The Golden Age of Bitcoin

This article was published on the Delato WeChat public account, authored by Dovey Wan.

Bruegel, "The Triumph of Death," 1562

Preface

Meeting old friends in Chengdu over the weekend, I revisited some predictions and viewpoints from our previous fireside chat, "The Golden Age of Bitcoin," which I had with Xiong Yue at the listing conference of Canaan 18 months ago. At this conference in Chengdu, I found that most of our previous predictions had been realized or had taken shape within the past year and a half. The following transcript of the dialogue is a revised version of my text from PAnews, and I would like to thank the organization of Yinbit and the support from various media.

From the end of 2013 to the beginning of 2017, Bitcoin returned to $1200, and from the end of 2017 to the end of 2020, it returned to $20,000. Although there have been significant differences in market structure and investor profiles, the phases of market sentiment show astonishing similarities. When recording the episode "Bitcoin: Is This Time Different?" with Mikko, he asked a soul-searching question: What exactly is Bitcoin? I pulled out an old journal and quoted a passage to answer him: "The business of currency is the establishment of a totem and the popularization of symbols; it is the permeation of doctrine during the preaching process of religion; it is a collective hypnosis of mass psychology."

During this trip back home, I talked exhaustively with many traditional investors about the value consensus of Bitcoin, discussing DeFi and self-sovereignty. Most of the time, effective communication was still elusive. After all, having become accustomed to the games of gathering, capital accumulation, and monopoly rent-seeking, it must be quite difficult to suddenly understand meme wars, the rise of superindividual developers, and on-chain protocol governance.

The beginning of a revolution signifies the decline of old beliefs. The worship of Rome turned Roman civilization into a "self-fulfilling prophecy" that dominated the world. The birth of new gods may be random, but the twilight of the old gods is already determined.

I particularly like a saying: "The future is here, just not evenly distributed." This might be the most accurate description of the current state.

On April 24, the "2021 New Infrastructure Blockchain Summit," hosted by Yinbit and guided by the Zhuhai Hengqin New Area Digital Finance Research Institute, was held in Chengdu. In a keynote dialogue titled "Revisiting the Long Bull Market After 18 Months," Dovey Wan, founding partner of Primitive Ventures, stated during a conversation with Xiong Yue, director of the Coin Research Institute, that grasping the overall trend is quite important for long-term players in cryptocurrency.

Dovey noted that in this round of bull market, Bitcoin has not seen a drop greater than 35%, and its volatility is converging. Once Bitcoin's price exceeds $55,555, it has reached the scale of a mid-to-large tech stock, and more traditional financial structures will enter and serve it in the future. As for the peak of the bull market, it is about $200,000, with approximately $150,000 before the peak, as it has reached parity with the market value of gold as a financial trading asset.

Additionally, Dovey pointed out that DeFi has turned Bitcoin into a very good yield-generating asset, and it is the highest quality asset with the best credit rating within the DeFi world. From the perspective of Bitcoin, this is certainly a positive development. We are still in the first three minutes of DeFi's development history, and a lot of financial Lego has yet to be built. Therefore, everyone should deeply participate in and pay attention to DeFi.

The upcoming bear market will not be like the past, as its lower limit has been raised, and the attributes of new entrants holding coins have changed: for example, MicroStrategy has borrowed at zero interest for four years, and it will not face pressure from funding costs during that time, allowing it to effectively cross the original four-year bull-bear cycle. The next bear market, especially for Bitcoin assets, is unlikely to experience the "bitter winter" of the past; the bear market will be shortened due to reduced selling pressure and enhanced consensus cycles.

The following is the transcript of the dialogue:

Volatility Convergence

Xiong Yue: Good afternoon, Dovey. Since I left Hangzhou, Bitcoin has been falling. Especially yesterday, there was a significant drop. How do you view this drop?

Dovey: Just before I went on stage, I told Xiong Yue that as Bitcoin veterans and holders, we shouldn't discuss price. I mentioned in many articles and public speeches last year about the convergence of volatility in this cycle, for example, in last year's keynote speech "The Long Bull Market from the West."

