SLP64 Tuur Demeester – What is Bitcoin Worth? A Bitcoin Valuation Framework

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Tuur Demeester, Bitcoin/Macro Investor and Writer, and Founding Partner of Adamant Capital joins us in a very important macro-economic and investment discussion on how to assess Bitcoin’s value through its past and into the future.

  • Bitcoin Outlook and Phases
  • Historical Bitcoin Valuation ideas
  • New Bitcoin Valuation ideas
  • Bitcoin Full Reserve Banking

Tuur and Adamant Capital Links:

Podcast Transcript Sponsored by GiveBitcoin:

Stephan Livera: Welcome to the Stephan Livera podcast focused on Bitcoin and Austrian economics. Learn the economics and technology of Bitcoin by listening to interviews with Bitcoin’s best.

Stephan Livera: For episode 64 today, my guest is Tuur Demeester. He’s one of the long standing Bitcoin investment writers, creators, and analysts, having written about Bitcoin investment in 2012. Tuur is highly influential. Ranking 11th globally as a crypto influencer and he’s the founding partner of Adamant Capital. Here’s the interview.

Stephan Livera: It’s a great pleasure to welcome you to the show, Tuur. I’ve been, obviously, reading a lot of your work and listening to some of your speeches over the years. So, thanks for coming on the show.

Tuur Demeester: Hey, Stephan. Pleasure to be here.

Stephan Livera: Yeah, so Tuur, I think you’ve been writing some fantastic stuff recently. You’ve obviously written many influential pieces on Bitcoin and some of your most recent work is around, essentially a primer on Bitcoin investment sentiment and changes in saving behavior. But I suppose before we get into some of those it might be good to just talk a little bit about your overall approach, and kind of your guiding philosophy.

Stephan Livera: There are different ways and aspects in which we can view Bitcoin. Can you comment a little on some of those?

Tuur Demeester: Yeah, I mean, how I encountered Bitcoin, the background to that was in 2005 I was studying business cycle theory and the history of money and banking, and so I was just kind of thinking about these cycles where regular recessions and even depressions, the way you defend yourself against that is you just make sure that you have a lot of cash, and then you can buy when everything’s cheap.

Tuur Demeester: But that changes if there’s an inflationary depression because then cash is not safe either. So, you need some kind of different answer and in a depression nobody wants to buy anything. So, the only place to hide really is to find a liquid asset that… And, also everything defaults in a depression, or at least many institutions do. So, you have to find a liquid asset that has low third party risk, low counter party risk.

Tuur Demeester: So, that’s why I was drawn to gold and a lot of other people that started investing in Bitcoin pretty early on originally had a gold background. That’s kind of how I learned about Bitcoin. To me it makes sense as a digital answer to gold because it did make sense to me that in the 21st century we want digital money. Lugging gold bars around is just not very efficient.

Tuur Demeester: And, so that is kind of how I ran into Bitcoin. It made sense to me as a collateral asset. Eventually, I think that’s where were heading towards. As a reserve asset, as a savings instrument and I think down the road it’s also going to become a financial bench mark, a basis for lending, really a standard in many different ways. Similar to how over the centuries we started talking about a gold standard. I think Bitcoin is also going to become a standard.

Stephan Livera: Fantastic. I suppose, we can already see the beginnings of some of this today, right? There are already some Bitcoin backed lending products available.

Tuur Demeester: Yeah, true that. Yeah, and if you look at how crypto traders think. Often case what they’ll do is they’ll kind of measure their performance in Bitcoin terms ’cause why would you do a lot of trading if you can just hold on to Bitcoin, but of course, if with your trading you can enhance your performance above Bitcoin than that makes sense.

Tuur Demeester: And, so I think that’s going to develop more and more. We have a significant pool of Bitcoin savers right now. Probably between 60 to 80 billion dollars worth of bitcoins that are out there, and so there are people and more and more of people who own Bitcoin but who would like to be rewarded for their patience to some extent. The way you do that is that you lend them out in some way, and then the interest rates that you get back that is your reward for relinquishing access to your capital for a while.

Tuur Demeester: Of course, you also incur risk to some extent. So, it’s also your reward for taking some risk. But, that’s essentially how the gold market works for many, many centuries, is that if you had a certain amount of gold at some point you would diversify by investing into loans that would give you claim to a little bit more gold, and then ideally you would be able to live off your interest.

Stephan Livera: Precisely. And, I suppose that may contrast a little bit with what some within the Bitcoin world may… Let’s call it the “hardcore HODLer” position, who believe in the fully not your keys, not your coins model but perhaps that model is… I guess, I can sort of see two different arguments here.

Stephan Livera: One argument would be, “Look, Bitcoin is going through this massive price appreciation. Why do you need to take on the risk of keeping your bitcoins at some custodian when you can simply hold them yourself?” But then on the other hand there is an argument there around no return without risk. What do you think on that?

Tuur Demeester: Yeah, I think it’s not either or it’s really you see most clearly if you kind of imagine different use cases, different profiles of investors, different needs. I think that it’s a very profound insight that not your keys, not your coins, it is true. If you don’t control your keys than you are trusting a third party, and then the question is are you comfortable with that?

Tuur Demeester: We have to also take into account that the current state of Bitcoin hasn’t really allowed for insurance yet. Only now with players like Fidelity coming into play are we seeing significant Bitcoin insurance. Basically insurance against loss of funds, against hacks and things like that.

