BTC017: Bitcoin Onchain Analytics & Timing w/ Charles Edwards (Bitcoin Podcast)We Study Billionaires - The Investor’s Podcast Network
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- 17 Mar 2021
In this episode, you'll learn:Charles' thoughts on how to value BitcoinWhat are hash ribbonsWhat are some Macro factors he's paying attention toWhat is the contango tradeBitcoin's price floor and how it relates to energy costsTop 3 investing lessonsBitcoin Tail RisksBOOKS AND RESOURCES MENTIONED IN THIS EPISODEBitcoin's production cost article by Charles EdwardsWhat are Hash Ribbons & Bitcoin by Charles EdwardsCharles Edwards fund at Capriole.ioCharles Edwards on TwitterGet a FREE book on how to systematically identify and follow market trends with Top Traders Unplugged. Elevate your writing with 20% off Grammarly Premium.Take your business to the next level by hiring the right people with ZipRecruiter.Automate your money with M1 Finance. Get $30 when you sign up for free today. Push your team to do their best work with Monday.com Work OS. Start your free two-week trial today.Take your business to the next level by hiring the right people with ZipRecruiter.join OurCrowd’s Investment in ByondXR—a platform that’s enabling the world's leading brands to attract customers with the future of virtual shopping journeys. Open your account today.Invest in high-yield, professionally managed real estate, starting with as little as $10K with EquityMultiple.Browse through all our episodes (complete with transcripts) here.Support our free podcast by supporting our sponsors.
You're listening to IP, hey, everyone, welcome to our Wednesday release of the show where we're talking about Bitcoin. Today's guest is a good friend and person I've been following for years, Mr. Charles Edwards. Charles is a quant investor and the creator of a popular trading metric called Hash Rubins and Trade King. On today's show, we talk about Charles's opinion on energy costs potentially setting the price floor for Bitcoin. We talk about some of his favorite metrics for understanding market trends and much, much more so without further delay.
Here's my conversation with Charles Edwards.
And you're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Kristen. All right, so here I am with Charles Edwards, like we said in the introduction. And Charles, welcome to the show. Thanks, IRA. Great to be here. We've been chatting for a long time now, and I'll tell you, I really pay close attention to your messages on Twitter, more so than probably most people that I follow. And the reason why is because you have a real knack, especially for Bitcoin, of just kind of knowing where things are going.
You have the ability to kind of really be able to have your your thumb on the pulse and to really kind of understand in an unemotional kind of way where things are moving. So my question just to kind of start things off for you is just how do you think about the valuation? We have tons of people from traditional finance that listen to the show, talk to us about some of those ideas of how you're looking at the value of Bitcoin. Just before I do, I must quickly say a big thank you to you and Steeg, I think your podcast is amazing.
I've been listening to is almost every episode. It's taught me a lot from investing in how I invest and do trading with Bitcoin even. And probably maybe more importantly for me at the time was the in particular a couple of episodes on entrepreneurship and and making the leap of faith, I guess, into the unknown. And that really helped me start my adventure as well as I do a great deal of gratitude on. Yeah, man, that we really appreciate that.
So in terms of valuation, my background was value investing as well. So I was really into Buffett's approach, Buffett's essays and intelligent investor for probably 10 years or so and went about trying to go about an algorithmic approach to valuing stocks, using this kind of cash flow approach and automating that and did that for some time, a number of years quite well. But I also called the Bitcoin bargain and wanted to take that valuation approach to Bitcoin because I could see the power of it.
But a lot of the analysis was really just more price or speculation based. I suppose there was quite a lot of good work done by Willie Walsh in particular. I wanted to kind of build on that. So I looked at it from a fundamental perspective at the start. And now it's kind of grown into fundamental and technical analysis is how I kind of present that to people. But the reality is that it's grown to all sorts of information, anything which kind of comes in supply and demand.
So four or five years ago, I thought technical analysis was rubbish. I actually was at a John Ballinger presentation. I left halfway through because I just thought it was hocus-pocus. And the irony is that it's not there's limitations to every method of investing and analysis you do, but there's a lot of power in different information. So I try and consider now anything from technicals, momentum, fundamentals, unchained sentiment, whatever you call it. I think all of this information, any information is just an input into a supply and demand calculation today, which supply and demand sets the price for any asset, I would argue even value investing.
It's the same thing when you're discounting cash flows and trying to come up with intrinsic value. They're basically saying at this price, if it's worth ten dollars below that, the supply dries up because no one's willing to sell it. Because within a margin of safety, of course. Why would you sell it when the business is worth more? So you know that when you buy below that there's a statistical probability that there's an upward pressure on price. So I try to take that same approach to to Bitcoin and basically consider anything which would set that from whatever it being chained to to price behavior to different fundamental inputs or state correlations with the stock market as well.
So talk to us about some of these metrics that you're talking about, because back before the having event, you and I and to be honest with you, I took the idea completely from you, but I was just talking about it a lot, which was the hash ribbon's. This was an idea that you had talked about.
There's many other ideas that you're kind of using various metrics for us to talk to us through some of these metrics, maybe start off with the hash ribbon's and whether you find it valid today or it's only valid at certain points in the four year cycle. Talk to us about some of that stuff.