"I personally believe that there will not be a major retracement exceeding 35% like in previous bull market cycles. With the emergence of institutional allocations, the probability of such a level of retracement will become smaller."

The 35% drop has indeed not been reached. Since prices are determined by market supply and demand, and with the changes in player attributes in this cycle, the price floor will be raised higher and higher. In addition to the convergence of volatility, the price divergence rate from the Stock-to-Flow model is also converging. This price model often diverges downward during bear markets, and when market greed dominates, especially in times of excessive bubbles, it can be significantly higher than the model itself. This time, we see the entire price moving closely along the model, and the divergence rate's volatility is also converging, which is the highest alignment with the model in the past few cycles (the red and green curves in the chart below represent the divergence rate; above the model price is red, below the model price is green, and the divergence rate has greatly converged in this cycle).

I started mentioning that $55,555 is a key price point last year, because when Bitcoin reaches $55,555, its market value hits $1 trillion, which is a critical price node or market value for institutional investors entering the market, equivalent to a mid-to-large tech stock. At this market value, many institutions can put down more psychological burdens and enter the market with confidence. Therefore, if the price fluctuates between $50,000 and $55,000, it is very positive for the bull market. Moreover, this is not really a crash; the magnitude of each retracement is decreasing, and the chips are being fully exchanged, which is a good thing.

Xiong Yue: Many people think yesterday was the lunar 312, comparing it to last year's 312. We can see that yesterday's drop was not significant, and today it has basically bounced back to $50,000.

Dovey: I have been mentioning for the past few years that the market trading structure has changed significantly. Earlier, exchanges were only spot markets, and their market value was very small, making it easy to have huge fluctuations. However, this time, there are a lot of derivatives and contract markets emerging, and as the options market grows larger, the delivery of many options will also have a short-term impact on market prices. This is inevitable, but it does not affect the long-term trend.

Cycle Resonance

Xiong Yue: Let's get to the main topic. 18 months ago, at the end of 2019, we had a dialogue at Canaan's listing. Most people were quite pessimistic in 2019 because the coin price was not high. At that time, we expressed firmly that there would be a significant bull market in the future. Looking back now, the coin price has roughly increased more than tenfold in this year. After 18 months, what aspects did we see in the bull market, and what did we miss?

Dovey: Reflecting on our conversation (the specific content can be found in "The Golden Age of Bitcoin"), we talked a lot about the overlapping macro cycles. We cannot accurately predict tomorrow's weather, but we can sense the seasons. Another analogy is that the solar system will eventually be destroyed; this is inevitable, but we do not know the rise and fall of the stock market tomorrow. For long-term players, having a long-term optimistic attitude towards this industry and grasping the overall trend is more important than anything else. 18 months ago, we mentioned that there would be three major cycles resonating. At that time, in November 2019, we judged that there might be three overlapping cycles in the next ten years. First, the Bitcoin halving cycle. Second, the economic debt cycle. Third, the fiat currency credit cycle. We judged that these three major cycles would overlap, creating a very strong resonance effect, leading to a super cycle. Of course, we did not anticipate the black swan event.

Xiong Yue: We did not foresee the impact of the pandemic.

Dovey: We anticipated a major economic debt cycle, as the last economic crisis had passed more than a decade ago. We did not expect it to manifest in such a black swan form.

Xiong Yue: The most direct influence on coin prices is not these cycles, but the pandemic, which led to unlimited quantitative easing in the U.S. in March 2020. This includes the Biden administration's $1.9 trillion aid package at the beginning of this year, etc.

Dovey: Xiong Yue has a more professional view on macroeconomics. Many traditional financial practitioners attribute the pure rise in coin prices to excessive liquidity, as they see cryptocurrency as a very small alternative asset. I personally believe that such a simple attribution is not adequate, because since the day Bitcoin was born, it has been a social movement rooted in the ideology of technological libertarianism. If everyone pays attention to foreign events, such as the phenomenon of retail investors and populist capital leaders like GameStop, where Wall Street retail investors completed what the 2008 "Occupy Wall Street" movement could not achieve, we can see that although the pandemic has further divided different groups in global politics, there is one thing that can quickly reach consensus: people around the world have realized that we deserve better governance.