Tuur Demeester: A lot of bitcoiners got scarred from Mt. Gox and before that there were several custodians that basically either did an exit scam or got hacked. I think this paranoia is very understandable, productive, important but at the same time we are seeing the custody ecosystem mature and I think as a means of diversification it does make sense to look for a return on your Bitcoin, taking into account the volatility, and you have to think about a lot of things before doing that.

Tuur Demeester: Just like how you diversify a traditional portfolio, you have to think about it in that way as well for your Bitcoin portfolio. I think that there are arguments why you might want to trust all or part of your bitcoins to a third party. If you have very limited technical ability, maybe the third party is going to be able to secure it in a better way than you do.

Tuur Demeester: There’s no reason to be restricted to just one. You can have multiple third parties that take care of parts of your Bitcoin. You can engage in multi-sig storage where you only store one out of three keys with a third party so that they can have a backup for you in case you lose one of your keys yourself.

Tuur Demeester: I’m talking about a multi-sig set up that is going to become more and more popular where rather than trusting a custodian to hold all of your Bitcoin, you trust them to hold one of your keys, and say that your set up is, for example, three out of five multi-sig, you can give one key to three different custodians so they store three keys between them and then you have two, and then of course you have to trust that their not going to collude. There’s all kinds of schemes possible there.

Tuur Demeester: It’s going to be really interesting, and I think to some extent people underestimate how creative these multi-sig schemes can become to really cover a lot of edge cases where you might lose your Bitcoin. Even the time locks are super interesting as well. For example, you have a two out of two multi-sig between you and the custodian, and if everything’s normal you just sign transactions, and then if you don’t sign the transaction for let’s say six months it’s possible to create a contract that will then revert control to you as single signatory.

Tuur Demeester: So, that would basically mean that you can take away the power from your counterparty if, for example, you don’t trust them anymore you can say, “All right. I’m just not going to sign for six months. The power then goes back to me.” But then there’s another case where maybe you just lost that key, so then from what I hear, it should even be possible to have another mechanism that then over time reverts the power back to the third party.

Tuur Demeester: We can talk a lot of detail here but basically just to illustrate how flexible these signature structures can become to really get the best of both worlds of third party custody and then also control of your own keys.

Stephan Livera: Exactly, and I think you make a very good point there that in the early days these sorts of multi-signature, easy to use solutions, were not available, and that as Bitcoin proceeds through these different phases some of these more advanced techniques are becoming available. We’re seeing more financialization. I think these are just some of the different phases of Bitcoin.

Stephan Livera: I noticed on your website you listed some different phases. You talked about this concept of discovery from 2008 to 2013, infrastructure 2013 to 2020, and then deployment 2020 to 2025. Do you want to just elaborate a little on those phases?

Tuur Demeester: Yeah, sure. Sure. So, in my mind Bitcoin is slowly maturing to becoming a full fledged reserve asset, a full fledged digital gold, a full fledged money, and that just doesn’t happen in one day. It goes in phases. Historically also money never just appeared, it always evolved.

Tuur Demeester: The way I see the first phase in Bitcoin is really discovery. It’s hackers and coders who just found this interesting project, and I think that phase was roughly speaking from 2008 to 2013. Where we saw extreme volatility, very poor tools available, everything was command line based. Not a lot for investors or lay people that was available. And, then I think that changed in 2013 with the price increasing, and some VC’s getting involved, and some start ups that were really trying to increase the appeal for Bitcoin to the general public.

Tuur Demeester: We saw the first hardware wallets appear in 2013. Also, the first ASIC mining rigs. Mining became more and more professionalized. Some improvements in custody like 2013 is when Mt. Gox starting seeing some very serious competition. It was also that you could see the decline in market share of Mt. Gox, which to me was the epitome of the discovery phase. Just an incredibly poorly run exchange.

Tuur Demeester: I see this infrastructure phase going on even today. The financialization of Bitcoin is part of that where we just get Bitcoin futures, Bitcoin derivatives, more advanced ways to store Bitcoin. The first instances of serious Bitcoin insurance. I see that continues still maybe in 2020 that you could call that the end of the infrastructure phase, and the start of what I call the deployment phase.

Tuur Demeester: Let’s call it the Windows 1995 moment when we can really go main stream, and so that’s when I see Bitcoin starting to be held by large hedge funds, sovereign wealth funds, where we have really a mature custody and insurance system. Which doesn’t mean that nobody’s ever going to go bankrupt anymore, but at least there’s more significant maturity, enough for mass adoption.

Tuur Demeester: That’s kind of also where you probably could see the adoption rate go from five, six percent today to really pass that inflection point of maybe 10 percent. If you look at internet adoption, I believe in 1995 in the US, nine percent of households had internet, and of course we all know today it’s well above 80 percent.

Tuur Demeester: So, I think we could see that in 2020, 2021 is really we would move past that inflection point and get main stream adoption of Bitcoin.

Stephan Livera: Precisely, and the other thing with this, if you’re thinking as an investor, as a trader then it’s a question of how do you deploy your capital, and I think one of the difficult problems that many people have faced is the difficulty of simply generating a return over and above Bitcoin.

