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The Physics of Money
Cash, Digital Money, Data Servers and Ledgers: Why Number Go Up?
My friend behind the Traders Desk presses me for a valuation model of Bitcoin. I sadly do not have this. The stock to flow model is not too much better than throwing darts. Does this mean $30,000 Bitcoin is dust in the wind or…?
Equities itself have no tangible purpose, so there is no natural price elasticity linked to their usage like in commodities, and similar to Bitcoin you can say that equities have no intrinsic value, and are also digital (I own equities, but I will never see anything else than their price on my banking app). But equities represent the partial ownership of a company which is productive. If a company produces more value(able products or services) year after year, it is likely that its profitability rises year after year, which it will share with its shareholders, so it is very likely that the value of its equity, represented in its stock price, goes up, over time.
Okay - so I’ll try to attempt to explain how like a stock price, Bitcoin will have a tendency to go up over time. I will argue that Bitcoin is more elastic like a commodity but has the properties of an equity as it represents partial ownership of a productive network.
How to send money
Digital money is now a major part of our lives. Many people send fiat on tradfi networks in the trillions of dollars daily. Sitting in your chair behind a computer or pressing on the screen of your phone, sending cash through venmo feels the same as sending cash using Strike. What’s going on underneath doesn’t feel different but it becomes more complicated with distance and because of this creates natural political factors that come with extending the geographical range your money must travel.
Not a digital dollar, a physical dollar bill. Its heavy. Gold is heavier. It requires storage and physical energy to spend. You must literally hand it to someone.
If you want to get that Cash or Gold to someone a mile away you have to physically carry it there, or pay a courier to carry it for you. There’s a time or cost to sending the money as it requires to physically change its position for a transaction to take place.
Let’s go back to Digital Money.
What’s actually happening behind the scenes when you Venmo or Paypal someone? There is a private ledger and Venmo/Paypal most likely store this ledger on an AWS, Google or Microsoft server and then with some cadence that ledger is balanced with your Bank who also has a private ledger - who balances that ledger with a central bank. It works pretty well.
Zoom out geographically.
How do you get money across an ocean? Only two ways:
Carry cash on a boat or plane (swim with a waterproof bag)
Send Digital Currency through the internet
Messaging: Across the Pod
Cash on a boat or plane is easy to understand, but how does the digital currency move through the internet especially over vast distances that cross political borders?
The larger you expand physical distances the more often you cross geographical borders. This creates a political friction for moving money. Each political body or group of bodies have their own money and therefor their own digital currency. This is why Paypal works well to send US dollars to US citizens but not to send EUROs or even send US dollars to non-US citizens.
This is because :
a) - You have to send a digital message if you want to use the internet
b) - You need to swap currencies to cross political boundaries which are proportional to distance traveled and at higher density depending on geographical region.
Clearly, we all know sending physical cash back and forth in ships or planes can’t scale in the way digital messages across the internet can.
That’s the point though, you have to send a message.
So, the transaction flow is : Cash → Digital Money → Message → Digital Money → Cash
We are back to ledgers again. I’ll admit I’m ignorant about the distribution of servers in Europe, but as mentioned earlier, the US digital money is mostly stored on ledgers on AWS, Microsoft and Google servers. If Digital Money is to be sent from the US to Europe there must be a ledger that records the transaction. The physical cash must still be sent to Europe in someway if the person on the receiving end wants physical cash, but the message and the ledgers can all update at near the speed of light.
No matter what though, a ledger must exist that records the transactions that someone in the US and someone in Europe are swapping each others currencies.
And who owns that ledger?
I bet you probably thought I’d say Bitcoin a lot more by now… Well now we finally understand the problem Bitcoin is going after. Does the US own that ledger or does Europe? What about all the other countries that want to have US dollars and Euros? What you need is a global ledger that keeps track of who traded what with whom.
Then who owns that ledger?
Bitcoin wants to be that ledger and if you study mining and nodes and such, you’ll see that Bitcoin allows for the ledger to be owned by anyone in the world who participates in the Bitcoin system.
Messaging: How Does Bitcoin Create a Global Ledger of Foreign Exchange and Who Owns What Fiat Money?
It’s all in the message and the physics of sending money. Bitcoin attaches the value to the message. The message itself by the mechanics of Bitcoin creates a global entry in the Bitcoin network.
