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Is Bitcoin dead or just waiting for a catalyst?

Is Bitcoin dead or just waiting for a catalyst?


A year ago, Bitcoin and the leading cryptocurrencies were the hottest tickets in town. On December 1st, 2017, Bitcoin closed above $10,000 for the first time, and as the ascent continued, so did the forecasts.

If you take the time to look at the news and forecasted prices, they were almost all bullish — with the exception of a few establishment stalwarts like Jamie Dimon from JP Morgan, you'd have been hard pressed to find negative news — except, of course, from governments, who had moved into overdrive to shut down the gates.

The cryptocurrency markets aren’t mechanical (neither is any other financial market), but some traits show up at highs that are missing at lows, and traits that show up at lows that are missing at highs.

Headlines from the first week of December 2017, included —

“Cryptocurrency Ecosystem will be worth Trillions of Dollars…”

“Cryptocurrency could replace gold.”

“Bitcoin achieves all-time high, it’s only the Beginning.”

“‘Big Four’ accountancy firm PwC now accepts Bitcoin payments.”

Governments are usually reactive and not proactive, for example, they announce plans for affordable housing, not at the beginning of a trend, but just before or after the trend has ended.

With cryptocurrencies, they did something different. They got in front of it. Fast.

“Warning: Bitcoin profits are considered taxable income by IRS…”

“Bitcoin: UK and EU plan crackdown amid crime and tax evasion fears…”

“IRS gets access to Coinbase accounts…”

In contrast to the “only way is up” positive articles, the establishment launched a full-on fear campaign.

The majority, the 95%, search online for opinions that match their own needs, and when combined with FOMO, the fear of missing out, it’s powerful dopamine fuelled behaviour.

The 5%, the most consistent and profitable investors and speculators, don’t search for matching opinions; instead, they analyse, objectively, direct market feedback, both fundamental and technical, and build their own story about the market in question.

The 5% build positions and enter if the market is acting in alignment with their assessment of market conditions, but if the market is not “acting right,” they take evasive action — action not prompted on someone's opinion, but by their own analysis.

As the cryptocurrency markets get hit hard, the 5% step back and take the market’s vital signs.

Read on…

Counter Culture

A Bloomberg headline this week, “Bitcoin becomes a story of boom and bust,” sums up the mood.

In December 2017, the news covering the cryptocurrency markets was good, the only was up; then, carnage. This week, CNBC, the financial news channel, brought on an ‘establishment’ guest, an economist from a leading Swiss investment bank, who, with a tone full of authority and absolute certainty, started the conversation like this…

“Of course, anyone with even a high school understanding of economics knows that Bitcoin could never be a store of value…”

What followed was what could be described as a smug, and some might say even condescending commentary on why Bitcoin investors are (although he was careful not to use the exact word) fools.

This is the same Bank, whose losses, in 2008, exceeded $37 billion because of their exposure to sub-prime investments. This is the bank that also announced, in 2008, the lay-off of 8,700 staff members, and this is the bank that made the biggest loss in Swiss corporate history.

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At this point, it’s important to mention that is not a cheerleading site for Bitcoin. Bitcoin is important only because it currently represents the majority of cryptocurrency volume and market capitalisation, and because, as of late 2018, where Bitcoin goes most of the cryptocurrency market follows.

This might not be the case this time next year or even in six months, but while the cryptocurrency markets are so positively correlated to Bitcoin, Bitcoin remains front and centre.

In the Puppet on a string article, we discussed built-in biases and behaviour patterns. A good rule of thumb when observing the cryptocurrency market, actually any market where there is competition for resources (including real estate), is — “When the only way is up, the only way is down,” and “When the only is down, the only way is up.”

This week, a senior analyst from a Swiss investment bank, that just then years ago completely missed the financial crisis, lost $50 billion dollars, laid off thousands of staff, and, who, a few years later, lost billions trading their clients money, appeared on the most watched financial channel in the US, and in a headmaster-esque tone, that would have transported any British public schoolboy back to their childhood, implied Bitcoin was an investment for fools.