Stephan Livera: So, when they’re thinking about investing in a company, they have to now worry, “Well, hang on. In fact, very few companies in this space have done better than simply holding Bitcoin.” Do you have any thoughts on how achievable that is, and ways to think about that?

Tuur Demeester: Yeah, it’s a complex question. There are several things to take into account. One is obviously taxation. If capital gains are taxed basically the more you move, the more you trade, the more likely you’re going to be facing higher taxes. So that’s one thing to take into account, is that longer term strategies are going to yield better results on average.

Tuur Demeester: When you think about lending Bitcoin you have to think about, again, how is it going to be taxed? It’s actually unclear how that is in the US, for example. And, in other places, how Bitcoin loans exactly are taxed. Of course, you’re dealing with counter party risk if you’re talking about lending.

Tuur Demeester: I’m listing the challenges here but I do think Bitcoin lending is going to become huge. I think it’s going to be a huge market over time, and Bitcoin is going to basically a very sought after source of capital in the long run. But it’ll take time to mature.

Tuur Demeester: One of the challenges in the short term with lending out Bitcoin is that in a bull market when the price goes up a lot than these counter parties potentially have more and more trouble to repay the loan, because what was initially, let’s say, 100,000 dollar loan becomes 500,000 or a million if Bitcoin really is in one of those big rally’s. That’s something to take into account.

Tuur Demeester: There is also the strategy of converting your Bitcoin into mining gear, and deciding to switch to Bitcoin mining. I think that is very difficult to do well. I think it is possible to enhance your Bitcoin returns by doing that. I think historically we did some work on this, and it looks like if you can time the top in a good way then, even after taxes, you will likely be able to generate a return above and beyond Bitcoin.

Tuur Demeester: There’s a lot of caveats there. By the way, this is not financial advice. This is just me thinking out loud, and then having thought about some of these general strategies. But, the challenge there is that there’s operational risk, obviously.

Tuur Demeester: You need to make sure that if you sell your Bitcoin and then you buy the equipment, that the equipment will rise, that it’s in good quality, that your electricity costs are low enough because that’s the trap of bull markets. Is that you see mining pop up everywhere, even at electricity costs of seven cents a kilowatt, eight, nine, and that’s all doable in a raging bull market, but as soon as the price drops than it becomes extremely competitive.

Tuur Demeester: Right now, it’s very hard to be competitive if you have five cents electricity costs or higher. You really have to go lower than that. Generally speaking, in terms of timing you have to be at the top of the market when you decide to convert into mining. So, that’s a timing challenge, and an operational challenge ’cause you’re competing with the entire world basically. Miners could be anywhere.

Tuur Demeester: Another strategy is to basically use your Bitcoin as collateral and in a bear market borrow somewhat against that. Basically, lever up slightly and acquire some more Bitcoin, and then as the market goes up you’ll be able to repay that loan and whatever’s left is basically your alpha.

Tuur Demeester: That’s another strategy and I think that’s probably the most promising strategy, because it’s tax efficient. You, obviously, have to know what you’re doing. You have to time the market well. But, in general terms, I think that’s a viable long term strategy.

Stephan Livera: Right, and I think, I’m curious actually, that brings up the question. This whole concept of can we time the market? And, obviously there are debates around whether TA is a thing, and so on. My view is essentially that it’s sort of like poker, right? There might be the top five percent who actually can make money, but then probably that bottom 95 percent, many of those people are either breaking even or losing money, right?

Stephan Livera: In this analogy maybe a person who’s good at poker it’s because they sort of know the game better, and they play their cards better. I suppose, a person who is good at let’s say timing the market, is it then in your view, is it that they are better at perceiving the emotional bias, or perceiving the thoughts of the other people in the market better?

Tuur Demeester: Well, there’s a number of things to that. I think nobody can exactly time the market. That is just impossible. Calling the exact bottom, calling the exact top, that’s not possible. I think the good news is that it’s not necessary, if you can roughly get it right, and you have appropriate risk management then you can out perform the market.

Tuur Demeester: I think that’s been proven time and time again, but I think one of the biggest challenge for traders is just to accept that, and have the humility that you cannot get it right, and so that you have to really manage risk in a significant way, and just be aware that you can get it wrong, and then have contingency plans for if it goes wrong. How to unwind your position, and things like that. And really, kind of, also emotionally and practically prepare for scenarios where you get it wrong.

Tuur Demeester: I think that’s really what differentiates successful speculators from unsuccessful speculators. And, then what you get at, I think is also true, that having a feel for the market, for the emotions that are alive in the market, I think is very value, and that’s where I think experience comes into play.

Tuur Demeester: Obviously, no two markets are the same, and no two different phases in the same market will ever be exactly the same, but getting an emotional feel for markets, I do think you can develop. Somebody whose been studying the oil markets for a decade is going to have a significant advantage over somebody who’s knew to them, and understand better what drives them in terms of price.

Tuur Demeester: The same goes for Bitcoin where you, for example, I’ve been in this market for seven years, and I’ve made some mistakes, and I’ve paid my dues to some extent because I always traded with a very small amount ’cause I knew I was putting myself through Bitcoin trading university which nobody had ever done. I think you just have to be aware that you’re a novice if you start in a new market.

Tuur Demeester: So, I always traded with very small amounts to kind of learn the ropes, and the interesting thing with Bitcoin is that there are some quantitative sources of information available that are very hard, if not impossible, to acquire in other asset classes, and I think that’s fascinating and very valuable. And, it can allow you to get an edge over other people.

