Issue 4

bitfinex.com  

Welcome to issue 4 of Bitfinex Alpha!

Bitcoin is not only the most popular cryptocurrency. With its inherent characteristics—digital scarcity, capital appreciation, interest income, Bitcoin is positioned to become the single dominant natively digital form of money. 

At the same time, Bitcoinization is more than just a new term. It’s a belief that Bitcoin will be the dominant digital store of value and globally fungible collateral providing new interest rate benchmarks, which will be the basis for valuing all risk assets.

Why is Bitcoin believed to bring such a significant impact to the finance industry? And how far would the impact be to traditional finance?

Bitfinex Alpha | ISSUE 4

Thought leadership | Research | Market Analysis

John Dwyer—a fintech and crypto researcher, gives insight into the major implications that Bitcoin causes to the finance industry, particularly traditional finance. 

Our primary goal is to bring you exciting and mind-opening topics around cryptocurrency and blockchain, with valuable insight into the market  in each issue of Bitfinex Alpha.

John Dwyer is a contractor for Bitfinex where he provides crypto research services. He first bought Bitcoin in 2013 and invested in the Ethereum financing in July 2014.

Previously he was Global Digital Assets Research Lead at Celent (the fintech research division of Oliver Wyman). This followed a career in investment banking, where he ran equity capital markets businesses at Macquarie Capital (specializing in natural resources) and Goldman Sachs.

The views and opinions expressed in the note belong solely to the authors and do not reflect those of Bitfinex.

Bitcoinization 

Repricing Global Risk Assets

By John Dwyer

30 July 2021

Introduction

This is the final in a three-part series which brings together three key themes:

i.  Bitflexivity: Bitcoin’s embedded optionality on the future financial system which will create a reflexive feedback loop of capital flow from TradFi into Bitcoin.

ii.  Bitlectricity: Bitcoin mining connects the digital economy to the physical world creating the world’s first global market for electricity. Bitcoin is positioned to be the future unit of electricity and energy.

iii. Bitcoinization: Bitcoin will be the dominant digital store of value and globally fungible collateral providing new interest rate benchmarks which will be the basis for valuing all risk assets.

Paradigm Shift

Bitcoin is a paradigm shift across key areas including global energy markets, money, collateral, and the definition of risk-free rate of return. Its embedded optionality and network effects ensure exponential price appreciation and reflexive trading activity in the years ahead. Like any paradigm shift, the rules of the old paradigm will become obsolete. 

Yield is a Crypto Game Changer

The next phase of mainstream adoption will be characterized by cash flow and interest income rather than just speculation. Cashflow is the most visible form of total asset returns which dampens volatility, facilitates passive portfolio strategies, and attracts new constituencies of institutional and retail investors.

This report focuses on Bitcoin’s potential for yield. This is not to ignore yields in DeFi, rather to explore the impact of a Bitcoin yield for its role as financial collateral and the creation of new interest rate benchmarks which will challenge legacy definitions of risk-free rates.

Terminology

“Digital” assets” refers to all assets other than Bitcoin. “Crypto” is a collective term for digital assets and Bitcoin. “Digital money” and Bitcoin are used interchangeably. “Open-source capitalism”, “open-source protocols”, and “open-source ecosystem” are all interchangeable. “FUD” refers to fear, uncertainty, and doubt. “TradFi” means traditional finance.

Bitcoinization

Bitcoinization is a term loosely defined as the economic and financial environment which emerges once Bitcoin is widely accepted as the superior form of global money. This report will explore the impact of three inherent characteristics of Bitcoin.

1.  Digital Scarcity: Bitcoin is the first proof of concept of digital scarcity and its sole purpose is to be a natively digital, censorship-resistant, immutable, non-sovereign money with a pre-determined issuance schedule.[1] Digital money has the largest network ever such that Bitcoin’s dominance as the store of value asset will be a winner-takes-all outcome.

2.  Capital Appreciation: money is at least one side of any transaction in an economy. Information Theory demonstrates that the rate of innovation in the open-source digital asset ecosystem will grow exponentially. Bitcoin will be the unit of measure of value in this new digital economy such that the value created in digital assets will also be captured by Bitcoin.