Zero Interest for 4 years

Zero Interest for 4 years

Another useful rule of thumb is to remember, that frenzies don’t begin trends. They end them. Trends start quietly, with zero interest. This chart shows a company where no one is interested, and this condition lasted for four years. The 5%, build positions when a market is out of fashion, not when it’s the hottest game in town.

Can you guess the company?

On the surface, it looks like there is nothing going on, but behind the scenes, over this time period, the most iconic product in a generation is being developed.

You probably guessed it is Apple.

And here’s what happened after the trend got started.



The blue box is the time period shown in the first chart.

When the masses arrive and buy at any price, when the media is all over the story, who do you think is doing the selling?

The 5% observe the levels of activity and fear in the markets they invest in. In December 2017, the FOMO in Bitcoin and the top-ranked alt-coins hit fever pitch. The only way was up, and the opposite happened.

One interesting exercise you might find useful is to go back in time and observe market highs and lows. Did the economists predict the imminent crashes, and did they anticipate the new uptrends?

Take the stock market. Did economists see the stock market crash of 1929 coming? No. The US stock market crash may have started in 1929, but it actually rallied into April 1930, and if you check the news and social mood at the time, you’ll find the majority were expecting the good times to continue. (The song “Happy Days Are Here Again” was released in early 1930.) — Just in time for the worst stock market crash in history, as the US indexes began a two-year decline, eventually losing 89% of their value.

At the market lows in 1932, did economists predict the new uptrend? The answer is no.

It took government intervention, through the confiscation and a revaluing of gold against the dollar, to bring confidence back to the market. (See Guns and Butter) Intervention — not before it happened but after.

Next time you see an economist, on screen, espousing their views, take the time to remember their track record is not exactly perfect.

For example, in recent history, did economists predict the bear markets in 1974-75? No. Did they foresee the stock market crash of October 1989, when the Dow Jones index lost 22.61% (at current levels that’s a move down of over 5,000 points) in one day? No. Did economists see the fall of Japan in late December 1989, where the Nikkei 225 index moved from the all-time high of 38,957 to an all-time low of 7,054 in March 2009 — a move down of 81.89%. No. What about the 2000-2003 stock market crash, where the Nasdaq fell 78.4%? No again.

Did they predict the rally, between March 2003 and October 2007, where money flowed back into the stock market and real estate? No.

When an authority figure, like a senior investment advisor from a leading investment bank, appears on TV and confidently tells you the reason why, in hindsight, a market has gone up or down, it’s not easy to ignore their advice. After all, they are the acknowledged authority, and they are supposed to be experts in their field.

This is one of the reasons investing and speculating is so difficult. It’s because it’s counter to our inbuilt human biases. We are hard-wired to be part of the crowd. The majority, the 95%, go with the crowd, searching for information that supports the consensus view, looking for certainty, needing to feel safe before committing, seeking the security of the majority.

This tendency is what causes the herding effect. It’s the cause of parabolic up moves and irrational price crashes.

The 5% are conscious of this behaviour. One ‘tell’ the probability of a market making a low has increased is an increase of negative news and opinion. The 5% know when the majority can’t take the pain of losing, which is 250% more intense than the elation of winning, and throw in the towel, a low is most likely near.

Instead of wasting time searching for information that supports their position, the 5% study market conditions, preferring instead to take the vital signs, both fundamental and socioeconomic, of the market they are interested in.

They don’t focus on how much profit they could make; they focus on the price of entry in terms of risk.

If you study booms and busts in real estate, the stock market, the precious metals markets, or the cryptocurrency markets, take some time and observe the news and opinions at market highs, and the news and opinions at market lows.

This week, Bitcoin was down 82.2% (using BitStamp data) from its all-time high. Here’s a headline from Bloomberg: “Bitcoin’s Deepening Crash Now Approaches Its Worst Bear Market.”