Ashram's is probably the most known for one of my early indicators and still today, I think probably the best long term buy signal for Bitcoin. So I'm just trying to come up with an approach to find out when I capitulation in Bitcoin. And so every cycle is there's usually an 80 or 90 percent down during the Bitcoin price and there's been three or four of those type events. And what I was trying to do with Ashram's in particular is identify when that was over to get the Best Buy opportunity.
And it turns out that what when the price drops from the cycle peak, say, 20, 30, 40 percent, at some point the inefficient miners start to struggle to be profitable or they find other opportunities, maybe with higher profit margins in other old coins or in other business ventures with their equipment. So they start to shut down, particularly the the miners with higher electrical costs. So the average Bitcoin mining, which will cost around three point five cents per kilowatt, it varies widely.
So someone else can do it for a cent and they'll be fine no matter what. And some like five cents or six. And they will struggle when these events happen. So they'll potentially turn off some shut down completely, go out of business and maybe sell off then Bitcoin to get out of that. And that's why we have that real collapse in price, another 30 or 40 percent top collapse. And when that is over and for the efficient miners and difficulty adjusting to make things a bit easier, things start to bottom out and creep back up.
And when you see that reflected in the cash rate and then also even better matched with some price momentum, it's been a great opportunity. So that that is kind of like a bottoming of the, I suppose, the supply. And in general, with a lot of the metrics I look at, it's much easier to identify undervalued and bottoming than it is to identify top. So I can talk about that a bit more later. But yeah, it is.
I will say it now because when it's like intrinsic value with the stock under that price, you know, you've got a good deal. Whereas if it's if the value of stocks were ten dollars an hour, 50, you don't know if it's going to go to a two hundred dollars or VATA ten. Because of the emotional piece that's driving it like it's too hard to to determine emotionally how much more. Yeah, it's easy to identify the family, but not when the overvalue is, I suppose so with with Bitcoin in particular, you know, it's one or two percent adoption globally.
So the upside potential this is a demand is huge. So you can go to a massive historical levels of overvaluation very quickly and it's harder to identify that type. I'm not saying you can't do it. It's just you can do a much more accurately with the bottoms because you know that the supply is gone and this is where it usually starts to trend up. So if types there, are there other metrics I'm looking at like Hardaway's, which is basically a metric of what percentage of the Bitcoin miners have been holding Bitcoin for more than, say, two years is a good baseline.
So the longer term, smarter money and if they're selling or buying is very interesting. Different premiums and discounts. So greyscale premium, for example, the stable kind prints the the supply of TEDD, in particular USA Today. Another one I really like is I wrote an article about a couple years ago that dynamic and VTE. So Network Family for Transactions is like a p e ratio for Bitcoin and that one in particular. When they get into an overextended redzone, it's often a good time to take up some risk.
Same with the main model, which has actually worked really well the last few months, which I know you're a big fan of, and that's been about to run for 2.5 hours. It depends on your time horizon, but it's a good idea to manage risk. So probably I should come with all these metrics. It really depends on your time horizon. So if you're investing for five years plus, there's basically only one metric to buy more. Obviously not investment advice, but any metric you look at one to two cycles onwards, it almost says everything is undervalued for Bitcoin that is struggling to see it under 200 thousand, five, six, seven years time and ending a huge anomaly, black swan type event we cannot foresee right now.
When I tweet or one of the articles I write, it's usually looking at that sort of wonderful year period or monthly level period of how can we try and manage those big down drawers of 80 per cent and when's a good time to buy. So that's another time horizon where a lot of these measures that is talked about I think are valuable. And then if you want to gain more highfaluting that which is some of the trading that we do at Caprioglio and buying and selling on top level, it's a different set of data is completely different supply and demand model.
So somebody who would hear the previous part that we were talking about, as far as it being difficult to understand a top because of the emotional aspects of the market participants, I think a person would hear that and say, well, the same thing could be said about a bottom. But I suspect your answer goes to the electrical cost and minor stepping in. But I'm curious how you how you respond to something like that, considering you should expect the exact same thing on the bottom.
I suppose the demand is infinite relative to the current price, so they can get one hundred X, whereas the supply is and that's the probably the highest level summary. But you're right, production cost is a great metric for that, because it's it's looking at the electrical cost of mining, bitcoin and the number of Bitcoin. But the day to calculate what is the price to mind and bitcoin. And once we got a price goes below that, it starts making sense to start shutting down your operations.
This kind of two levels at production cost less in the article I wrote considers more generally business costs. So it might be a rent and warehousing profit margins are really redeemable as electrical costs. So that's the price at which you literally wouldn't they just turn off your bitcoin mining rigs because the price of Bitcoin is broken. That threshold that has never happened historically until March 20 last year, where we did Dongara for a few hours and had the ultimate buy signal ever thrown off for a thousand dollars.
It's hard to believe that was less than a year ago. But in three days a year ago, and that was a 70 percent drop in a day, which is happening all the time for Bitcoin, an extremely rare that time of cycle. So an unusual event. So when you get into this, you know, whether we friends production costs or extreme levels of undervaluation there, the Bitcoin and considering where we think this is going to go in the macro economic environment we're in, it's a great buy signal statistically.
So, Charles, you've written an amazing article on this whole idea that you're talking about as far as the electrical cost and there being almost like a floor to the Bitcoin price based on these electrical expenses that the miners are producing. What's the name of the article? And then is there any other highlights that you would point out from that? I think that would be Bitcoin's production cost as the article Young Medium, so I've got a few articles there which go through all of the metrics we're talking about here in greater detail.
