think that could be the moment when hyperbitcoinization or the supercycle kicks in, in a way that’s so much better than real estate and gold and all the other assets that everybody will buy it. And it will probably be the de facto money at that time. So if you look at the S2F model at the moment, it uses Bitcoin prices expressed in Dollars because the Dollar is the world’s reserve currency—everything is expressed in Dollars. But once Bitcoin hit’s that stock to flow ratio of 100 and becomes the best money in the world, I guess it’s time to price everything in Bitcoin, and the role of the Dollar will be less at that time. But that’s after the next halving and probably not before 2025-2026 or something. But I could see a hyperbitcoinization in that sense, a supercycle in that sense, that Bitcoin becomes the de facto money and the denominator of all things valuable. I could see that—but later on.

Stephan Livera:

Yeah, I see. So you see it more like not this cycle but potentially next. But then what about this idea that maybe four-year cycles are gone and actually we might still have cycles up and down, but just not four-year ones. Now to flesh out that argument, it might be that, Okay, the number of new coins coming in now is not that big of a deal. And it’s actually more about what the OG or older HODLers or longer-time HODLers are doing with their stack than it is about the incoming new coins that are coming in as part of the block subsidy every 10 minutes. What’s your view on that?

PlanB:

Yeah, I don’t agree with that view. I understand that view, and most technical people are having that view and indeed the amount of new Bitcoins or the percentage of new Bitcoins is getting less and less and less of a factor in the markets. But you have to look at it from the other way—and that’s also in line with the stock to flow view of things—that you have to view it like an investor. An investor has alternative investments: gold, real estate, equities, et cetera—and Bitcoin. And the fact that when Bitcoin halves, the stock to flow ratio will double, and it will put Bitcoin next to real estate by then, and next to gold by now. So people are really comparing it to gold right now because it’s as scarce as gold—that’s how I view it. So the fact that it’s only very little new Bitcoins coming into markets and less and less, by the way, every halving, and that the impact, for example, of exchanges selling—their fees is bigger than that—or miners not even selling but being fully-funded through their shareholders and not having to sell their coins for electricity costs. Those are all maybe bigger factors in the market, but I look at it from the other way—from the investor way. They’re just scouting for scarce assets. And right now Bitcoin is comparable to gold, and it will be comparable to real estate. And that will be a big change in the eye of the investor.

Stephan Livera:

Yeah. So historically, if we were to look at it, there were times where there was essentially a multi-year bear cycle. So 2014 and 2015 and part of 2016, and then obviously 2017 was the big run-up. And then you could arguably say 2018 and maybe 2019 and 2020 were sort of like bearish years. And then obviously this year, 2021, has been a huge bull run—and the end of 2020 there was a big bull run as well. So are you essentially arguing then that we could see a similar thing happen? That we may see a huge, huge momentum come in, and then again the cycle turns at some point and we have potentially a multi-year bear again before the next bull run?

PlanB:

Yes. And I don’t know if it’s multiple years—all the bulls and bear markets are different—always. They’re never exactly the same. But yeah, I think we go up. The bull run isn’t finished yet. And it will go beyond the $100K level towards $200K or $300K. You know, in the last bull market, the the Bitcoin price went up 2x, or 3x, or sometimes even more, above the stock to flow levels. So yeah, we could see $300K Bitcoin—that would not surprise me. But after the next all-time high, fear will kick in and we will see a lower Bitcoin price. And I guess that will be a trigger that triggers that fear and that downward movement. And that could be a government thing. It’s mostly a government thing [that causes fear], but it could be anything. But it could also be just a very short bear market this time—only half a year or one year. It doesn’t have to be multiple years. But yeah, it could be that 2022 is a bull year—so next year, another bull run. 2023 is a bear market. 2024 will stay in the bear market. And in 2025 it will go up again. I wouldn’t be surprised to see that happening like that.

