The Great Bitcoin Migration

The Great Bitcoin Migration

One way to think about corrections in the equities market is that they’re the process of stocks migrating from shorter-term holders to longer-term holders.

When things are good, everyone’s willing to own stocks. If there’s news suggesting tomorrow might be bad (or less good, even), people who were long on a one-day time frame sell to those on a two-day time frame.

Recent news suggests things could be bad for significantly longer than that — another year, maybe? So the stock market is in a process of finding a level where the marginal buyer is willing to hold stocks for at least that long. 

Something similar is happening in bitcoin. Things can’t technically get “bad” for bitcoin — there are no earnings, cash flows or product cycles to worry about. 

But that lack of fundamentals makes BTC a purely speculative asset, so the price itself is effectively the product. 

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 Narrative follows price for all risk assets, but particularly so with bitcoin: When the price is going up, everyone is willing to hold. When it's going down, fewer are. 

 The price of bitcoin has been going down for 10 months now, and with each tick lower, sellers have to find buyers that are confident on increasingly longer-term timeframes.

 Unlike with equities, this is quantifiable for bitcoin:

The rising orange line above represents “the total amount of circulating supply held by long-term holders” of bitcoin, as calculated by Glassnode from on-chain data — holders of bitcoin are becoming increasingly laser-eyed and diamond-handed.

This is a feature of bitcoin sell-offs. But maybe also a flaw? 

Feature: Speculators will come and go, but if bitcoin wins more true believers over time, the lows of each boom/bust cycle should be progressively less low.

Flaw? The current monetary policy of bitcoin becomes an article of faith that may not be able to adjust to new realities. 

On the way up, we celebrated every new buyer of bitcoin, be they traditional asset managers, small pension funds, ETF or GBTC investors. But many of those were low-conviction and turned seller on the way down.

That’s made bitcoin disappointingly correlated to other risk assets, tech stocks in particular.

The ultimate bull case is that bitcoin becomes a risk-off monetary store-of-value — and that process may currently be underway: As coins move from sellers who see it as a risk-on, tech-correlated asset to buyers who see it as a risk-off monetary asset, we self-fullfillingly edge closer to that latter view becoming reality.

That same process also cements bitcoin’s social contract, which is that, unlike flighty Ethereum, it will never change.

Simultaneously, however, there seems to be an increasing recognition that Bitcoin in its current form may not be sustainable.

Herein lies danger: As the social contract hardens around Bitcoin’s hard-coded monetary policy as an article of faith, it will become harder for Bitcoin to evolve.

John Pfeffer tweeted recently that, should “the supply curve ever be tampered with, most Bitcoiners agree that the result would no longer be Bitcoin.”

He meant that as a feature — but I think it could also be a flaw?

Satoshi’s white paper suggests rewards were meant as a boot-strapping mechanism: “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.”

It appears increasingly evident that transaction fees alone will not be up to the task: The network is generating only about 15 BTC per day in fees, vs. 900 BTC in block subsidies.

15 BTC per day is not enough to secure the network. 

This could solve itself through either higher activity or higher prices, but neither of those seems like something to hang our hat on: With bitcoin increasingly held by diamond-handed true believers, activity seems likely to stay low. 

And the idea that the dollar price of bitcoin will double with every halvening feels a little shopworn: We’ve just witnessed ETH going down after its triple halvening.

That leaves Bitcoin’s long-term security dependent on some combination of higher ticket fees and/or higher issuance.

This is not a new issue, it’s been dissected for a while now.  

But it’s an increasingly relevant one, and the room for maneuver may be narrowing as the nature of the holders change.

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