So, yes, feel free to check that out. And then any questions people mentioned? Sorry. Are you firmly of the opinion so when you look at the price chart and you see that it almost is like a perfect representation of Metcalf's law, especially when you look at the base in the bottom of the price action over the last decade, you're of the opinion that the that the miners and the energy to mine the Bitcoin is setting that floor. Would that be a correct assumption that.
Yeah, it plays into Metcalfe's law and also the lendee effect and the domination that Bitcoin now has in this market. So, you know, you'd be a bit more questionable maybe about these theories four or five or six years ago. But now it's very clear, not really spoken about as well, that Bitcoin is the clear winner in this decentralized monetary space. So you can, I suppose, trust in these metrics a bit more easily recently when we broke out a trillion dollars and Bitcoin is the fastest growing asset to get to that faster than Facebook and the Internet and these other other metrics.
Do you see that production cost pulling in governing the top of the price, or do you feel that maybe the price could just keep on running and it could become a dominant global currency without the price, the energy costs pulling it back down into a lower level? Yes, I think you go through cycles, I think right now the production costs are not very useful for us because we're so far above it. The energy value is also less. Let's around twenty five thousand.
But the main thing with those metrics is its main reverting to the energy in particular. So that is a model which maps the energy input angels almost one to one to decline. So it assesses the rates, the mining, hardware efficiency and supply growth rate of Bitcoin. And basically you calculate it all out and it's just joules of energy in and multiplied by a price multiple. And you get the energy value their prices mean reverted to that consistently for the last 10 years.
It's, I think, something very powerful in my opinion. But it comes back to intrinsic value, like in value investing for actual prices below it. It's a great buy. When it's above it, you're in a little bit, maybe extended territory and need to be more careful or it provides less value. Historically, though, the last cycle's prices extended pretty consistently. Four to five hundred per cent above energy value at the top doesn't mean it will this time.
But that's the reasons why you want to be a bit careful. Went out about twice energy value and the things to look out for there when cash rates and energy value just start to drop. That's when you probably want to start either managing risk or definitely not be buying when you've seen a network. And that's just one element. So does the Hashemites, which gives you insight to the miners that you might see institution start unloading coins on the exchanges or the multiple modularly highs.
Well, you really want to get a confluence of factors to to line up and give you an insight as to whether the top may be in. But, yeah, certain certain metrics are more useful when you're near fair value. So production cost, energy value and other metrics are better when you're extended or maybe more valuable, such as mammal's for the dynamic entity ratio. Talk to us a little bit about your opinions on the macro backdrop, particularly in the past year and how you think that kind of plays into the Bitcoin narrative.
So I think Hasidism probably got a pretty similar view to you in that the best thing about this is Ray D'Alessio and his views on these cycles. So, yes, strong believer in what he writes about where we are, that we're near the end of one hundred year debt cycle. And it's a period where there's a lot of debt restructuring, potentially currency collapse. And in the midst of that, we have Bitcoin appearing as the perfect candidate. So I think that plays into Bitcoin's hands.
Same time, even before last year or last year, recession was pretty obviously going to happen. A lot of the macroeconomic factors were screaming towards it, such as the yield curve inversion, which is at a positive rate. And you've now got this situation where we're at the end of a huge cycle. We've got recession, we've got lockdown's and a struggling economy. With Junpei down, stocks rallied and gold is still down from 2008. And so when I look at it, the macro, you see the economy that doesn't look very healthy.
It's propped up with continual monetary stimulus and you see stocks flying. So I'm not here to say that stocks are overvalued because it's hard to say that when you've got this much printing, people need to put their capital somewhere. And that's the gold bitcoin or stocks. Obviously, we think Bitcoin is a great choice there, but it's hard to know where that train ends. I think the optimistic scenario is the beautiful deleveraging that Dalia talks about, where we hopefully have some great policies implemented, debt reduction by government, which lines up perfectly with monetary printing.
But I'm personally not saying that. I don't know if you've got any insights there for some. Yeah, no, I'm with you, I think when you're looking at that, you're just saying, I think this is where Ray gets the most grief from a lot of his followers is I think people say this whole beautiful deleveraging thing that you talk about at the end.
How does that work again? Yeah. It seems very optimistic. I'd love it to be true, but I think that it's going to they can't stop printing. So the question is if they'll implement policies to manage the debt down, which I am not saying. So for me, at some point it's going to it feels like it's going to buckle in terms of people switching point, saying Bitcoin every day with a price appreciation will be somewhere. Will they will this money's worthless like it has happened at the end of every debt cycle.
And there's probably a more clear, obvious hyperinflationary type event, which I think we're seeing now in asset inflation, but not really in day to day living so much yet. So what does that mean? I think for stocks, it means there's probably going to be a lot of volatility to the upside for sure. But if things collapse also potentially to the downside, as we saw in Germany and some of other cases, the Bitcoin, I think it's great in the long term because it's the obvious contender to fiat currencies right now.
In the short term, there is some risk in large drills or collapses like we had in March last year. So it really depends on its high rise. And if you can't handle volatility like that, like if 30, 40, 50 percent drops, which could happen if the stock market drops 30 percent tomorrow, then Bitcoin's probably not for you. But if you are willing to accept that it's possible and stick around for a number of years, probably going to be a great option to navigate in this economic situation.