Stephan Livera:

I see, yeah. And so the way I’m thinking about it is that—so as we were saying, this whole momentum-chasing idea, that on the way up there’s all these people who are chasing, they’re seeing the number go up and they haven’t really studied this thing—and then eventually as it turns, we fall to the level of the “DCA army” or the Bitcoin savings plan. That is the level who are holding the support. So maybe that’s where the supercycle people are saying essentially that there’s going to be such a phase-shift or such a step-change in the way people think about Bitcoin, that there will just be all these new people who are accumulating Bitcoin. And therefore that’s why the supercycle is going to happen and therefore it won’t be huge, huge drawdowns coming because it’ll just be steady continual adoption. So I’m wondering your reaction on that?

PlanB:

Yeah. I hope that were true, but that’s how it felt the last bull markets as well. Like, Oh, this time it’s different and we won’t go down anymore. And that’s why you have to protect yourself against that feeling, because I know how that feels. You think it will go to a million straight up. But yeah I liked your argument:i t’s the DCA army or the army of HODLers that’s constantly adding and not selling. You could, for example, see the 200-week moving average—that’s a four-year moving average. That’s a technical indicator that measures the average price of the last four years. And that measure always goes up. It never goes down. And Bitcoin monthly closes never fall below that 200-week moving average line. So it’s a very interesting indicator. And that’s indeed how I, long-term, would see Bitcoin: it always goes up, and there is a lot of volatility above that 200-week moving average which you should ignore. And in the long-term it all goes up. But it already did that, right? The last 10 years. And I think the next 10 years, yeah—it could be like that. Not necessarily an acceleration of that 200-week moving average, which would be the case if there was a supercycle.

Stephan Livera:

Yeah. So I wanted to turn now to the question of evaluation of these models, because there’s a lot of back and forth. There’s some people out there who are saying, No, S2F modeling is dead, and there are others who say, No, it’s still on track. How do you think about that? How do you think the model should be assessed? And I remember one of our earlier conversations you were saying—put in simple terms—if Bitcoin is not over $100K by the end of this year, 2021, that you would then say, Okay, that model is probably failed. Do you still hold that view or has your view shifted here?

PlanB:

Yeah. And that’s a bit of a short measure, a bit of a simple measure, but yeah—I still hold that view. I think S2F is tracking very well since it was published in March 2019 when Bitcoin was below $4,000. So yeah it tracked really well and it mainly predicted that the the halving was not priced in and would trigger another bull run, which we saw. And we’re now sitting at a bit below $60K, what is it? $57K. So if you look at the charts, for example, this bot of Bitstein which can be found on Twitter, it’s called @S2Fmultiple, and it tracks the performance of the model on a daily basis. You can see that it tracks very well, most of the time within one standard deviation band. And it went a little below the one standard deviation band into the two standard deviations band lately, but came back up from there and we’re now smack back in the one standard deviation band and going towards $100K. So yeah, I think it tracked as advertised. And even I am a bit amazed by that because the model should not work at all, in fact—the efficient market hypothesis—you cannot model the market. But I think the proof of the pudding, the real victory lap is when we cross that $100K barrier. I guess that’s the thing. And it’s good to explain that when you read the article—when you see how the model is made—it’s just a normal regression analysis. It’s nothing spectacular, nothing exotic. It’s very, very simple: one input variable. But what it basically says is: after the 2020 halving, the price level should be on average for that halving period (so, until 2024 ) be $100K. So that is the real proof or validation, if you will. If we track, if the data still fits that very simple linear regression, then it’s all okay. But since technical analysis people somehow don’t really understand the average linear regression thing and are really used to thinking in levels and price targets. I shouldn’t say dumb that down, but I simplify that into: it should be $100K on average one and a half years into the halving cycle. So one and a half years after the last halving, it should at least cross that average of $100K because otherwise it will be very difficult to be $100K on average. We should spend a lot of time above $100K to even make that average. So, yeah, at some point we should cross that line. And historically, looking to the last two bull runs—2017 and 2013—that point is about one and a half years after the halving. So that’s how I came up with: [by] the end of 2021, it should be above $100K. Which is very short and snappy. And technical analysis people understand it. So it’s really the average that we should be looking at, but the $100K is short and simple.