3.  Interest Income: the next phase of mainstream adoption will be driven by yield as Bitcoin and digital assets offer their own interest rates. These rates provide an alternative model for pricing of risk without being subject to manipulation by central banks. As institutional capital seeks out this yield, there is the potential for fundamental re-pricing of traditional risk asset prices.

Bitcoin is positioned to become the single dominant natively digital form of money with embedded long-term capital appreciation, provable scarcity, and a market-based interest rate. This begs the question: why would a Bitcoin HODLer ever sell?

Bitcoin Mining vs. Secondary Markets

There is significant FUD regarding Bitcoin mining and its implications for the environment. We explored how Bitcoin transforms energy monetization in our last report, Bitlectricity, and expect mining to drive unprecedented innovation in renewable and waste energy.

Should a predictable Bitcoin yield emerge alongside its role as digital money, then future secondary markets in Bitcoin may become thinner as HODLing becomes the logical strategy for Bitcoin. In that case, mining would become the primary source for new Bitcoin thus adding to the intensity of competition and innovation around transforming energy assets into Bitcoin.

Information Theory of Capitalism[2]

The key to economic growth is entrepreneurial innovation. Through innovation we gain knowledge (information) on what works and what does not work when building new products and services. Thus, the wealth of an economy is represented by the total knowledge of its participants and economic growth is the rate of accumulation of new knowledge.

Bitcoin was the ultimate “zero-to-one” moment spawning a global ecosystem of innovation which is open-source and censorship resistant. The accumulation of knowledge within this ecosystem is global, rapid, transparent, cumulative, and expands in multiple directions simultaneously.

Popper’s Falsification Principle

“Open-source capitalism” is so powerful because it embodies Karl Popper’s Falsification Principle, which demarcates science from non-science by testing any theory so that it can be conceivably proven false[3]. 

Popper believed in deductive reasoning, whereby any hypothesis must be observed and confirmed as follows: Theory – Hypothesis – Observation – Confirmation.

ICO Boom – Hypothesis Driven

During the ICO boom of 2016/17, entrepreneurs raised capital based purely on white papers with few ideas being tested on a mainnet given the lack of maturity of the digital asset ecosystem. These ideas were still at the hypothesis stage and consisted largely of hype. Since then, the swarm of developers and entrepreneurs has grown immeasurably, and the infrastructure has matured such that protocols have advanced through to the observation and confirmation stage. The investment proposition of crypto is more mature and proven.

Open-Source Capitalism

Open-source ecosystems are the perfect environment for capitalism to thrive as the ecosystem is global, accessible by all, transparent, with a vibrant culture of unrelenting experimentation and intense competition coupled with ruthless interrogation of new ideas.

Embedded financial rewards incentivize users/hackers to identify and exploit any bugs in smart contracts or open-source code like white blood cells helping the immune system fight infection. The result is the largest ecosystem of innovation and experimentation ever with enormous quantities of observational data which confirm a new protocol’s utility and security. 

This is an incredibly powerful economic phenomenon – it represents the coming Digital Age.

Zombie Capitalism

Capitalism works because any business is effectively testing an entrepreneurial idea in the marketplace. The global economy is a large petri dish of economic ideas under constant examination. Unfortunately, central banks have impeded this test environment in the traditional economy through manipulation of interest rates and bailouts. The result is large misallocation of capital and zombie businesses which exist because the cost of capital has been artificially lowered.

Boundless Digital Innovation

Conversely, open-source protocols represent the future for the global economy as we transition from the Industrial Age to the Digital Age. There are no government bailouts in open-source capitalism, just the ultimate testing ground of new ideas characterized by network effects, staking, hackers, bounties, vampire attacks, airdrops, NFTs, DeFi, the Metaverse, economic incentives, and tokenized governance. The full implications of these dynamics are still not understood; however, the impact of composability will gain greater prominence.

Composability Accelerates Innovation

Crypto networks are trustless and stateful which means that developers benefit from building on top of a shared, immutable, censorship-resistant global infrastructure. This provides access to resources such as a user base, asset liquidity[4], data, security, and code. The decentralized nature of this infrastructure means developers harness these resources without risk of future access being censored– thus avoiding the major drawback of reliance upon traditional, centralized Web 2 protocols. This creates powerful ecosystem effects.