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So Charles, what are your thoughts on this cycle that we're currently experiencing in Bitcoin? I'm assuming you believe in these four year cycles, but give us your thoughts on that and then where do you see us right now in this in this bull run that we're currently experiencing? There's probably two glasses for this cycle and where we are now. So I come into this year, I thought we were going to get to one or two hundred thousand at least I wouldn't be surprised if we touched the three hundred.
And that's based on about a year ago. Long term forecast for energy is pretty simple regression, but also a number of other metrics. You look at whether we start to fly, for example, or different things. Even Fibonacci sequence is amazing how closely and there's something else. This thing is crazy, but how closely the long term and long time frame price action be taken matters into different gold ratios because so almost every Bitcoin type is about seven, eight, 10 times that, the Fibonacci retracement of the parietal.
So that puts us around 300 K. Yes, all the metrics kind of point to that region. And I think we will get into most likely two hundred K and possibly higher. And, and from there the bounds are overly dependent on economic stimulus. I think the twenty five percent inflation we've now had, which we never had before in terms of monetary printing, will ratchet that up and more than more than a twenty five percent factor. So the price appreciation we've had just in the last few months of Bitcoin is significantly faster than 17 when there was maybe arguably more hype at that time, but closer to 2013.
And I think the speed maybe contributed or probably contributed from the institutional buy and the hedge against that monetary inflation. So I think we're going to do that to his generation. But I would adjust that based on new information that may come out in the months if we're going four or five trillion stimulus. So who knows what in the next six, 12 months that will probably impact it significantly. In terms of the cycles, I think we're still on the four year cycles for now.
So a learning for me has been in investing and trying to be careful of this time is different. So it's easy to do that, particularly in hypomania. And Tuval cycles are we're never going to crash again because usually if it statistically happens one way, that those odds will continue. So a good example is the assurance. For example, we had a bicycle December and we've had four bicycle since I release that. And they're all up between 150 and 600 percent since that was released without any change with the one in December.
There was a good narrative going around it because the end of the wet season for the minus and the Chinese minus during the wet season, they relocate across the country is hydropower that's cheaper. And then after that, they relocate and also turn on and off their race to do that. And that causes hasher to drop and you then get another bicycle. Not so there was speculation and even I had a little bit of, I suppose, nervousness about the strength of it because of that not being really a capitulation type event.
But and whether or not that narrative is true, it doesn't really matter because it worked. That may sound simple, but the hasher or the hash rate assesses the entire network globally, sort of says it's all factors and that's the beauty of it in identifying those opportunities to buy. So what I'm trying to say in that story is that you should just trust the data until the data proves otherwise or unless the narrative is backed by some really strong that I like the twenty five percent monetary inflation we have now, which will probably impact some metrics.
So it's better to kind of potentially use something which may work, which has historically worked really well until it maybe doesn't work out well then it is to abandon a certain narrative. So with that strong interest, I think the focus will probably continue or that we should be very careful at the end of it for a large drawdown, because even if we have widespread institutional adoption, a lot of the large holders of Bitcoin have been around for five, 10 years.
And even if it's self-fulfilling behavior, you will say that their movements of coins and how they react to these metrics and things will drive outcomes and it can be self-fulfilling. That said, I'll revise that if we get massive stimulus or some kind of economic meltdown situation or change of events. But for now, I would bet on the four year cycle looking at further like 10, 20, 30, whatever years. I think those cycles will diminish. So the depth of them, it will kind of approach more of an exponential curve.
So instead of the big dips, you get shallow dips and so on because of two reasons. I think the impact of each of the miners reduces their relative share of supply and also the net impact of any individual holder or entity reduced. So historically, the Bitcoin has been really retail driven, maybe speculation driven. Now we're getting more institutions in the coin share is getting more distributed. So all of these factors, I think, reduce the impact of capitulation events or massive sell offs or the impact of an individual party, I suppose.
And the other key factor is that all of the key components of Bitcoin, a novel and preprogram. As we know, the supply model, cash rate model, difficulty, whatever metric it is you want to look at online, it's all there for analysis. And I think in the long run, a lot of it is having priced in or obviously wasn't not having wasn't priced in a huge appreciation. But at some point, whether it's five, 10, 15 years or whatever, maybe a one year, these events will get more and more priced in by institutions, I believe.
And by the public in general and expectations. Maybe it will start to flow any model and that will smooth in the volatility side in the long run. I think actually, because the history of being considered volatile and and risky. But that's probably the least risky asset into the future, in my opinion, and it may be the least volatile asset in the long run as well. Charles, do you see a possibility that a melt up in Bitcoin could happen after a certain threshold is breached just as far as adoption rates go?
So we all talk about these four year cycles because that's what we've seen to date. But is there a certain point in the future where trust breaks down, erodes from the traditional system and there's this all at once flood into Bitcoin that causes the price to melt up and then it just really never comes back from that. It just it just keeps on running. Almost like a Germany paper mark chart from the nineteen twenties. Exactly, that's so that's the one event I do think about, as I mentioned before, how do you handle this volatile event that may happen in the market because of a lack of trust?