As the modern political and economic landscape makes it increasingly costly for those in power to reach consensus, when people become more disillusioned with public credit, they will naturally think about what can support them, offering more choices for better control over their destinies as ordinary people, rather than being swallowed by various historical forces. This is why a series of social thoughts and movements have emerged, precisely because our so-called "alternative asset" exists beyond traditional sovereign credit assets, fitting perfectly with the rise of this thought.

Consensus Pathways

Xiong Yue: I think it’s interesting that another point has coincided. Last year, Bitcoin completed another halving, and after this halving, Bitcoin's scarcity reached the level of gold, making Bitcoin the most scarce asset. Moreover, Bitcoin's inflation rate was relatively high in its early days, but after last year's halving, Bitcoin's inflation rate is now at the same level as that of the Federal Reserve. So many factors have come together, leading many people to feel the need to hold Bitcoin as a vehicle for their wealth.

Dovey: Of course, we conduct many scientific analyses on the scarcity of this asset, but the key point is that any store of value, any currency itself is a price consensus, a belief system. This belief does not require any intrinsic value because it is a self-fulfilling language. Every cycle has many people believing it will go to zero, and when it not only does not go to zero but continues to reach new highs, its value consensus becomes stronger.

The emergence of value consensus has different pathways. I have talked to many people in the traditional capital circle, and they often overlook this. In the past, whether it was gold, jewelry, or core real estate, their value consensus was a process of permeation from the elite to the grassroots, including the iPhone, which is expensive and used by upper-middle-class and wealthy individuals; when the poor see it, they also want to own it to reflect their identity. In all of human history, the value consensus of all core value carriers has been a process of permeation from the elite and ruling class to the ruled class. However, Bitcoin is remarkably different; it started with a very marginalized group, the early crypto punks. Then, in the last bull market in 2013, it began to penetrate into the geeks, futurists, and early venture capitalists in Silicon Valley.

Xiong Yue: And those who believe in free markets and liberalism.

Dovey: Exactly. From 2013 to the 2017 bull market, it completed its penetration into Silicon Valley and relatively cutting-edge financial practitioners. Now, in this cycle, we have seen participation and close attention from top players on Wall Street, like Dalio.

Xiong Yue: This process of permeation from grassroots to elite is quite interesting. I want to share something. Today, we originally invited someone from Fidelity, and he said he was my fan. I was like, wow. I think it's amazing that someone from a grassroots background has a fan at the level of a Fidelity director; this experience is wonderful and magical.

Dovey: The pathway of value consensus permeation like this gives this asset a very strong grassroots foundation. If those present experienced the 2017 94 incident, they should have a profound feeling that after 94, China's discourse power and asset pricing power, including computing power, have been undergoing a rapid process of de-Sinicization.

Xiong Yue: There is a statistic that China's computing power has dropped below 70% for the first time, now only over 60%. In the early days, a small meeting room with Shen Yu, Xing Kong, and a few others combined to account for 80%.

Dovey: Moreover, the coin price could basically be manipulated by a single WeChat group. If even our country, with such strong organizational capabilities, can quickly suppress a virus but cannot effectively control any aspect of Bitcoin, then there should be no country in the world that can.

Xiong Yue: It was indeed like that back then.

I believe one reason Bitcoin's value foundation is very solid is that we can now see many memes emerging from the community; the only way they create value and consensus is by everyone sharing a lot of memes. Bitcoin's value comes from many things; Bitcoin was initially a meme coin, especially before it reached $1, and the memes were created by the Bitcoin community. At that time, the Bitcoin community made a lot of funny memes.

Dovey: This aligns with what I just mentioned because this is a populist capitalist movement applicable to the masses.

Xiong Yue: The interesting thing about Bitcoin is that practitioners from different industries discover things that attract them in the process of studying Bitcoin. Some tech enthusiasts may find the proof-of-work technology beautiful, while some economics enthusiasts or libertarians may feel that this aligns with their vision; it is a diversified value.

