Crypto Update

I run a portfolio of BTC:ETH which started in a 75:25 ratio. Over the course of the year the ratio has flattened to 55:45 as ETH had outperformed as an asset. My Y.O.Y of the entire portfolio has increased by 9x. YOY BTC is up 4x and ETH is up 16x. The combination of the 2 has proven to be invaluable in reducing my day to day volatility and improving my return. The crypto infrastructure continues to be built out and adoption continues, despite what passes for “news” (Elon Musk and his antics) which IMHO should totally be ignored. Out of a 2T market his stake is about 15B or 0.75%. It is not the tail on the dog but a flea on the tail that’s doing the wagging.

Crypto follows market cycles like anything else except the cycles tend to have an exponential component because the growth has an exponential component. Crypto seems to be taking a pause in growth. There were wild predictions this year BTC would reach 100K to 500K by the end of the year. This is of course the problem with exponential predictions. Humans are ill equipped to deal with exponential processes.

If you look at BTC growth since 2013 it’s undergone 4 cycles. Each cycles seems to be getting longer as the asset matures and different players, with different trading an investing goals, enter the space. The growth prospects of the space remain intact but the predictability of growth remains exponential. Many people feel like they were left in the dust at the recent explosion in value, but the market, like any market will let you in if you choose to participate. Both BTC and ETH have their growth tied to Metcalf’s law. As the number of wallets increase, the network value increases exponentially. ETH is about 3 years behind in terms of adoption compared to BTC, so ETH is responding to a shorter steeper growth as we see in the YOY above. BTC is going flat t o negative for a while, and it may be a good time to get in if you missed the runup. ETH remains in a strong bullish trend so probably not yet time to buy. BTC is at 43K today and may go as low as 30K so if you want in pick an amount and watch numbers for an entry point. ETH which is growing along a different path (# of wallets) will also eventually allow entry into the market.

I think something between a 50:50 allocation and a 75:25 allocation is what I would aim for. If BTC goes down, buy some, but not necessarily buy ETH. When ETH draws down, buy your stake in ETH in the ratio you have determined. In todays prices for a 50:50 ratio you 1 BTC for 43K and 13 ETH at 3.2K, for a total investment of 86K. Eventually there will be US ETF’s for BTC and ETH which will allow buy in same as buying QQQ or GLD.

Regarding BTC and energy. BTC is actually a greening influence. Suppose you build a wind farm that is capable of 100MW peak power but your needed distribution today is 20MW. 80MW of electricity is wasted. It is projected to be necessary in 15 years but today it is wasted. Suppose the cost of the wind farm is 100M financed over 5 years. If you use the excess power to mine BTC you payoff the wind farm in a year and reduce the cost to consumers over time as the mine continues to produce profit. BTC mining is geographically indifferent. It does not require a deposit to be mined it merely requires cheap power. Greenland has hugely underutilized hydro and thermal power and no way to effect transmission. Greenland is a preferred mining destination allowing water pressure to be turned into digital gold, improving the lives of the Greenlanders. Also BTC is mined on a decreasing function. The # of BTC is set to 21M and some where between 18M and 19M have already been mined. Once mined the coin does not need to be remined but has it’s own market based intrinsic value which allows possession and trading. This works like gold. Gold is a metal who’s lower limit vale is set by the energy and infrastructure required to get an OZ out of the ground. In 2020 mining cost was about $800 an OZ. What gives BTC it’s value growth above speculation is the upper 21M limit in # of coins. All of the tons of gold mined in the world have associated with it a bottom line energy cost and a relatively inelastic ability to increase supply. BTC has an even more inelastic ability to increase supply, only about 900 coins a day are allowed to be mined so energy costs are predictable.

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