Tuur Demeester: And, also, of course, the choice of those quantitative measures is vital, right? It’s not enough to see a pattern because patterns can be broken. It’s very important to understand why a certain pattern might matter or might not matter. So, I think those are some of the ways to think about how to time the market, how to work on your skills in that regard. One of the ways that’s been helpful for me is to be active on social media, especially on Twitter ’cause it’s almost like you have your finger on the pulse.

Tuur Demeester: Every day you see what traders are saying, what people are doing, the kind of calls that they’re making. That’s been really valuable for me to get signals from the market.

Stephan Livera: Let’s now talk a little bit about some of the historical approaches to assessing Bitcoin because some of these you mention in your article, and obviously just having been around the space there have been different approaches. So, I think one very popular one was Trace Mayer’s 200 Day Moving Average, which also became known as the Mayer Multiple. Do you want to comment a little on that one?

Tuur Demeester: Sure. Sure, yeah. So, it’s true. How to value Bitcoin has just been a mystery to people, and something that people really have been thinking about since 2010. How do you value Bitcoin? It’s not a stock. It’s not a company. It’s probably a commodity but it’s very scarce, so you can’t just look at supply and demand in the way that you can with maybe wheat, or oil, or something like that.

Tuur Demeester: So, early on people came up with these different approaches, and I think what Trace saw in 2012 was that basically his core observation is Bitcoin is in a long term secular uptrend. And, it’s very, very volatile, so what can we do to smoothen out that volatility to then decide whether or not Bitcoin is deviating from the general trend? That’s how he came up with… I think other people named it the Mayer Multiple, but he suggested that 200 daily moving average of the market cap at Bitcoin.

Tuur Demeester: I think that’s an absolutely valid way to look at Bitcoin. I do think the danger there can be that it’s kind of self-referential ’cause you try to predict the price based on price information which is not bad in itself, but I think you always want to find sources of data and measures that will independently confirm or potentially contradict what your moving average says.

Stephan Livera: Right. Yeah. It’s a good point there around needing some form of external data input rather than simply just looking at the price trend. But, there were other aspects there that do build on aspects around that. Another example is NVT. How do you view NVT then?

Tuur Demeester: Yeah, this first was suggested in early 2014. It was somebody, I think on Bitcoin Talk, who suggested this thing called Network Value. He said, basically, let’s look at how fast Bitcoin addresses are growing and map that out against its market capitalization. So, there will be times when you have relatively more address growth and a relatively low market cap. Maybe that’s when Bitcoin is undervalued.

Tuur Demeester: It’s kind of similar to the ideas that the address growth is a proxy for user growth. It goes back to how a lot of internet start ups are often valued. In Facebook, for example, is valued at either market cap or revenue per user. Monthly active users, for example, is a very popular metric for these kinds of internet companies.

Tuur Demeester: I think the challenge is that Bitcoin’s address space is limited. There’s only… What is it now? Three, four megabytes available per 10 minutes to add to the Bitcoin blockchain. So, there’s a limit there. The other challenge is that in periods of low transaction fees, anyone can just spam the blockchain and add more transactions, and create more addresses, that doesn’t mean that we’re seeing meaningful activity.

Tuur Demeester: That’s always been where I was uncomfortable with network value or NVT as a way to really value Bitcoin. Is that, yes, it measures activity, but does it measure meaningful activity? So, I prefer to not use that measure to decide whether or not Bitcoin is at fair value even though so far to be fair the signals have been fairly reliable. But, I think that especially as we run into these capacity limits, it might just lose potency.

Stephan Livera: Right, and I think Willy Woo himself came out and said, “Well, look now with Blockstream Liquid, it might actually use some of its predictive power because some of that larger volume might now be going across using liquid.”

Tuur Demeester: True that, yes.

Stephan Livera: Yeah. And, then I suppose some of the next work that was sort of a landmark in this kind of idea of blockchain data analysis, I think is Dhruv Bansal’s HODL Waves. Do you want to comment a little on what are your thoughts on HODL Wave’s?

Tuur Demeester: Yeah, fascinating research. And, this was 2018, but I think to appreciate HODL Waves you probably need to go back to 2011 when some early Bitcoiners came up with this idea of Bitcoin days destroyed. The idea is that every time one bitcoin is not spent for an entire day that’s one Bitcoin day. So, if I have one bitcoin and that one bitcoin is a thousand days old basically it has not been spent in a thousand days, and then I decide to spend it then I’m destroying a thousand Bitcoin days.

Tuur Demeester: So, you can aggregate that across the entire blockchain and look at how many days are there destroyed every day, and that’s fascinating because it really communicates that there’s meaningful activity there. If a lot of days are destroyed that means a lot of old coins are moving that must have some significance.

Tuur Demeester: So, that was all the way back in 2011, and then for a long time nothing really happened with that. You could see the measure blockchain info in their chart pack, and then eventually in 2014 John Radcliffe published this analysis of the blockchain where he also looked at the age of bitcoins based on when they were last used. It was just this kind of elegant graph that showed like, “Oh, yeah, look. Today this many coins are six months old or younger. And this many coins are between one and two years old, and so on and so forth.”