The analogy of Lego pieces helps visualize composability whereby protocols fit together like building blocks so that increasingly complex applications and experiences can emerge.

Open-Source Ecosystems – Characteristics[5]

The key characteristics of composable open-source ecosystems are:

1.    The absence of any centralized control.

2.    The autonomous nature of each individual protocol.

3.    Growing connectivity between each individual protocol.

4.    Non-linear impact of protocols influencing each other.

Open-source ecosystems do have certain drawbacks:

System redundancy without any centralized control can mean inefficiency.

No centralized control also means the ecosystem is uncontrollable.

Most importantly from an investment perspective, the impact of decisions taken in this ecosystem is not immediate, often it is nonlinear and unpredictable.

Such drawbacks were prevalent during the early years of digital assets which we will loosely define as the years upto 2020.

Open-Source Ecosystems – Benefits

However, there are powerful benefits which emerge from open-source ecosystems:

The highly distributed nature of these systems brings adaptability. The recent migration of Bitcoin mining capacity out of China to the rest of the world is an example.

The locus of adaptation evolves from one part of the system to another. For example, the ICO boom has been replaced by DeFi, which may give over to NFTs and so on.

System redundancy means that the system is highly resilient.

From an investment perspective, as throughput increases and interaction between protocols becomes more seamless, then the assets, functionality, and experiences grow in an emergent and boundless manner bringing new value creation and utility.

Digital Assets Inflection Point

These benefits are becoming more evident given the success of DeFi protocols which demonstrate improved levels of capital efficiency, UX, functionality, and cash flow. This results from observation and confirmation of each protocol’s utility in the marketplace.

We are at an inflection point whereby the boundless potential of the open-source ecosystem will become much more obvious to the global investment community.

Bitcoin

Bitcoin is the result of over 40 years of R&D across a range of disciplines and its sole purpose is to be a natively digital, non-sovereign, immutable, censorship-resistant, digital money.

Digital money has the largest network effect. 

Like any successful network, it will be a winner-takes-all (or most) outcome. That does not mean that other cryptocurrencies will not be accepted by some as money, but they will represent a fraction of the total capitalization of Bitcoin.

Bitcoin Prehistory–Over 40 Years of Research and Development

Money Measures Value Creation

Money is the unit of measure of value creation in an economy. 

Therefore, money should not be subject to unpredictable new issuance (such as quantitative easing) as this impedes its ability to act as an effective unit of measure. Imagine if other units of measurement, such as a mile or an inch, were subject to material and random changes.

Bitcoin is highly predictable – its issuance schedule is known as the halving schedule, block reward, difficulty adjustment, and timing of new blocks are all pre-determined. At the risk of sounding glib, the only thing about it which is unpredictable is its price in fiat currency.

Bitcoin’s predictability makes it suitable as the monetary unit for the Digital Age.

Money versus Assets

Bitcoin and digital assets are two separate things.

-          Bitcoin is the unit of measurement of value in the Digital Age.

-          Digital assets will tokenize all assets in digital form –from NFTs to traditional assets.

Put differently, Bitcoin was created by Satoshi Nakamoto whereas digital assets are/will be created by humanity as our creativity is accelerated in the Digital Age.

Given Bitcoin’s role as the unit of measurement of value, then its valuation will grow as the value of the digital asset ecosystem grows. This idea was captured in our report, Bitflexivity, which explored Bitcoin as a call option on all future innovation within digital assets.

Some dismiss this idea as narrow-minded Bitcoin Maximalism. In reality,  Satoshi Nakamoto invented the ultimate form of digital money and thus the ultimate unit of measurement of value. This will become clearer as DeFi protocols are built on top of Bitcoin (e.g., Sovryn).

Predictable Money vs Unpredictable Ecosystem

The Bitcoin protocol is highly transparent and predictable. Conversely, the digital asset ecosystem is characterized by innovation, experimentation, and composability which are unpredictable but create the perfect capitalistic breeding ground for testing of ideas, innovation, and value creation.