If Susan converts $1 USD to BTC and sends the BTC to Frida in Europe who converts the $1 BTC to EURO then the entire Bitcoin network has registered a $1USD to $1 EURO swap between two anonymous parties. It is not possible to extract any of this information from the Bitcoin network unless both parties are KYC’d. However, two registered entities could still run their own private ledger to track which fiats are on whose balance sheet. However, there would be no counterparty risk if that private ledger is manipulated. Both parties have finality on their end and can again use the Bitcoin network.
The Bitcoin ledger registering these global forex transaction would also become globally distributed across these data servers running in every country so it would lose the political risk, and the risk of a ledger being stored only on AWS or some other private entity. The registered entities may find that someone providing USD or EURO liquidity to swap physical commodities across the ocean may prefer to just hedge Bitcoin price volatility and simply ask the few parties they interact with to identify their Bitcoin addresses and skip the middle men all together.
There are some limited entities, especially in south east asia, already operating in this way to perform cross border transactions. But can Bitcoin really scale with this volatility?
It would not require much to hedge the Bitcoin a private entity is using to provide cross border liquidity. Because of Bitcoins limited supply as these entities are forced to scale their hedges this will still force the Bitcoin price to rise even though it will slow down the price rise. I argue that this is why Bitcoin’s price is still rising exponentially but with a dampened amplitude.
The Bitcoin system attracts traders who then play the same role they do in the commodities market buying or selling Bitcoin when it steps out of the price that best represents its current usage.
People have Bitcoin network fees all wrong too. They often compare Bitcoin’s network fees to Ethereum’s to explain why Bitcoin’s security will never scale. However, the fees will come to the liquidity providers, and miners will most likely take on or partially take on this role as more fiat, commodities and equities become paired with Bitcoin. The bigger the pools of liquidity the more fees that will be generated. Ethereum is not as good at serving this purpose as a base pair because it does too much. Possibly (the way we are going) Ethereum will server as the platform to host this Bitcoin pair liquidity and so don’t worry ETH maxis this is a mechanism to push the ETH price up most likely proportionally to BTC’s price rise.
So, maybe I’m wrong and there’s a flaw in this adoption model that prevents scaling liquidity. There are already technologies like Strike and Lightning pushing in this direction. The test will be on El Salvador and Michael Saylor to do something useful with their Bitcoin similar to what I’ve described. The “Digital Gold” narrative probably needs to die for the next phase of adoption. Bitcoin can’t just sit around doing nothing or else the ETH maxis are right.
There you go. Bitcoin is elastic like a commodity but has the properties of an equity that number go up. When Bitcoin’s price experiences mean reversion it will always revert to a mean that is rising with time as long as adoption persists, and at present the best guesses of this rising mean (Stock to Flow) has proven to be inaccurate (+/- a few $10,000s).
Foot Guns Cheat Sheet and Discord
This is why we use the Cheat Sheet and spend so much time discussing price action in discord. Because Bitcoin’s valuation model is yet to be determined and we believe it has an upward rising mean. The lack of a well understood valuation model creates massive volatility resulting in periods of wild bull markets and massive draw downs.
We are making today’s Cheat Sheet available for free.
We release the cheat sheet everyday because crypto trades 24/7. Even though Hal and Boomer are spending tons of time looking at charts they still often refer to the cheat sheet daily. It’s a great way to get a birds eye view on where things are going. You can easily see how Bitcoin and ETH are moving in relation to each other, the stock market and oil. We also track a basket of altcoins meant to cover the various areas of DeFi : DEXs, stable coins, side chains, and lending markets.
We do the work for you every morning so you only need a few minutes to be updated and aware on where prices are likely headed in the coming days, weeks and months.
If you want to learn more about how the Cheat Sheet is constructed and ways to use it check out our latest video guide:
We also believe Bitcoin’s market participants are not very forward looking. This is another reason why price moves so wildly month to month, and we think even if you want to be a HODLr the cheat sheet is useful for building your entry or making your dollar cost averaging more efficient.
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Not Just Crypto
Another aspect we push is having managed risk by not being 100% in crypto. For example, last July our own Boomer suggested a bull run in commodities. One contract of gasoline worth 0.3 BTC last July would now be worth nearly 5 BTC. Even if you are a Bitcoin maxi that would have been a fantastic way to increase your stack.
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