Tuur Demeester: So, he did that in 2014, and then in 2018, recently Dhruv who is CSO at Unchained Capital. He took that idea a bit further, and presented it in a more elegant way, and updated the work ’cause it hadn’t really been done since 2014, and suggested this concept of HODL Wave’s where you could literally see how the age of the coins varies over time.

Tuur Demeester: In particular what you can see is that when Bitcoin rallies a lot in price, we see a decline in old coins, which basically means that there are liquidations happening. Value realization is happening when a lot of retail money flows into Bitcoin the “original gangsters” often decide to sell some coins or to move them around.

Tuur Demeester: That’s, I think, just really fascinating and interesting. I don’t know if you allow me, I can expand a little on how you can develop some measures from that.

Stephan Livera: Okay, so that’s a little bit of detail, a little bit of context around this idea of HODL Wave’s, and Bitcoin days destroyed and I think maybe the next idea that was significant in my mind was this concept of realized cap. And that was sort of valuing the aggregate value of the UTXO’s, priced by their value when they last moved. Do you have any reflections on that, Tuur?

Tuur Demeester: Yeah, I think that’s really interesting ’cause it starts going into like, “Well, is this blockchain meaningfully used?” Because, if you and I create a new coin and it has a supply of a billion, let’s say, and then you and I decide to move a thousand coins back and forth all the time. We can seemingly generate a lot of activity but what realized cap allows you to do is that it allows you do debunk that, and allows to prove that, “Look, you guys only moved a few coins. The realized cap of your blockchain is very low.”

Tuur Demeester: So, I think this was an important step, and then if you subtract the market cap from realized cap what you then get is the unrealized profit and loss. So, that’s really interesting where you can start aggregating and looking whether the average Bitcoin investor is either under water in dollar terms, or is in the green where he has unrealized profits.

Tuur Demeester: That ratio is super interesting. You can also then divide it again by the market cap to see it on a relative basis. So, then you get the relative and realized profit and loss. And, that really is, I think, a very powerful sentiment indicator.

Tuur Demeester: If you can estimate whether the market as a whole has large unrealized profits then maybe that says something about how people are very confident, how maybe at some point there’s exuberance, and then on the downside if in the aggregate if people are facing losses, well, then that probably means that the sentiment is much more negative and that you can start talking about under valuation.

Stephan Livera: Right, and then I guess if I understand you correctly then you would use that to try and perceive where the market is sitting, like emotionally where are most of the people collectively feeling, and also based on that understand if there’s a lot of people who have lost hope and are feeling capitulation, sort to speak, then that is theoretically a good time to start purchasing more bitcoins. Is that how you would think about it?

Tuur Demeester: Yeah, that’s what we’ve seen through these Bitcoin cycles. Especially the retail public that didn’t really have a long term game plan. They get involved. They’re very excited. They have this idea that they’re going to multiply their investments and then when it goes up a lot it’s great. When the value melts away, it’s still great but as soon as they start to get under water where they really are facing dollar based losses that’s when sentiment really quickly goes ice cold.

Tuur Demeester: Eventually people just walk away, and they feel disgusted. They don’t want to have anything to do with it, and that’s like you say that’s when using the word capitulation is appropriate, I think.

Stephan Livera: Let’s talk then about some of the new suggested evaluation tools, and one of the key measures that you suggest to explain is this concept of liveliness. Can you go into that?

Tuur Demeester: Yes, so, we were talking earlier about these HODL Waves where you can see like the coins between age two and three, two years old to three years old, these coins are diminishing in quantity, for example. And, we see more recently moved coins, and things like that. But, the challenge with that is that you don’t get a clear signal or unambiguous utility. You see an interesting graph but then what do you do with it?

Tuur Demeester: So, what our adviser Tamas Blummer came up with several months ago, is this idea of liveliness as one single measure that focuses on the coins that move relative to how long they were previously dormant. And, the way you calculate liveliness is by adding together all the Bitcoin days destroyed and then dividing that by the sum of all the Bitcoin days that were ever created.

Tuur Demeester: Basically, the more meaningful activity we see. The more coins that are destroyed, the higher the liveliness is going to be. It’s a percentage. It goes from zero to 100. And, so that gives you just one single data point. A single measure that evolves over time that gives you an idea of whether a particular blockchain has a lot of meaningful use. Are there a lot of days destroyed?

Tuur Demeester: And, then also it indicates… it will be lower, for example, if there’s a high inflation rate in the coin. Then the liveliness is going to be lower than in a case of a currency with a capped supply. So, it’s a very powerful tool, and you can imagine, for example, a lot of people use market cap these days to look at how valuable a cryptocurrency is.

Tuur Demeester: So, for example, with Litecoin you would just say, “What is the total supply of Litecoin?” What are all the litecoin’s that were ever mined, and then you multiply that by the price, and there you have the market cap.

Tuur Demeester: But, the challenge with… We already discussed it a little bit earlier. The challenge with that is that it doesn’t say anything about meaningful use, and so what you could do is you could multiply the market cap by liveliness, and then you get a corrected market cap. That in the case of some kind of scam coin all of a sudden you get a very low value, and in the case of Bitcoin where the liveliness is close to 60 percent, you would get a very high number.