Dovey: Yes, everyone has their own reasons for needing Bitcoin; it is not Bitcoin that needs you, but you need Bitcoin. You need to think about why you need this thing. Whether people want to make money, store value, hedge against fiat inflation, or escape from some wealth reshuffling, everyone has a core reason for needing Bitcoin that cannot be replaced by anything else.

Xiong Yue: Some people are also convinced by the price rise.

Dovey: Yes.

Institutional Entry

Xiong Yue: A huge trend that started in the last cycle is that the Bitcoin community has always believed in a roadmap: from crypto punks to libertarians, to ordinary people, then to institutions, and finally to countries entering the market. Since 2019, it has been evident that many institutions have indeed entered the market, including Tesla.

Dovey is quite familiar with this area; please share your views.

Dovey: I specifically discussed the institutional bull market at Fa Ge's conference last year and wrote an article titled "The Long Bull Market from the West." My views remain consistent, and most details can be found in the original article. People may not have an intuitive understanding of U.S. institutions; you can imagine if you could directly buy coins using Alipay in China, and the Industrial and Commercial Bank or China Construction Bank could help you with Bitcoin savings; this would be a significant milestone for Bitcoin's popularization. And that is the situation in the U.S.

I can roughly categorize institutions into two types: one helps you buy coins, like Grayscale, which buys coins for others without holding them. The other type is institutions that buy coins for themselves, like Tesla. Regardless of the type, institutions that help you buy coins earn fees, and they want the asset's size to be as large as possible, so they are naturally bullish and want to promote it. Institutions that hold coins themselves, like MicroStrategy, have 95% of their balance sheet turned into Bitcoin assets, effectively becoming a high-premium ETF. Tesla has also executed a clever capital operation; if Tesla were to use its stock as collateral for loans, the capital utilization rate would be very low because Tesla's stock rating is close to junk status.

However, Musk is a very clever person; he raised a large amount of cash by issuing new shares instead of using existing shares as collateral, converting it into a very solid quality asset (Bitcoin), which is a high-quality collateral. MicroStrategy has recently borrowed money to buy coins at zero interest, and the loans exceed $1 billion, borrowed at zero interest for four years. In the context of excessive dollar liquidity, combined with various social movements, has Bitcoin become a liquidity black hole for fiat currency? If you understand the logic, this super cycle is indeed the clearest of all, and the logic is incredibly clear.

Xiong Yue: In 2019, there was another matter that was not discussed much at the time but has risen since last year: DeFi. What impact does the rise of DeFi have on Bitcoin?

Dovey: The rise of DeFi is absolutely beneficial for Bitcoin. Buffett has always criticized Bitcoin because he does not like any non-yielding assets. Gold is the same; gold is difficult to yield, and as collateral for lending, it is not a very good collateral. However, DeFi has turned Bitcoin into a very good yield-generating asset, and it is the highest quality parallel asset in our crypto world. DeFi is currently doing a massive arbitrage across two parallel universes, which is certainly beneficial from Bitcoin's perspective.

Xiong Yue: There is another angle; many traditional funds are entering this alternative market, telling people worth $100 million to invest a bit in major coins. If they see their investment drop by $5 million the next day, they may hesitate to enter. But now, many people can accept the logic of entering through DeFi, which involves converting their assets into stablecoins, thus minimizing risk. Stablecoins in the DeFi market offer an annualized interest rate of 50%, which is appealing to them. Once they get on the boat, it is hard to get off, and gradually, some of that money will turn into Bitcoin.

Dovey: One thing is that if everyone started playing DeFi last year or just started this year, they might think DeFi suddenly exploded last year, but that’s not the case. I have mentioned many times on Weibo that many classical DeFi projects, such as Maker DAO and Aave, are actually from the last cycle, including Uniswap, which started in 2018 and was not well-received and struggled to raise funds. Our world cannot be mapped one-to-one with traditional finance; many friends entering new DeFi projects say they want to create derivatives. I ask them why they want to create DeFi derivatives or on-chain derivatives. They say that this market is large in the traditional financial world, which reflects a common path dependency or "natural next step fallacy." The current stage of DeFi is still very early; like my widely circulated article from 2017, we are in the first three minutes of DeFi's history, and a lot of financial Lego has yet to be built. Therefore, everyone should deeply participate in and pay attention to this matter.