Digital Money for the Digital Age

Unparalleled Digital Asset Innovation Ahead

As we move into this new era of open-source innovation with embedded network effects, the value creation will be unparalleled with extraordinary investment opportunities across digital assets. As the narrative grows of Bitcoin’s role as the natively digital reserve currency of the Digital Age, let us explore how the Bitcoin derivatives complex could respond

Contango and backwardation define the structure of the futures curve. Contango describes a situation where the futures price is higher than the spot price (“positive basis”[6]) whereas backwardation describes a situation where the futures price is lower than the spot price (“negative basis”[7]). Over time, the spot price and futures prices converge and capturing the spread between the two offers an arbitrage opportunity for traders (“the cash and carry trade”).

Bitcoin Derivatives - Contango

In crypto, the derivatives market is dominated by perpetual swaps (“perps”) originally pioneered by BitMEX. Perps are futures contracts which never settle in the traditional sense and instead utilize funding rates which are paid periodically (typically every eight hours) depending on whether the perpetual is in contango (longs pay shorts) or backwardation (shorts pay longs). Funding rates correlate with market sentiment, such that the more bullish the market and the greater the contango then the higher the funding rate paid by longs to shorts (and vice versa).

The “cash and carry trade” has been covered extensively elsewhere and so we will limit its discussion here. The important point is that when the Bitcoin market is in contango, arbitrageurs capture the positive spread by purchasing Bitcoin and shorting the Bitcoin perpetual contract[8]. This is a fixed income return over a given time period—it is an interest rate trade.

Perpetual Swap Funding Rates

The Contango Trade

There are a couple of critical takeaways from this discussion.

Firstly, derivative markets are two-sided and composed of speculators who are taking on price risk of the underlying (in this case Bitcoin) and arbitrageurs who provide liquidity on the other side of the trade whilst taking no Bitcoin price risk. These arbitrageurs are agnostic on Bitcoin itself, rather they are purely motivated to capture the spread (or basis). In effect, they are trading interest rates.

Secondly, the cash and carry trade is well-known in TradFi as well as crypto. The arbitrageurs are delta-neutral and so can mitigate Bitcoin price risk. Perceptions of risk in this trade by institutional traders have been around so-called “platform risk” when trading on unregulated crypto exchanges—these are moderating as market infrastructure matures. The perception of risk in the crypto markets (particularly systemic risk) versus TradFi will be the topic of our next report.

An Interest Rate Trade

Arbitrage between spot and perps creates a flow of interest payments for crypto. This is one of the key themes of DeFi and this yield is attracting institutional capital.

As of July 15th, 2021, Blockfi[9] indicated yields of 7.5% on USDC balances up to $50,000 and 5% above $50,000. Such yields are a significant premium to TradFi where 10-year sovereign bond yields in developed markets are sub 1% and, in some cases, are negative🔟.

Currently the psychology of the crypto market is bearish. At some point this market psychology will change and institutional investors will understand the unparalleled innovation and value creation taking place across crypto. There also remains FUD regarding Bitcoin mining which will dissipate, at some point, as the benefits of a decentralized global electricity market for energy innovation are better understood.

New Interest Rate Benchmarks for Risk Assets

Then the contango trade discussed above can bring visible interest income for institutional capital and an alternative set of benchmark reference rates. 

This will coincide with a transition in TradFi as the LIBOR benchmark reference rate complex is going through a complete overhaul.

LIBOR is the London Interbank Offered Rate and is the most widely used interest rate benchmark globally. It is calculated and published daily in five currencies and seven maturities by the ICE Benchmark Administration, and it is based on submissions by a panel of banks. This benchmark aims to reflect the cost at which large, globally active banks can borrow on an unsecured basis in wholesale markets.

Following nearly a decade of reform efforts, LIBOR is being phased out between 2021 and 2023. This is due to concerns of manipulation of LIBOR’s rate-setting process and the declining amount of unsecured, wholesale borrowings by banks post the Global Financial Crisis. 