Stephan Livera:

I see. So just to summarize then, the idea is: let’s say we’re looking at the S2F model. The idea then is that the price of Bitcoin should be oscillating around $100K. And so the simplified version that you gave was that the price should at least cross $100K by the end of this year. And you said that last year. And so you’re also thinking of that as like an average over the cycle. So another important thing to note is that Bitcoin can really move a lot in a short period of time. So it could very well spend most of the year well under $100K and then just at the end run really high. Or the other aspect would be if the price of Bitcoin goes well over $100K next year, then it can spend also a lot of the time above $100K. So I’m curious then, is that how you’re seeing it? Are you just essentially seeing it like there could just be really big price moves towards the end of this year or start of next year?

PlanB:

Yeah. Well, if you go for the supercycle it could be like that, right? We could be below $100K and then maybe next year go to $1 million and beyond and then still hit that $100K average. Theoretically that could be, but that’s not what I expect. So basically you can only say until next halfing, really, if the $100K average is reached. And there’s another argument by the way against that—if we spend, for example, three years below $100K and the last year, far above $100K, maybe at $1 million or something. And that is the fact that if you look at the S2F model—and I find that very important—then the Bitcoin price is above and below the model value each and every year. So it really oscillates like you called it around that model line—it really stays close to the model line, and that’s a very important thing. And there was a whole cointegration discussion when the model came out in 2019, which was very interesting. And that sort of hit on that fact that the Bitcoin price stays very close to the model and there were also some formal tests for the possible cointegration, which in the end we could not apply because Stock to Flow is not a random variable. But it’s a very important thing, nevertheless in my opinion, that the price of Bitcoin goes below and above the model line each and every year, the last 10 years.

Stephan Livera:

Yeah. Right. So in your point of view, that should not be seen as like a coincidental thing or not a relevant fact for you. In your mind, that’s quite an important point.

PlanB:

Yeah. And it means that we should not stay below $100K, for example, next year, and then shoot up to $1 million in 2023 and still make that average of $100K. We should go above $100K this year, but if we don’t go above $100K next year then for sure the model failed in my eyes.

Stephan Livera:

I see. And so there’s been a lot of talk around CAGR, right. Compound annual growth rate. And so that 200% number gets thrown around. And as we speak today, as an example, the 10-year version of that number is about 170%. Although of course I think it’s only fair to say that that should taper it down over time, and maybe it’s not fair to say it’s got to be 200% every year going forward, because it’s just not going to sustain that. I think it’s probably more like, like my friend Hass says, something in that 60%-70% range is what we might realistically see for the next coming years, and then it will taper it down over time. And then eventually the model has to fail, as I think you’ve mentioned as well. What’s your thought on that idea, like this idea that it has to taper it down? And that eventually the model would have to fail? And how would you know?

PlanB:

Those are two points. So first—indeed the annual rate, if you look at the last 10 years of Bitcoin is 170% growth or profit. And that is high, of course, and it’s a lot higher than you would expect from for example, the capital asset pricing model (CAPM)—that’s the Nobel prize-winning model that despite all its critics is still used a lot in the financial markets, where you can look at assets from a risk and return point of view. So given the risk of some asset, the volatility of some asset, there should be a return that makes up for that risk. And the risk of Bitcoin is high, but the return is much higher. And I mentioned the risk, the volatility of Bitcoin is—if you look at option prices, the implied volatility—it’s about 100%, but the return is 170%. So the return is higher than the volatility. And that is very rare to see in the markets. So all other assets—bonds, gold, equities, real estate—all other assets have returns that are lower than the volatility. Or the drawdown, depending on how you measure risk. And that’s a very distinct thing from Bitcoin. It technically means the Sharpe ratio is higher than one. The Sharpe ratio is the return divided by the volatility, the risk. So it’s 170% divided by 100% for Bitcoin. And that is very distinct. And I don’t know if that will fall, actually! I think the current central bank policies and the weird stuff we’re seeing with the money printing and even negative interest rates in the part of the world where I live is putting financial markets upside-down and making price discovery almost impossible. And you cannot kill risk. It seems like no company is allowed to go bust. Defaults are not allowed, because the central bank would come in and save the bank or save the airliners or whatever. And we are seeing the same right now with the whole COVID—people are not allowed to die and we’re doing everything, even the most stupid things, to prevent it. But the thing I’m getting at is that that risk is not going away because the governments say it’s going away. That risk—especially in the financial markets—just goes somewhere else. And I have the feeling that Bitcoin is the new frontier, the last place in the world, if you will, where risk and return can be truly present, and where true price discovery can take place. And that’s a very fundamental thing. A very new way of looking. So the whole question then boils down to risk. Is risk going to go away for Bitcoin? Because if that is the case—yeah, well then the returns will come down gradually from 170% to 100% to maybe 60%, which would be in line with other assets. But I don’t know about that! That’s not what I see at the moment. It could also be that the very distinct, exponential trends and the non-normal distribution of returns of Bitcoin—very much following power law distributions—that that characteristic stays for Bitcoin.