Tuur Demeester: So, I think that’s some work to be done where liveliness is used as a way to kind of adjust for meaningful use of blockchains. And, in the case of Bitcoin, the really cool thing is that it allows you to start estimating how many coins are being meaningfully held by Bitcoin savers and then from that you can derive whether people are accumulating more coins or whether in the aggregate they’re actually dishoarding and selling more coins.

Tuur Demeester: And, that is kind of the equivalent of insider buying and selling. So, that’s what we call the HODLer position change. Where you can start estimating, for example, on a monthly basis are in the aggregate Bitcoin holders are they selling coins, or are they accumulating more coins. That’s, of course, very interesting.

Tuur Demeester: If you had a way to know what long term gold holders are doing at any given time in the market, you would want to know that, if you are a gold investor, to decide whether or not gold is undervalued or overvalued at any given time.

Stephan Livera: It’s a fantastic point you make around this is an unprecedented thing. We could never have done this in the market for gold, but we can do this in the market for Bitcoin to some extent. Obviously, it’s not a perfect science, but it is an interesting idea.

Stephan Livera: I like that in some sense it’s trying to help understand what are the whales doing? What are the sort of people, who were around for a long time, what are they doing with their coins?

Stephan Livera: I suppose, just to kind of articulate how they might’ve thought, or how they might’ve gone through this, they might have bought some coins early and then the crazy November and December 2017 run up happens, and then some of them would have thought, “Well, hey, this is a pretty good price, I might as well take some of that out and buy a house, buy a car, whatever.” And, then go back to HODLing for the rest of their position.

Stephan Livera: In some ways this is kind of a way to try and interrogate through using data science and the blockchain to try and perceive that.

Tuur Demeester: Yeah. One interesting observation, for example, is that what we’ve seen like looking at the blockchain starting from 2012, is that every time a previous all time high is reached… So, for example, that would be in, let’s see, early 2013, late 2013, and then again in early 2017. For example, in early 2017 that’s when the thousand dollar was achieved again after the two year bear market.

Tuur Demeester: We saw really significant dishoarding. So, Bitcoin holders, they had been waiting for two years, and psychologically it was really important to them that the previous all time high was reached. And, so they felt the thing that they wished they had done in early 2014, like basically sell some more coins, finally they allowed themselves to do that in early 2017.

Tuur Demeester: The old, old time high was there. Let’s sell some coins. And, so we see this dishoarding happen just all the way through early 2018, and that’s kind of when you could say the whale selling started to become exhausted, and you saw accumulation again.

Stephan Livera: Fantastic. I guess we’re speculating here, obviously, Tuur, but do you believe that some of those people who maybe they had bought during 2013, and then they were selling at the start of 2017, as you mentioned.

Stephan Livera: Do you think they were selling because in their mind like to try and get into their head in terms of investor sentiment. Were they thinking, “I want to try and maybe I bought at like 800 dollars and now I can sell for 1000 so I can take out some of my initial money.” Or, do you think it was more like they had maybe bought at 200 and they wanted to sort of sell at 1000 just to try and “lock in” some of their gains?

Tuur Demeester: Yeah, I feel like it’s more about locking in. That’s kind of my hunch. It’s sort of like locking in come gains and to kind of, maybe it’s… You know, the bear market was rough. Especially for people that have significant exposure, they saw a down turn of 85 percent, massive decline in value at least psychologically of their portfolio.

Tuur Demeester: So, to kind of have some relief, to at least psychologically like, “Oh, yes. I made some actual profits off my Bitcoin. It’s like I can tell my wife, look we did a 3X on Bitcoin, or we doubled our money with Bitcoin.” And, that doesn’t mean that they sold everything. Of course, in the aggregate they didn’t.

Tuur Demeester: Yeah, I would say that’s probably the strongest motivation for people, or it’s more diversification, right? Maybe they sold some Bitcoin to invest in some assets that maybe are related to the ecosystem. Maybe they were starting to diversify in some old coins as well because that was the start of the ICO boom.

Stephan Livera: Right, yes. So, they could have thought, “Oh, hey. I can gamble a bit on these other coins because whatever.” Right?

Tuur Demeester: Maybe they were like, “Damn, I missed out on Ethereum and now there’s all these other coins coming up. Let’s try to hitch a ride with those.”

Stephan Livera: Precisely, yes. People may well have done that, I guess. Okay. Another concept I was keen to just get your thoughts on, are you a believer in this whole Bitcoin block halving? Every four years the subsidy drops in half. Are you a believer that is a supply shark that then drives the next bubble or do you think it’s something else?

Tuur Demeester: We’re doing some research into this currently. My belief is that value investors who invest in Bitcoin, they look at the 21 million number, and they basically just take into account that the supply is going to increase. So, basically they price in these diminishing supply factor over time.

Tuur Demeester: I do think to some extent it can be a catalyst of an already existing trend. Where it’s like the miners are going to get less coins, and it’s going to be less supply that comes into the market, and also miners anticipate the halving. So they decide to hold on to some more coins. They hoard more coins as the halving approaches because they know that they’ll only get 50 percent of those rewards anyway after the halving.

Tuur Demeester: So, if anything, I think it’s a catalyst. I don’t think it’s a fundamental trend driver. So, I think it’s very dangerous to think it’s guaranteed that we’re going to have this massive rally before the next halving. And, also you have to keep in mind that annual inflation, and I mean the definition of inflation that I use here would be just increase in supply, it originally was, I think, 12 percent or something like that, and then with the halving it went to about five percent. And then now it will be like two and a half percent after the next halving.