In other words, LIBOR does not reflect transaction-based market interest rates but rather just the opinions of a panel of banks[11]. The lack of transactions underpinning LIBOR has been driven by changing market structure, regulatory capital, and liquidity requirements as well as changing bank risk appetite for short-term funding.

LIBOR Termination

LIBOR is the benchmark for over $350 trillion[12] in notional value of financial contracts worldwide, of which $200 trillion uses USD LIBOR[13] as its reference rate. Due to the broad use of USD LIBOR, all financial market participants including retail, corporations, issuers, investors, asset managers, service providers, and financial institutions are impacted by LIBOR.

It is beyond this report’s scope to explore LIBOR’s transition in detail, but the operational burden and risks around transition to a new set of benchmark rates highlights the profound challenges in TradFi due to opacity, insufficient digitization and standardization, and a lack of composability. 

In short, LIBOR highlights many of the shortcomings of TradFi relative to DeFi.

$350 Trillion

Crypto is at an inflection point of adoption which will drive growing and continued inflows of institutional capital seeking capital appreciation and yield-generation. The maturity of the ecosystem indicates that the pace of innovation will accelerate. This will continue to attract institutional capital from TradFi seeking premium interest rates offered on crypto which will be impossible for institutional asset allocators to ignore.

Yield Premium Impossible to Ignore

The peer-to-peer nature of Bitcoin (and digital assets) allows borrowing/lending across a range of maturities whereby a granular transaction-driven yield curve can be created. This will enhance institutional recognition of Bitcoin’s role as financial collateral and will offer an alternative to the proposed new benchmark rates being considered to replace LIBOR.

Transaction-Driven Yield Curve

Bitcoin’s natively digital characteristics make it the best global collateral:

Programmable: Bitcoin can populate a smart contract with the key terms of conditionality and custody pre-agreed.

Divisible: the collateral is divisible to 8 decimal places such that a fraction of the total collateral can be sold if required.

Liquidity/Price Discovery: Bitcoin is a global market which is open 24/7/365 providing immediate price discovery and global fungibility.

Rehypothecation: re-use of Bitcoin can be restricted by the smart contract, thus avoiding complex collateral chains and multiple claims on a single piece of Bitcoin collateral.

Risk Management: The Bitcoin network is censorship resistant, offering new models of custody and collateral security which mitigate jurisdictional and regulatory risk.

Data Rich: the quantum of observational transaction data for Bitcoin is unparalleled and publicly available[14]. Interest rates will be supported by granular transaction data over multiple time frames enabling true pricing of risk.

Bitcoin as Collateral

Let’s switch gears and consider the implications of high crypto/Bitcoin interest rates upon the valuation of traditional risk assets. We will do this by zooming out and considering the impact of high interest rates upon the valuation of equity and credit in TradFi historically.

The key takeaways are:

Risk asset prices are inversely correlated with interest rates, and 

This relationship is non-linear, and

The sensitivity of risk assets to an increase in rates is at its most extreme.

Impact on Traditional Risk Assets

The chart below shows the S&P 500 PE ratio versus interest rates. The red-circled area highlights the 1970s to early 1980s when interest rates (orange line) were materially above the long-term average. PE ratios (blue line) during this period fell from mid double-digit levels in 1972 to single-digit levels from around 1975-1982 as interest rates rose to nearly 20%[15].

S&P 500 PE vs Interest Rates

Bonds have an inverse relationship with interest rates which is measured by the bond’s duration. Duration (which is measured in years) is a fundamental risk measure for fixed-income securities. The higher the bond duration, then the more the bond value will fall as interest rates rise (and vice versa). For example, if a bond had a duration of 5 years, then a 1% increase in interest rates would cause a 5% fall in the value of the bond (approximately).

Bonds vs Interest Rates

The table above indicates how a 1% increase in interest rates would impact the value of 2, 10 and 30-year US Treasuries[16]. The data shows that  the longer the maturity of the US Treasury, the greater the price fall in the bonds for a 1% increase in rates. Low coupon rates and bond tenor amplify the impact of a rate increase as shown by the 30 Year Treasury.