Stephan Livera:

Yeah. I’m also curious to ask around Bitcoin and how it fares during a crash. So let me spell a few things out here. So, as an example, people might say during March 2020, everyone was trying to go to USD cash, right? So that’s where basically a lot of things all went down and obviously Bitcoin at that time I think it was maybe $9,000-$10,000 and it crashed to maybe $3,000-$4,000, something roughly like that. And so the argument might be—now, again, I’m obviously more orange-pilled and Bitcoin HODLing myself—but hypothetically people might argue, Look, people have US Dollar-denominated debts or obligations. They need to make rent or payroll or various other obligations, and that’s in USD. So that’s why there’s this big selldown. And so I guess that’s the question that people might be thinking is: during a big crash, during a big financial crisis, could that also happen to Bitcoin? Or do you actually believe—and maybe that’s like the bull argument—that people are eventually going to see more safety in sats than they do in the US Dollar? What’s your reflection or thought on that?

PlanB:

That would be nice. But indeed, March 2020, the COVID crisis—everything went down, right? The bond market, equity markets, and even Bitcoin went down, so people have to sell everything because they lose their job or the company is in bad shape. They need money. And indeed they need the money in Dollars or other fiat and they need to sell their assets. So I guess yeah, that sort of stays. On the other hand, like you say personally, when I sell Bitcoin, then I have this cash on my bank balance sheet or in my bank. And yeah, it feels more risky than having it in Bitcoin because the inflation is eating the purchasing power of my Euros away. The banks can come block the account, freeze the account, can do everything with the account. It’s a much better feeling to have it in Bitcoin and going up all the time instead of having it in fiat. So I’m personally selling only what I need for food and stuff, but not more than that. So yeah, I could see that. But the counter-argument of course is that if you keep it in Bitcoin, you should be okay and at ease with all the volatility in the fiat terms of your stash, right? You should be okay to see it halve in Dollar terms, like we saw in May and June when the Chinese ban was there. And if that’s okay—because you know that on average it will jump back again and on average there will be this 170% growth rate annually—then this is the most perfect investment there is. So yeah, I’m also very hardcore in that I’m okay with the volatility and keep it in Bitcoin rather than turning it to cash. But in these very distinct crisis situations like March 2020, some people don’t have a choice—they have to sell. And of course leverage is playing a part here as well. One of the reasons that it was a very steep selloff in Bitcoin in March 2020 was because of all the leverage longs that were killed and liquidated and those people have their stop losses put in, see the price go against them, go down, and they don’t want to sell because they know it will go back up again, but the exchange will sell it for them. They will be liquidated by the exchange. And yeah, there’s so much leverage in Bitcoin, which I think is very stupid for people to do. To do naked longs or shorts without having the underlying.