And it is probably a breaking point with people that I don't want any of this currency. I think we're quite away from that. But it could definitely happen. It's just it's you know, it's an event that happens once every hundred years. And we've never seen it on a global scale, on a digital assets. So it's almost impossible to predict. It'll probably be obvious when you're in it. It's a tough one to answer. I think at some point, obviously, leading Bitcoin to long term growth and in the adoption.
But I don't know if that event would be two years, 10 years or 20 years away. But I think with every day that we have economic conditions right now and monetary stimulus right now, it gets closer to. Let's talk about the contango trade, so this is something that you've posted about I've seen you post about what's going on there. First, explain what contango is and then talk us through why you think that this trade exists. Because I find this trade to be kind of mind blowing, especially considering your cost of storage for Bitcoin is literally nothing or near nothing.
And when you think of contango in the oil market, a lot of the times it comes down to like the price of storing the oil because there's been an oversupply starts getting built into the future prices. But this is a this is a strange one. So explain what it is and then give us some of your thoughts on it. Yes, I think you're talking about the long and short thread I posted about so the one I specifically wrote about and there's no one to know a bit more about if you had me and you just want to make an interest free ride or return on that, you can deposit it with a loan institution like Find or whatever it may be.
There's lots of them now and you get 50 percent of that capital back. You got 10 Bitcoin, you get five back and that you can then short it on a perpetual futures contract. This is what I look at. And they historically have an average funding rate of one zero one percent a day. So it's roughly compounded 12 percent a year. And that's the baseline rate. But that rate varies. So it will often be above or below that.
And it depends on the markets. If it's a bear market, it might be below because it's based on the positions that traders are taking. But in a in a bull run right now and has lots of demand for Bitcoin, a lot of people speculating on price increases. It gets really high. So 10 times higher or five to ten times higher is not unusual. So if you if you do that, try and you would deposit your ten bitcoin, you get five back for free, so to speak, with some interest rate to pay five cents a year.
And then you short that the entire amount on a perpetual
contract and you get somewhere between 12 and probably 50 plus percent interest free on that on that trade, there's no risk of there's this platform risk that the exchange goes down, you lose your coins, all, as I would argue, smaller risk that we have today. But in terms of the actual trade itself, it's it's zero risk. And you get you lock in like somewhere between 12 to 30 plus percent interest on your on your clients.
So in this, you're locking up coins, you're taking the 10 that you originally started with, you're locking those up, you're getting five back, then you're putting those into the market and you're you're doing these activities that are putting coins into escrow instead of letting the coins come into the underlying buying and selling market, which in my opinion is driving is an increase bid on the price because of supply, suffocation of the coins. Do you see it that the same way or do you think that that it's still net neutral or is this kind of an error to disagree with?
Yes, so you saying that because people are locking in their bitcoins, this applies less and that is pushing price up a bit more? Is that what you're saying?
Yeah, I think it's actually almost like a second happening event. Yeah, it could be I don't know if that train is that occupied yet. Probably I think it is on an institutional level and it will obviously it's a very attractive trade. So if it isn't now, it will be even more in the future. So it is I think there's a valid answer to that. And it's hard because that's one component of lock up. There's other lock ups of just harmless buying.
Michael know, and on its balance sheet, there's various levels of lock up for that sort of supply side. And it's great to look at things like the auto waves or the net flow of coins from exchanges. So which is gives you a bit more of a macro view of that phenomenon of supply drying up that you talk about. So who resembles a toilet as well? To long ago about Coinbase is about fifteen thousand coins going out a week, so somewhere between a half billion billion a week, which is pretty obvious institutional buying.
So we're definitely seeing that supply being sucked out of the system, at least over the weekly and monthly level. So a lot of it I don't know the extent, but a good portion of it could be going into that trade. What are your thoughts on the exchange, the number of coins that are being pulled off the exchange because relative to the previous four year cycle, I mean, the quantities are it's drastic.
It's kind of crazy to see the amount of coins coming off the exchange. Do you have any thoughts on that? Yeah, it's really it's been really bullish, I think the rate has slowed down a little bit in the last weeks. In particular, the Hardaway's the the percentage of of people who have held Bitcoin for more than two years has kind of near to the intermediate level and come down. And normally that drop happens around mid cycle. So 30 to 50 percent through the cycle, which I'd argue is roughly where we are now based on historical cycles anyway.
And when that kind of starts to stable, it's going against people selling out. So it's a change of hands, right? I think a lot of it's going to institutions which will probably have a stronger hand, but that trade is not as strong for me right now as it was three to four months ago when it was just straight down. It may continue to do that, but it seems to slow down for the time being on the shorter time horizon that.
So a lot of people on Twitter were wanting to know, what are the big metrics you're looking at for where we're at right now in the cycle and probably the next two or three months from now? We've talked about Harrigan's energy is dynamic, and so we touched on that it's a network value of the consumer market, kind of like the market divided by the transaction value. So essentially, what the value, what value is thrown to a network, kind of like a PE ratio.
And when that gets above the to in Japan, it signifies overvalues the price. The network is significantly higher than historical level from a transactional perspective. So we talked to that recently the other day as well as mammal's for when we had that 30 percent drop. So that's a good one to watch. Stable clients also good large inflows or outflows in that it can trigger the same or the opposite reaction of price. So I think a good description of that is when when is large demand, particularly USD hey, which is the biggest one at the moment, the US dollar stable.