Sensitivity to 1% in Interest Rates

The implications of a rising interest rate environment for global debt markets are simply staggering. Global debt markets are over $300 trillion[17] and they dwarf the size of global equity markets which are approximately $95 trillion[18]. The duration across the fixed income complex indicates that any rise in interest rates could trigger an unprecedented sell off in bond/credit markets and lead to significant market volatility.

When central banks increase rates they typically do so incrementally (say, by 25 basis points). The rates observable in crypto are hundreds of basis points higher than those in TradFi such that the impact on equity and debt valuations of using such rates for valuation purposes would imply a broad-based collapse in valuations of traditional risk assets.

This is a simple framework to highlight how sensitive traditional risk assets are to even a minor increase in benchmark rates. High valuations, low yields, and low coupon rates all magnify the impact. Should the premium yields in crypto attract institutional capital then, over time, the locus of determination of interest rate benchmarks will shift away from TradFi and towards DeFi. The timing of the LIBOR transition between 2021-2023 is fascinating as it will coincide with accelerating institutional adoption of crypto, particularly Bitcoin. It will offer a unique opportunity to compare the new benchmark rates in TradFi relative to those in DeFi.

Implications for Global Markets

Risk Parity is a popular portfolio strategy which combines a 60% allocation to stocks with a 40% allocation to bonds and typically the strategy employs leverage. This allocation assumes that bonds and equities are inversely correlated such that the portfolio will perform well in almost any market environment. However, the market dislocation in March 2020 saw both equities and bonds falling at the same time.

Materially higher interest rates which are outside the control of central banks would have profoundly negative implications for equities and debt simultaneously. It is estimated that $400bn -$600bn of capital[19] is in risk parity funds which is a significant part of the market. There are various other factors which would come into play including credit risk for refinancing debt in a rising interest rate environment, market structure, and centralized clearing which would add further challenges. 

In short, the risk of unprecedented global market volatility would be real.

Risk Parity = Risk Vulnerability

As we explored in our first report in this series, Bitflexivity, volatility spikes cause a cascade of deleveraging and selling of risk assets – the market goes from “Risk-On '' to “Risk-Off '' very quickly. As realized volatility explodes during a Risk-Off event, the correlation of all assets leads to one and sanctuary is sought in cash (primarily the US dollar).

Volatility Structure

The Bitflexivity report used Option Theory to describe Bitcoin as a perpetual call option on the biggest network effect in financial history. Very few institutions own Bitcoin and those that do not are effectively short a call option (short gamma) which implies procyclical buying from institutional investors (in the future) as institutions act collectively to build a Bitcoin position. Furthermore, as the digital asset ecosystem matures, the Bitcoin contango trade will offer a sustainable premium yield to arbitrageurs, many of whom will come from TradFi.

Optionality = Volatility

Given the manipulation of central banks, in extremis, TradFi is short volatility, short optionality, long financial leverage, and has low liquidity. Whereas Bitcoin is long volatility, long optionality, long network leverage, and has high liquidity.

This could initiate a reflexive feedback loop as institutional capital leaves TradFi, thus creating selling pressure on traditional risk assets combined with a re-pricing of risk assets downwards based on new benchmark rates set by Bitcoin (or DeFi more broadly).

Higher Rates = Higher Volatility

Higher Rates = Higher Volatility

Recognition of Bitcoin as an institutional grade reserve asset is growing as is awareness of the innovation in the open-source ecosystem it has spawned. A visible and sustainable yield on Bitcoin will have a profound impact upon its acceptance as a globally fungible form of collateral and provide an alternative basis for calculation of interest rate benchmarks.

To the extent such benchmark rates would be even modestly higher relative to TradFi rates, then it would have profoundly negative implications for valuations of all traditional assets including sovereign debt, corporate credit, fiat currencies, equity, and real estate.

Bitcoin could accelerate the end of the bull market in long duration assets and reward portfolios which are long volatility and optionality - namely crypto.

Bitcoin-the Safe Risk-On Asset

Bitcoin’s Holy Trinity

Given Bitcoin’s role as the money of the Digital Age, it will capture the value of innovation created across all digital assets over the medium to long-term. Therefore, if Bitcoin is provably scarce, generates capital appreciation and interest income, then could we reach a point in the future where Bitcoin holders refuse to sell their Bitcoin? 