Tuur Demeester: So every time the effect becomes less and less, like right now in the gold mining world, for example, gold miners only manage to add about one percent of additional supply to the existing above ground supply. Just because there’s already so much gold mine, the easy, the low hanging fruit is gone.

Tuur Demeester: It will be similar with Bitcoin where I think you have to be careful to think about it as this season… I’ve seen it often in seasonality where people are like, “Oh, gold is in season.” Like the summer doldrums and then there’s a rally and at that point I think it’s dangerous to just assume that it will come back because its happened in the past. Bitcoin has only seen what now three halvings, am I right?

Tuur Demeester: No, it went from 50 to [crosstalk 00:46:30] 25 and then to twelve and a half.

Stephan Livera: Two.

Tuur Demeester: So, yeah, only two. I think that’s not a big data set. I want to be careful to throw it in there as a massive factor.

Stephan Livera: Right, yeah. So, I think the other point that would be made is just that knowledge is not given to everyone, and many kind of newbie investors who buy into Bitcoin they may not be aware of the dynamics around the halving. So, that may be one point to consider, but also I would recognize that perhaps where seeing this phenomenon of the cycles elongating. Do you have any thoughts on that concept?

Tuur Demeester: Yeah, I think it just fits together so nicely. It always kind of makes me skeptical of the theory because its so elegant to think Bitcoin has these cycles, and it’s a commodity, and so it’s maturing into a really full fledged mature commodity like oil, or like wheat, or gold.

Tuur Demeester: And, so just like in the commodities market eventually we’ll have these twenty year cycles, and so the way to get there would be that gradually the Bitcoin cycles are going to lengthen more and more until we get to that lower volatility, long term cycle situation of other commodities.

Tuur Demeester: But even though I’m trying to be my own devil’s advocate, I haven’t really found strong counter arguments as to this happening. Bitcoin is 10 years old, and we are actually seeing the volatility’s slowly declining over time, the cycles are lengthening. I think it’s a very valid, and important piece to the puzzle, if you want to understand Bitcoin’s price dynamics.

Stephan Livera: Precisely. Also, just wanted to get your thoughts around the potential for some of these blockchain analytics and data science potential to be diminished by coming changes. So, let’s say an increased use of Lightning Network or if, let’s say, some day confidential transactions were to come to Bitcoin. Would they reduce the ability to actually do this kind of blockchain data analysis?

Tuur Demeester: Well, that’s interesting, and we’ve thought about this quite a lot. For one, obviously, de-anonymization would be a lot harder if Schnorr were to be merged into Bitcoin, and some other things where we actually get a lot of use of confidential transactions. But, you would still be able to determine the age of meaningful Bitcoin transactions.

Tuur Demeester: So, the idea of liveliness, all the measures that we talked about you would still be able to calculate those. At least, that’s my understanding. I’m happy to be corrected. Then when you think about maybe the Liquid sidechain, or if you look at Lightning. These are other ways in which Bitcoin will be moved around. That is true, but the blockchain is still going to be the ultimate settlement system.

Tuur Demeester: It’s kind of like looking at large scale gold settlement transactions. I think it’s fair to say that those are more meaningful than how the Gold ETF is moving ’cause I think a Gold ETF is much more going to reflect retail markets whereas moving tons of physical gold around the world that is more likely to be the long term savers of gold that are starting to speak.

Tuur Demeester: And, I think it’s similar for Bitcoin. I think that almost by definition because of how this protocol stack is built up where the most secure layer is the bottom layer. The most meaningful Bitcoin transaction will always happen on the blockchain.

Stephan Livera: Fantastic insights. I a hundred percent agree, I think ultimately we have to view each Bitcoin transaction as kind of gaining weight over time that right now it could just be… In the early days people did use it for coffee, but over time it will become very large. Many, many transactions will be sort of contained within one Bitcoin transaction, if that makes sense.

Tuur Demeester: Yeah, one way to compare, if you will, to the gold world would be to look at the London Bullion Market Association which is the place where whole sale settlement of physical gold transactions happen. I need to look up the exact number, but the daily amount of transactions that are settled on that platform is extremely low.

Tuur Demeester: And, I remember calculating that the average transaction size of the LBMA is 7 million dollars worth of gold. And, so, of course, if you project forward and think about the Bitcoin blockchain being such a core whole sale transaction settlement system, and say that the average size of a Bitcoin transaction goes up to maybe thousands and thousands of dollars. It could be 100,000 dollars worth of coins on average for every transaction then, of course, you can imagine much higher fees, and of course, with that a much bigger and beefier fire wall.

Tuur Demeester: The Bitcoin mining security would then have all those transaction fees as fuel to make sure that Bitcoin stays safe.

Stephan Livera: Fantastic. Last kind of area I was keen to touch on with you, Tuur, actually we’re sort of calling back. It just occurred to me, one of your earlier articles and this is now what five years old? Bitcoin as the new petroleum. So, I think it was a great article, very forward looking.

Stephan Livera: In this article you talk a little bit about some of these ideas around how customers would demand certain things, right? They will want a kind of deposit banking. They will want kind of verifiable reserve orders. They might want lending and borrowing brokerage as a separate service.