It indicates that people are either drinking from crypto and getting out of it and into the US dollar, or there's a lot of new entrants coming in and comment on boring ways to convert the US dollar straight to Usted, for example. So what does that mean? People usually get out of Bitcoin, all kinds of whatever it may be when they're concerned or there's fear and they want to do risk. And that often lines up with a bottom or a local price bottom.
So when you say large relative increases in your debt or other stable clients versus versus Bitcoin, it's actually a good indicator that there could be some appreciating bitcoin, whether it be from the new demand or from the sort of bottoming factor of of of existing players. And as vice versa, you can use that as well as an indicator when the talking process may be shorter term or probably less reliable is a greyscale premium. So we're seeing lately that I think right now it's about the price of greyscale stock is about five percent and the Bitcoin price.
So there's only a few data points there. So I didn't worry with it. But every time it's been under five percent it which has only been three times, I think in five years, the price has done very well over the coming months. So we're in now negative five percent. So I would suggest the next few months should be really good. And again, that's just an indicator with a few data points. But that's why it's really important to combine a number of these metrics to get you an overall picture of what's happening.
So they're the ones who probably really pay attention to right now and they take multiple USA Today and different premiums. What are your top three lessons that you would tell somebody younger, just about trading or value investing, just investing in general? What are your top three tips? That's a tough little spot. Yeah, I think you have to love it, and if you really want to do it seriously yourself and not get someone else to do it, so you can probably come back to the office quieter just fine index if you're not going to spend all your time with us.
But if you really love it and definitely go for it and I think any more reading and research into the better. So your podcast is a great start. Lots and lots of books, buffet books, trading books and just getting and being a sponge and all the information out there. I think getting locked up in a camp of I'm only an investor, I'm only a technical trader, I'm only this it blocks you out to all the ideas that are out there.
And it did for me for years. And now I logically, you might say that doesn't make sense, that this would lead to this price doing that and therefore I can't pay. And that's how you block it off mentally. But as soon as you say no, let's let's open that up. Why why could it be or maybe it is just because it's statistically is just being open minded to everything. And all information will give you a huge advantage over everyone else who usually locks himself into one camp.
I totally agree with what you just said. Totally agree, like if if I could have thought that I would be posting a chart on Twitter that had the Makdisi five years ago, I would have laughed you out.
I said, there's absolutely no way that. Yeah, but here we are. And. Most of the people who shoot you down or disagree with their ideas say, oh, that's crazy, that doesn't happen. It's like this is any closed minded attitude like that is not going to help you grow in this and investing anything in particular in as well, where every bit of data and information out there is now valuable. We interviewed Bill Miller pretty early in our podcasting time, and that was one of the things I kind of distinctly remember after we were done talking to him because he was talking about incorporating technical indicators and things like that.
And I just I remember walking away from the interview just kind of like, wow, I'm kind of surprised that here I am talking to this legend of value investing. And he was talking to us about things that I just really was not expecting him to be bringing up. I share your sentiment so much there, Charles. I really like that. OK, what are your thoughts on DFI decentralised finance? And if you want to talk the NFTE stuff, feel free.
I'll describe it is my expertise is in Bitcoin, and it's basically my whole life, so I don't take it with a grain of salt that even though I spend my whole life in crypto, it's so deep. You need to be an expert in different areas. But I think it is a huge amount of value. And if I to be honest, in the long term, I think it's right now. What I was saying is very similar to 2007 is where you got tons of new tokens and models and most of them will fail or go to zero.
And it's I think it's two huge problems that any individual project has. If it's genuine in that it's a startup and business model in this area in itself is really hard. And then actually decentralizing that and handing over complete power and everything to a network is even harder. So doing a bunch of them, the chances of success are very slim. And Bitcoin's anyone's really done it today before decentralized. But having said that, the concepts that have come out of it, I think are really powerful.
So even Bitcoin fails. You could say 10 or 20 or 30 years later, it might be a bit gold with different models that broke down because you couldn't get the you know, you couldn't get a digital money, which was there was only one measure of it. And I think we're seeing it now in phase, for example, where you can have millions of copies of it on different channels. So it doesn't work now, in my opinion, but I think it will in the future in some format, which maybe we can't consider right now.
But the DFI, so Dalles in particular, is a decentralized autonomous organisations, really interesting to me. So the idea that a business can be sort of tokenized, decentralized and run by voting as opposed to having command and control, say, a person in charge, I think that model with AI on top where people just find a general direction or a general concept, I think that would be a really powerful feature. I don't know what networks that would run on.
Maybe it's maybe it's a theory and maybe it's one of those in your local data or whatever it may be, other networks, maybe it's Bitcoin eventually. But the concepts of it, I think a really sound I just would be very careful and to invest it now because it yeah. Your chances of success are extremely small. Nettie's is. I've struggled with them.
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Let me go back to that other comment you just made. And it's mostly because of the probabilities that you assign to all these potential array of outcomes. You just don't have any type of confidence in any one of them. Basically, I don't have any confidence that any of the coin is being properly decentralized and having a genuine model to to build an infrastructure that works like this sustainable into the future. There are some tokens which I find interesting, like stock, like tokens like Nekesa I've written about in the past where they're trying to model a stock.