If this is the case, then the long-term secondary market in Bitcoin may become thinner with the only reliable place to secure new Bitcoin being via mining.

Repricing Global Risk Assets- Summary

Implications

Bitcoin as Money

Bitcoin is the culmination of over 40 years of R&D

Digital money is the largest network effect ever

Bitcoin will be the unit of measure of value for the coming Digital Age

Digital Assets

Inflection Point

Digital asset innovation is at an inflection point of growth

Composability accelerates value creation in a boundless manner

Open-source ecosystems are perfect environments for capitalism

Interest Rate Benchmarks

Premium yields will drive the coming phase of global adoption

Granular transaction data will drive new interest rate benchmarks

New interest rate benchmarks to emerge as LIBOR is phased out

Higher rates are deeply negative for traditional risk assets

Repricing Global Risk Assets- Summary

Implications

Bitcoin’s Holy Trinity

Bitcoin is provably scarce - there will only ever be 21 million Bitcoin

Bitcoin ensures capital appreciation over the medium-to-long term

Bitcoin’s yield will become a core part of its investment proposition

Bitcoin Mining

Bitcoin HODLing the logical investment strategy

Bitcoin’s secondary markets would become thinner

Bitcoin mining will be the primary route for sourcing new Bitcoin

John was Global Digital Assets Research Lead at Celent (fintech research division of Oliver Wyman). This followed a career in investment banking where he ran equity capital markets businesses at Macquarie Capital (specializing in natural resources) and Goldman Sachs. 

The views and opinions expressed in the note belong solely to the author and do not reflect those of Bitfinex.

About the Author

References

[1] Bitcoin’s dominance among store of value assets is approximately 88% Source: Messari as of 22 July 2021

[2] The Information Theory of Capitalism develops ideas from Claude Shannon and George Gilder https://www.amazon.co.uk/Knowledge-Power-Information-Capitalism-Revolutionizing-ebook/dp/B07DFG91MY/ref=sr_1_1?dchild=1&keywords=the+information+theory+of+capitalism&qid=1626178970&s=digital-text&sr=1-1

[3] https://www.simplypsychology.org/Karl-Popper.html

[4] Particularly important for DeFi protocols being built on top of the most liquid asset – Bitcoin [5] These ideas borrow heavily from Kevin Kelly, Out of Control https://www.amazon.co.uk/dp/B06XC83SZQ/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1

[6] In contango (future price > spot price) then (future price – spot price = positive basis)

[7] In backwardation (future price < spot price) then (future price – spot price = negative basis)

[8] Executing this trade with 1x leverage creates a synthetic hedge on the fiat valuation of the long Bitcoin position. Using 1x leverage also means that position cannot be closed out by the crypto exchange

[9] https://blockfi.com/rates/

🔟 https://www.bloomberg.com/markets/rates-bonds

[11] To use Popper’s Falsification Theory, LIBOR is theoretical rather than based on observation in the market.

[12]https://www.euromoney.com/article/b1h2rksb5rjr9j/libor-transition-are-markets-ready-for-a-350-trillion-white-knuckle-ride

[13] https://www.reuters.com/article/us-usa-bonds-libor-idUSKBN1GH2Z8

[14] Permissioned access to costly financial data in TradFi has been a key challenge for Fintechs historically.

[15] https://www.valuescopeinc.com/resources/white-papers/the-sp-500-pe-ratio-a-historical-perspective/

[16] The bond duration calculator is here https://dqydj.com/bond-duration-calculator/ and the underlying US Treasury data is below

[17] https://www.reuters.com/article/us-global-debt-idUSKBN27Y239

[18]https://www.marketwatch.com/story/value-of-the-world-wide-stock-market-soars-to-record-95-trillion-despite-resurgence-of-coronavirus-11605196894

[19] https://www.ft.com/content/8542e88e-cea6-11e5-92a1-c5e23ef99c7

Bitfinex Alpha | ISSUE 4

Thought leadership | Research | Market Analysis

If you would like to speak to the Bitfinex team you can contact - OTC@Bitfinex.com