Stephan Livera: I’m just curious, do you see a future where we have Bitcoin full reserve banking?

Tuur Demeester: Yeah, and I think that it’s going to be this incredible… It’s just going to be so fascinating. This incredible tension between on the one hand full reserve banking, and on the other hand the desire to go fractional reserve banking. And, it’s understandable if you think of it, right?

Tuur Demeester: People entrust you as an entity with thousands of bitcoins, and the only thing you can do is just sit and stare at them, and charge them a little fee for holding it. Maybe like half percent or one percent for holding onto those coins, even though it’s such an incredibly liquid asset.

Tuur Demeester: It becomes very tempting to say, “Well, what are the chances we get a bank run where people are going to withdrawal 80 percent of the coins? That’s very low. Let’s just start lending out some of these coins and make an extra return, and then maybe we can even start paying our depositor’s an interest rate.”

Tuur Demeester: But the challenge with that is that in absence of a central bank that’s ready to be the lender of last resort, and bail out the banks. You have a risk of failure, and these things can escalate very quickly like the Trace Mayer suggested proof of keys event. If people really start doing that, and withdrawing large amounts of coins from these exchanges than that will be making it clear who is swimming naked, sort to speak, if the tide recedes.

Tuur Demeester: So, I think that’s why really trying to emphasize audits of Bitcoin exchanges, and trying to build tools that make it easier for exchanges to audit reserves in a way that still preserves their customer confidentiality ’cause that’s always the challenge if you try to audit. How do you audit without de-anonymizing your customers and revealing to the world who is banking with you?

Tuur Demeester: But, so, yeah. Absolutely, I think that full reserve banking is already the case, right? At least in theory, all the Bitcoin exchanges are what you could call full reserve banks. Especially the shops like Xapo. That’s a full reserve bank right there. Places like Gemini that do cold storage, that’s a full reserve bank.

Tuur Demeester: I think the interesting time is coming where people want a return on their Bitcoin and then there’s these shops that say, “Hey, you could do it here.” The risk is that they’ll start making these impossible promises of like, “Oh, we can make you a return but also your bitcoins are always available to you.” Which is not possible, right? It’s a dance of chairs.

Tuur Demeester: It’s only a matter of time until you’re the marginal customer that can no longer withdraw because of the problem of maturity mismatch.

Stephan Livera: Fantastic insights, as well. And, I can see again the parallels between the Austrian full reserve and Fractional reserve banking debate coming up again. And, so there would be some who believe that could be a good thing because customers can earn more, but then on the sort of more full reserve argument side, it’s more like, “Why would such a thing be necessary?”

Stephan Livera: Speaking in a macro sense, why would such a thing be necessary? That could also create the business cycle, as I’m sure you’re aware.

Tuur Demeester: Exactly. It’s exactly the ’cause of… it’s one of my pet peeves is that the ultimate cause of business cycles is not just some natural phenomenon like the weather. Where it’s like, “Oh, storms they come and go.” It’s really the credit expansion or fractional reserve banks that cause very serious capital misallocation, and then the crisis is just correcting for that, and so I think that having an economy with many more full reserve banks would basically allow credits to be priced accurately, and to not be artificially cheap. Then we would avoid a lot of these bubbles.

Tuur Demeester: I think it would really allow… look at the 19th century, especially second half 19th century. One of the most prosperous periods in world history and it was all built on gold standard banking. Just this very solid basis to have sustainable growth on.

Stephan Livera: Fantastic. I think we’re in 100 percent agreement there, Tuur. So, look I think we’re unfortunately coming to the end of our time. So, Tuur, I’ll just give you an opportunity perhaps if you’ve got any closing thoughts on where you see the Bitcoin ecosystem projecting out over the next few years, and lastly then just finish up with how the listeners can find you, and sign up for updates.

Tuur Demeester: Yeah, so, you probably have show notes so I’ll probably have a link for that. We have investment research that we share, or general market research actually. And then people can find me on Twitter just google my name, and the first link is my twitter account. I’m there pretty much every day.

Tuur Demeester: In terms of where I see the market going. We’re putting out a piece soon. That’ll be out, I want to say next week but it’ll be within the next two weeks we’re putting that out. I’ll refrain from summarizing it’s going to be in there. I guess the basic idea is that we are currently in the accumulation phase. This is where the retail public is not interested, but it is at the same time the phase where value investors are accumulating Bitcoin. It’ll form the base for the next bull market.

Stephan Livera: Fantastic. Look, that’s all been really a great discussion, and I’m sure the listeners will love to hear this. So, thank you so much for coming on the show, Tuur.

Tuur Demeester: Happy to be here, Stephan. It was great. Thank you.

Stephan Livera: All right. There you go. What did you think of that? I think Tuur has a lot of really cool insights that have been won through years and years in this space, and he’s particularly good with using parallels to other markets to try and help explain what’s happening.

Stephan Livera: Another cool factor was this whole concept of full reserve Bitcoin banking, which I’m quite keen to see how that evolves, and how that plays out over time. So, make sure you are subscribed to the podcast. You find it on Apple, Google, Spotify, by searching Stephan Livera podcast.

Stephan Livera: Lastly, if you enjoyed it make sure you help share the episode. Post it on Twitter. Post it on Reddit, Telegram, wherever else. Thanks very much, guys. Chat next time.

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