Stephan Livera:

And coming back to what we were saying earlier around momentum and how people are thinking when they’re in the euphoria phase of the bull run, that’s when a lot of people will leave it up. And so that’s typically when you can see these big de-leveraging moments where the price comes down a lot. And so at least historically the way it sort of moves, it’s almost like two steps forward, one step back dance. And so it kind of comes up a bit and then back, and then it comes up again and back. But eventually that dance is over and it’s the end of that overarching cycle. To use an example of 2017, $20K was the top, but what happened is after that drop down to say $14K, people were still wondering, Well, hang on—are we going to do another two steps up or is that it for this round? And it took some time for them to know, Oh yeah, actually we are done for this time and we’re going to have to wait until the next big overall cycle. But in the minds of people out there, they might still be confused because you’re not clear whether that was the top or whether we’re still about to go back up again.

PlanB:

Yeah. And it’s always interesting to go back in time and look how you felt in March 2020. Were you close to selling? Or did you feel anything?

Stephan Livera:

I was trying to stack hard!

PlanB:

Or did you switch off the monitor and go sailing or running? And that’s by the way why I say—when the price goes down—I just switch off the monitors. I do a Tweet like I’m sailing or I’m running because that’s really what I’m doing then. I just switch off the monitors and go away from the desk and into Nature to not have to look at it. Because you might be overcome by fear and sell, and you have to protect yourself against that. If you have the confidence and opportunity of course, to sit it out.

Stephan Livera:

And so this whole conversation around macro and Bitcoin and broader conversations around nation states and their adoption of Bitcoin or their response to Bitcoin, I’m curious around your thoughts there? Do you see this?—like there will be nation state-level mining? Or do you think it makes more sense for them to simply accumulate without mining and either purchase or even print and purchase? What kind of adoption do you see making sense for nation states?

PlanB:

Yeah, I think they’ll have the same decision to make that all of us have made individually earlier on, and that investors have to do, and institutional investors have to do right now. To buy Bitcoin now would mean you’re one of the first people or countries to do it like El Salvador. And they got all of the flak for it, and also all the compliments, but from the traditional world and the IMF, for example, they got the flak. So yeah, it’s a first-mover advantage, but it’s also a first-mover of who gets all the critics. You have to have balls, you have to have probably a small country with a leader that can do such a change. That’s a big change. But I guess it makes a lot of sense, right? It makes a lot of sense. Because the alternative is to be rescued by the IMF continuously and eternally for smaller countries, but also, yeah, for the bigger countries, the central banks play such a large role at the moment, they saved all the banks in 2008, they saved all the companies after a COVID March 2020. It seems that even the very big countries like the US and all the countries in Europe cannot operate without the the money printing of the central bank. It’s either that, or hedge a little bit into hard assets like Bitcoin or gold. Well, I find it very interesting what the Chinese are doing at the moment. So they of course have a lot of the US debt, a lot of the US treasuries. And if something were to happen with the US Dollar, as in hyperinflation or debt rescheduling, then of course the Chinese treasuries would be hit. And what you see is the Chinese are buying a lot of real stuff, right? Gold mines in Africa, cobalt mines. All the commodity mines in Africa, all the strategic important infrastructure like harbors in Middle East and Europe, and even in the US. So it’s very interesting to see the the Chinese government buy real stuff—hard assets. And of course the hardest asset in my view would be Bitcoin because it’s better than gold, scarcer than gold in a few years, and more portable, more divisible. It’s thermodynamically the best thing there is. And some governments will figure that out like El Salvador which is of course a small country, but I guess that we’ll see some other countries following that up and then it becomes easier and easier for other countries to adopt because they’re not the first-mover anymore. But I’m quite sure some countries are analyzing it now and are making plans to add Bitcoin to their reserves or switch to legal tender, which El Salvador did. Which is a very boss move, but yeah, I think it brings great, great wealth to a country.

Stephan Livera:

And speaking of El Salvador—so they have made Bitcoin legal tender—and I’m sure you’ve seen the recent announcement about Bitcoin City and the use of a specially structured bond that will actually be giving out a Bitcoin dividend. So I’m curious if you’ve had a chance to look at that Bitcoin City idea and Bitcoin bonds and whether you have any reactions to it or any analysis you’ve looked at?