They pay a dividend. Most of the other tokens, they're trying to get value from voting rights and token bans. And I tried doing a lot of different valuation approaches on because I couldn't find any which justified the values of these icons in the past. I think the dividend model is interesting where you try to tokenized a stock essentially, but there is a trust element and security securitisation regulation element, which is probably missing an audit element. So it's the Wild West and the probability that the probabilities assignment success is extremely low.
But if you do get one of them or two of them, you're going to do extremely well. I think SFD is I struggle with the concept of it because of the duplicity of synchronising art, basically digital art. And I think the value of any even if you've got a great piece of artwork which is worth millions on one of these channels, I think the value of that artwork is intrinsically linked to the chain. So there's dozens of different crypto chains out there.
Which one will survive? Probably most of the way, and maybe it will be kind of in the future. We don't know. So. And on that topic, so just so folks know this, this NFTE stuff, this is non fungible tokens is what we're talking about, where the idea is like if you create let's say you create a piece of digital art through encryption, maybe as is websites are sharing that piece of art that the person who actually owns the digital asset, they could somehow be stream some type of a value in the future for the use or the utility that it provides on the Internet.
So I think a better example is kind of music. So if a person would create a song, that person who created obviously owns it. As people listen to it, they get streamed money, they get streamed Satz. Tosches for the use of somebody listening to the song. And if you're dealing with an Internet that has where the platforms where this music is getting streamed can determine who's listening to it, who the owner of the song is through that non fungible token, then this streaming of value can then come back to to the owner of it.
My issue is the same as yours, Charles, which is just we are way, way to the left of that being a reality based on how the Internet is currently the architecture of the Internet and the encryption that is provided and the platforms, how they would interact with these tokens.
We're just I mean, we're way far away from this being a reality.
That's the concept. Yeah, that was well described, I agree. I think there's a really intelligent and and life changing concept in here and probably the music streaming or art or credibility sharing and maybe was your way to say, if you've copied this art, you can't or, you know, to link it to shut down the network of 20 Satz or whatever it.
Yeah, I have a copy of this JPEG or whatever. Exactly. I can see a future where it's basically tokenized everything, putting a price on everything and giving the owner some ownership in that revenue model. And I can see that being happening in the well in the future. But like I said, the way the world works so far away from that and the probability of an individual change being successful, and that is really low. Obviously, that's where the reward is as well.
Like, if you can get it now and it ends up happening, you're going to do amazingly well. But it's still low probabilities. And I needed the. The copy paste element of media is just way too easy. I mean, OK, it's a song.
I could just grab my external recorder and record it or it's a picture. I can take a picture of the picture. I just don't know how how any of that will be enforced in the future. But, hey, you never know.
Yeah, exactly. I agree with you. Going back to one of your your points there, one of your lessons. Keep an open mind. You never know. I want to talk a little bit more about this premium.
You hit on it a little bit earlier that it got to a negative five of the of the value that's actually inside of the trust. You said this has happened, I think you said three times previously in the last five years. Sorry, it's been under five percent, the positive five percent rate for the last five years and it got as low as I think, negative 10 percent a few days ago, and now it's negative five. Yes, I think there's a lot of people concerned about what does this mean now that it's gone below the value that's actually on the underlying.
Is this a trend that you see persisting in the future because they're now getting competition? What are some of your thoughts on that? To be honest, I'm not sure I think the competition factor could be a relevant narrative that is suppressing it a bit, but I think that it comes back to my point of this time is different when you got a relative undervaluation. It's usually a good time to buy. And when you got over, it's usually a good time to do risk.
So when that premium is being as high as 20, 25 percent, historically, it's actually been a good time to today risk or to you know, there's been some kind of local toppin decline, whether it be just for a couple of weeks or not, until that resets. But it gives you a good indication of sentiment towards the asset. Yeah, I haven't analyzed it in any doubts as to why it's so low right now, because for me it's an interesting metric, but it only has a few data points.
But nonetheless, it's probably a good idea to go with the data and not the narrative. So the data says it's undervalued. It's probably good by. So, Charles, when I think about a hurdle rate that's near impossible to outperform bitcoins at the top of the list, especially over the last year, and your fund has outperformed this hurdle rate, correct?
To be clear, Al El Al model algorithms, which we call trunking, has said last year we we got 680 percent with no leverage, some more than double behind vinyl and the fund that's excited to say that we launched the US Fund for Accredited Investors two weeks ago. So that's newly launched. I can't give you any data on that, obviously. But yes, today we've been doing pretty well. How long have you guys been active and then I'm kind of curious, back testing results prior to the time.
So this this six hundred and eighty percent that you said is the last 12 months.
That is still 20, 20. That was for twenty twenty, OK? And then when did you guys launch the fun? It's been a big evolution, so we've grown very quickly, it started as we had these indicators and then it has been a subscription model which people it has been independently tracked. And we've got that's where that comes from. And the last six or so months, we've been doing some managed accounts and now we've launched the fund. So, yeah, we've grown quickly now, managing over 40 million.
And if a person wanted to do they subscribe to Trend King, how does that work?
As a as a business, we work with China, with investors, so if they've got a license to manage their assets, if it's hundred thousand, I'm kind of curious when you run the model of your your trunking back during the know, the market peaked in twenty eighteen, went through the big sell off, the 80 percent correction that everyone's well versed on. How did the model perform in back testing during that period of time. Pretty well, I will tell you what, for the numbers.