Xiong Yue: Looking ahead to the future, what do you see the coin price at the end of the year?

Dovey: I have mentioned predicting coin prices many times; last year's article stated that the range between $50,000 and $55,000 is a significant watershed. Once it surpasses $55,000, as a sizable asset, more traditional financial structures will come in to serve it. However, human nature does not change; when will this thing enter a bear market? It will be when the new money coming in is insufficient to support profit-taking, as the market is always determined by supply and demand. We must know that at all peaks, when we are at the peak, we do not feel it is the peak; this is also a natural human reaction. Every peak is a sharp top that is suddenly blown up, and then it explodes, which is what we often refer to as "blow-off top." Before this sharp top, I think it will be around $150,000, and the blow-off top is estimated to be $200,000. The $150,000 figure is because Bitcoin has no industrial or decorative use, so a better comparison is the market value calculated from gold investment and reserves (see chart below), which is about 1/3, so $150,000 can reach this level. This is also my maximum expectation for this cycle.

The upcoming bear market will not be like the past because its lower limit has been raised, and the attributes of players have changed, with many holders entering the market. For example, MicroStrategy has borrowed money for four years and does not need to consider changing positions during that time. I do not think the next bear market will be as painful as the past, where a bear market lasts for 18 months.

Xiong Yue: Recently, we can see Bitcoin's market share has dropped below 50%, the lowest point in the last two to three years. Do you think it will rebound or continue to decline?

Dovey: This indicator is indeed a very unscientific metric, or rather, based on this metric, Bitcoin's share should steadily decline. Why? Because in the world, besides Bitcoin, there can be countless mainstream coins and altcoins. I could launch a "Dove Coin" today, and its market value could be easily pulled to $1 billion. So this metric is meaningless. Many studies abroad have shown that many altcoins have extremely poor liquidity, and now with decentralized exchanges, the emergence of altcoins and their initial liquidity has basically no threshold. Therefore, according to the current share standard, it will definitely decline in the long term. Another analysis abroad has shown that if we do a liquidity-weighted share analysis, Bitcoin's long-term share is above 90%. I think this is a very scary thing because anyone can issue a high market value altcoin. A few days ago, I saw a purely airdrop coin with a market value of $3 billion, and there was also a "dog king" SAFEMOON with a market value of $5 billion. The structure of the numerator and denominator in this metric is completely illogical and does not represent anything. Of course, it does not prevent traders from using this metric for speculation and trading, but this metric cannot be used as a reference for Bitcoin's fundamentals.

Xiong Yue: Since you started in 2012 until now, what supports you to continue contributing to this industry? I find that what we talk about each time is almost the same; this is just a repetition of what we discussed in 2019. In fact, I often ask Xiong Yue if it is time to exit the circle; we are considering whether to pursue a PhD. For example, I really like biology and medicine, while Xiong Yue continues to do more specialization in Austrian economics. I wonder what supports you to keep outputting?

Xiong Yue: I think it’s people. This industry is developing rapidly, attracting many interesting people. At the lunch meeting, I heard about a new thing, an underwater IDC data center being built in Hainan. If I really exited the circle, I would become isolated and disconnected from these things.

Dovey: That’s true. One reason I have not exited the circle is that I see more and more excellent newcomers entering this industry with each cycle. Although I often talk about principles that do not change much, I hope to provide more people with an epiphany moment to find the path that truly suits them. Each cycle has many speculative people coming in and then speculating out, but many people come in through speculation and, through their own learning, firmly stay in this industry or become a small node in the value consensus of Bitcoin. This is what motivates me to keep outputting in this industry. If this cycle can resemble our predictions, being a relatively logically clear strong bull market, everyone should not overly worry about gains and losses, nor should they have overly high expectations for the current coin price, being overly anxious about immediate matters. If you can clarify this underlying logic, many things will be self-evident.

Xiong Yue: In simple terms, just hold your coins and do nothing.

Dovey: This is perhaps the best strategy for lazy people. Thank you all!