PlanB:

Yeah. I didn’t look at a city bond as much, but I did look at the volcano bond. Maybe that’s the same thing, but the mining—

Stephan Livera:

I think they are one and the same.

PlanB:

Ah okay. So yeah, the mining bonds are very interesting, and of course mining is a very profitable thing, and giving notes or bonds on that operation is a very logical thing to do—with Blockstream of course doing that already with the Blockstream Mining Notes where you can participate in an otherwise very large capital investment. You can now buy small parts of that investment and still earn that quite huge return. So I think that’s a very logical, very nice thing to do, and a method of making it accessible to traditional investors, because bonds and notes are, they have ISIN numbers. They can be put in the investment administration systems just like a normal bond or shares. Yeah it’s a very, very smart thing to do. I think we’ll see a lot more of that.

Stephan Livera:

Yeah. To your point about easy coding and putting it into the system, it’s crazy how much inertia there is. I recall at the announcement, President Bukele and Samson Mow of Blockstream were saying the code would be EBB1, right? And that was the El Salvador Bitcoin Bond 1. And then I think that’d be the first of a range of these to come. So it might just be that it makes it accessible to people who are otherwise stuck in investing in the more traditional world. And potentially even for the retail investors, there might be a reason for them if they are getting a permanent residency in El Salvador with a track to citizenship. But that is the question for some people, because for many people they might just be like, Well, I could just be holding Bitcoin—why do I want to hold this? And so they would have to think about why they would want to do that. And in some cases it might be access. In some cases it might be they want the permanent residency. It might be they want to retain some exposure to Bitcoin as opposed to buying property, or they might want some level of Bitcoin exposure. So those are some ideas that I’m thinking of. Do you have anything to add there or do you agree? Disagree?

PlanB:

I agree. And of course the bonds and the mining notes do have very different risk profiles than Bitcoin. They don’t drop 50% in a week, for example, like Bitcoin. So the return would be a little bit less, but the risk is much less than Bitcoin. But still, and especially for traditional investors that are a bit scared of the volatility of Bitcoin—which is logical—I mean, 100% volatility is just too much for all banks and insurance companies. So the risk-return profile is different than Bitcoin, so it makes a very nice addition to Bitcoin the asset.

Stephan Livera:

Yeah. So in my mind, I’m sort of thinking of that tension or the clash, because I’m sure some listeners are like, Screw that. Why are you talking about Bitcoin mining stocks or Bitcoin mining notes and Bitcoin bonds—like just hold Bitcoin. But then on the other hand, it’s the right tool for the job or for the right person, right? So of course the retail, highly convicted stacker and HODLer is thinking, No, I just want to hold sats, I just want to hold Bitcoin. But then maybe some of the institutional investors or other people are thinking, Well, they might be buying Microstrategy because they want Bitcoin exposure and it’s easy for them. Or they might be buying Grayscale, or they might be doing the GBTC thing, or they might be looking at ways to get exposure by holding the mining stocks. Or by holding the mining note, or in this case, the Bitcoin bond, because they’re not at the level yet of being able to sustain or take that volatility of just simply holding Bitcoin. So I guess that’s maybe an exploration for the different kinds of people and the different kinds of reasons that people would buy these different things.

PlanB:

Yeah, and of course we have fallen in love with Bitcoin, and Bitcoin is so much more than an asset. It’s a way of living. It’s a culture. It’s a revolution and a new geopolitical thing. But a big institutional investor, he doesn’t mind what he’s investing in. He looks at all the investments through the same scope, and that is risk-return. So if it’s better in risk-return terms and within his mandate—which Bitcoin is not at the moment—then it’s okay. If it’s better, they go there. They’ll add it to the portfolio. But they will never fall in love with Bitcoin like we do.

Stephan Livera:

Yeah, I see. And I guess a similar kind of idea is other vehicles of investing. So there might be other people who are more comfortable with the likes of an ETF. So of course, while that might not be appropriate for those individuals who want direct exposure, I’m curious your thoughts there: do the ETFs represent some kind of centralization risk to Bitcoin? If let’s say all the coins end up in the hands of one big ETF custodian? Or maybe another way to look at it is it’s just inevitable? It was coming anyway. And so it’s time, it will just exist alongside let’s call it the more open, peer-to-peer Bitcoin world.