Well, first thing is you should take better results with a grain of salt livers. Live performance is the better metric, in my opinion. Drawdowns of 30 to 40 percent than unusual in this sort of model is there's always some drawdown. It's you know, you can't have a perfect model. But, yes, it perform pretty well. The returns we're getting in real life are pretty comparable to the back test results.
You basically doubled, so it was down 80 percent, you were down 30 to 40 percent. Am I reading that right? I wouldn't light it up, so, you know, there's a lot of the profit we make in those cycles from shorting as Bitcoin is falling. So the volatility we get is often at different times to when Bitcoin is experiencing volatility or it can be in a different direction. Got it. So, Charles, what is a tail risk that concerns you the most?
This probably to me, and I know you've spoken about a lot of the podcast. What's this? It's the regulatory risk which, you know, of outlaw, arguably, and then it's the potential hacking risk or breaking of the value of the chain in some format, whether that be a 50 percent attack or, you know, some supercomputing quantum computing outcome. I know there's plenty of evidence against that. I'm not saying that high probability by any means is an outlier, super low probability events I don't really worry about, but I think there's still some validity to them.
So we're seeing everything move in the exact opposite direction. As you've spoken about your podcast, where it's being integrated, particularly the US into financial systems, its banks, large U.S. companies, and a longer and longer life goes on, the harder it is to and then for any individual country to outlaw it, it's just a negative for them. The only thing I can see is if there is this cataclysmic event or hyperinflation event, which we talked about earlier, where you get sort of mass adoption or change.
Would it be possible for the G7 or G20 to go along and say, you can't have this anymore or we're going to buy it off from you like the US to go? It's super unlikely, right. Or how they could you and do that is super unlikely. But because of being open minded, I guess there's always that small chance that that could happen. So that's probably the highest risk. I would say, even though it's very small and seems improbable now, we never thought a year ago would be locked down for a.
I don't want to turn the risk into a positive. I'm just kind of curious how you would think about this. Let's say a major country does ban it like the US. Let's say the US would ban it. I think that's probably the best risk scenario. You could get it. Do you find that in the short term there is a massive price hit? But then, like we were discussing earlier, the energy cost for all the remaining countries that haven't banned it, that energy costs that the miners supply or that floor that bottom that we we suspect is being supplied by the miner production cost, would it just bring the price back to whatever?
Let's you know, we're thinking a hundred let's say one hundred thousand is where we think the production cost is now based on the stock, the flow, the US comes out and Banzet, the price takes a massive hit initially. Maybe it doesn't, but let's just walk through that scenario that the price would take a major hit through a situation like that. Does that production cost that the miners supply bring the price back up to that hundred thousand level, regardless of the the country, the the mega country that bans it?
I think, in short, it depends on the extent, so if something like the US, I mean there is going to be a big hit because they're such a big player, such a big player in this in the space and the integration so deep globally. And there's also a lot of money in there now. So the production costs of all that stuff just got switched off overnight would drop. So the production costs may may drop 30, 20, 40 percent.
Who knows? And the value would probably drop in line with that. It depends when and where in a cycle that would happen. So I think it would be a price hit. But I don't think any individual is just an individual country. I don't think that's going to matter any more long term. Like I say, I think they'll be a hit short term, whether it be three, six, 12 months. But unless everyone denies the incentive structure of Bitcoin is aligned to that, it's better for the other countries if they support it.
So it's hard to see this playing out unless there is a unified against it, which we're just not seeing any indication of right now. OK, Charles, last question, what is the thing that you look at on Bitcoin that kind of is the most impressive thing to you or the thing that you think so many people miss? That is the secret sauce or something that just like stands out to you. It's nothing special for me because it's just the the supply model, the halving event inflation model, having a supply model where it's now on par with gold and it will be the hottest asset in the world.
And the way that that is so decentralized, fungible and instantaneously transsexual people miss, miss, miss the power of that because they just see the volatility. But they don't realize that if Bitcoin is going to be a success, that we think it is. And then all signs show that it's going this direction and it does become a reserve currency or at least equivalent with gold, with we're heading towards 10 or 100 trillion dollars or more. So you can't go from zero to 100 trillion or one trillion.
You can't go one hundred X without volatility. So they will dismiss it because of that volatility. But it's an essential ingredient of getting there. It's like any startup going from zero to a billion dollars, except this is the biggest asset in history, doing the same thing. So I think that's what people miss. They dismiss it because of the volatility, but the power of it in being the the future currency and reserve asset of the world is you just can't ignore it, I think, especially in this environment.
Charles, I really enjoyed chatting with you. I'm glad we were able to do this, you know, face to face here on Skype at least. And man, I've been following you for a while and can't thank you enough for making time to come on the show, give people a hand off to some of your stuff, and then I'm going to have all of this in the show notes. I'm going to have your energy article there. Bitcoin's production cost article in the show notes, but give people a hand off to some other stuff.
Thank you so much, prison's always great to catch up and talk about Bitcoin and the market dynamics, and it's been a pleasure to be here. You can follow me on Twitter. It's at Caprioglio. So then our business Caprioglio and our website is the same Caprioglio dot higher. You can reach out there and happy to have it. A chat. Charles, thanks so much for your time. Thank you for. Hey, so thanks for everybody listening to the show, if you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you're using.
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