PlanB:

It’s less peer-to-peer, but I don’t see the concentration risk as a big problem. I see it as a big opportunity, a logical thing. A lot of people, especially through pension funds and normal investment schemes, cannot buy Bitcoin because the asset manager cannot hold the Bitcoin. Their systems are not adapted to private keys, or don’t have links to custodian services. But they can of course buy futures in gold and everything, and also in Bitcoin. So it’s a very easy way of acquiring some Bitcoin exposure for traditional investors, and that’s no problem at all. Also if it’s just a futures ETF, it just means that there is a counterpart that takes the first 10%-20% annually as a reward for having the spot exposure and going through the trouble of having the keys and the custodian services. But the traditional investors and the futures ETFs are willing to give that 10%-20% contango premium up and go for the other, well, 170% minus 10% is 160%, which is still a good deal and fits within their systems and legal framework. So, no, I think it’s just a normal situation—how things should go.

Stephan Livera:

Yeah. So I guess, just to summarize some of the other points we were talking about earlier: so essentially with the S2F model, essentially the simple way was hitting $100K before the end of the year. But the other way could just be sustaining a number well above $100K for let’s say the next two years after the end of this year, something like that. And then in terms of the floor model I think you got two or three months in a row pretty much on the number but it might be a bit difficult—as we record this, it’s the 25th of November and the price is about $57K. I can’t recall off the top of my head, but I believe your floor model had it something like $98K, meaning we’ve got about $30K to go in six, seven days.

PlanB:

Yeah. I won’t say we’re still in play, I guess it’s almost impossible to reach that goal. So I guess that will be a first miss after those three hits—which does not impact the S2F model—but it is a signal for me that something is going on because this hasn’t happened in the last 10 years. The floor model is a technical model, like I said, based on price of the last 10 years. And this is just an extrapolation of that. And the fact that it didn’t hit the $98K is in my view an outlier, a black swan event. I don’t know why, by the way, I have no idea why the price went down the last couple of weeks. It could be the Mt. Gox thing. It could be just technical issues, or consolidation after a big rise. It could be anything, but I couldn’t point to exactly what it is, but in my eyes, it’s an outlier. So in fact, I keep the $135K prediction that the floor model gave for December. I still keep that up and expect this [even] if we fail to hit $98K in five days which it probably will. But I see that as an outlier and probably a V-shaped recovery after that. And if that does not happen—so if we also miss December—then the floor model is out of the window and broken. But I think that’s a good point to make: a model is not broken by the first miss. A model is never 100% right. It can’t be because it would not be a model—a simplification of reality. So there will be misses. This is a miss—it’s a big mess, but it should be a one-off. If it keeps missing, if it’s not continuing its nailing of the other month’s track record then it’s not okay, but missing one month is not a problem for me, at least.

Stephan Livera:

I see. And, you know, it could be that in the next five days we see a bit of a run-up, so it’s not as much of a miss. Who knows. So I guess that’s probably a good spot to finish up. Any closing thoughts that you wanted to leave the listeners with, PlanB?

PlanB:

Well, I’ve got a lot of new followers lately. It’s about 400,000 last month, and the month before that. So it’s really a large number of new followers. I would urge those followers to read my articles, the original old articles from 2019-2020, because a lot of the questions that I get are all answered in those papers. And of course there’s a lot of interviews that I did going in depth for all the questions that are asked currently, and all the previous podcasts and interviews are on my website planbtc.com. The articles are there as well. So especially for the new followers, go to that website planbtc.com and you’ll find them. And make sure you read the articles and listen to one or two of the latest interviews. That would certainly give a lot of insight.

Stephan Livera:

Fantastic. Well, pleasure chatting with you and thank you for joining me, PlanB.

PlanB:

Thank you, Stephan.

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