This chart shows the deepest crashes in percentage terms from Bitcoin’s three previous price bubbles.

Under the Hood

As the price of Bitcoin falls and the media becomes increasingly negative, the 5% look under the hood and take a look at Bitcoin from a fundamental perspective.

During 2018, while the price of Bitcoin has been doing this, the number of active Bitcoin wallets has been doing this.

Blockchain Wallet Users

Blockchain Wallet Users

During November 2018, Bitcoin dropped from highs of around $6,500, depending on the exchange, to lows of around $3,500. Prices fell 47%, but the hash rate, the number of tera hashes per second the Bitcoin network is performing dropped 25%. (Think of hash rate per second as guesses per second.)

You’ll probably read that Bitcoin miners have to solve complex problems to earn Bitcoin, but it’s actually quite simple.

Bitcoin mining uses a proof of work algorithm to compensate miners. The work needed to discover the next block is a guessing game.

It works like this.

Bitcoin miners generate the creation of new coins, think of them like a central bank controlling the money supply, and it’s the only way new Bitcoins can be put into circulation.

What do miners earn and how do they get paid?

Bitcoin is mined in units called “Blocks.”

The current miner's reward for successfully completing one block is 12.5 Bitcoins, but this payment halves every time 210,000 blocks have been completed.

A new block is completed around every ten minutes, so 210,000 x 10 minutes = 2,100,000 minutes, and 2,100,000 divided by 60 gives 35,000 hours. 35,000 hours divided by 24 gives 1458.3 days, and 1458.3 days divided by 365.25 = 3.9926 years shows the next halving event will happen on April 30th, 2020.

Halving the reward helps regulate the supply. If the demand for Bitcoin is steady and the supply regulated, the price should increase in a controlled way.

Miners get paid for verifying Bitcoin transactions (think of them as auditors), and once they’ve verified a block, they are put in a draw to win 12.5 Bitcoin.

Imagine a hole. Miners race to fill the hole with sand, but in doing so, they aren’t guaranteed to be paid. After they’ve done the work of filling in the hole, they are put into a draw (think of this like a lottery), where the winner wins 12.5 Bitcoin.

This means getting paid as a miner requires you work hard (fill in the hole = verify a block) and be put into a draw in the hope you’ll be picked and paid.

But the effort of verifying a block is the easy part. The hard part is winning the draw, and this is where the computing power comes in.

You might have read that Bitcoin miners have to solve complex math problems, but actually, they don’t. All they have to do is win a guessing game.

The Bitcoin algorithm takes the contents of a block and encodes it, or hashes it. Hashing data takes an input and produces an encoded output of the same length, regardless of the length of the input. Think of it like this: The data from a block is forced through an encoding machine. The output is a hash, (string of numbers and letters) with a set length, and in Bitcoin’s case, the length is 256 bits.

And this is all cryptocurrency mining is — the encoding and decoding of a block in the blockchain.

The Bitcoin network sets a “target” value for the hash — called the target hash, and Bitcoin miners run hashing algorithms trying to guess a number that is equal to or less than the target hash. The first miner who does this successfully wins 12.5 Bitcoin.

The output of the algorithm is hash with a set length, in this case, 256 bits, but the hash is deterministic, and this means if you use exactly the same input data you’ll output exactly the same hash string value, so how do you change a hash if you’re trying to output a new hash value that meets the target hash requirements?

The answer is the miners add a random number, called a nonce, (number only used once) to the block and rehash it. If the new output is less than or equal to the target hash, the miner is awarded 12.5 Bitcoin.



Here’s the nonce that generated a hash that won this miner 12.5 bitcoin. The circled hash in the top right was created by hashing the block contents with the nonce added.

And that’s what all the investment money in Bitcoin mining is about. It’s about how to make as many guesses (or hashes) as possible — as fast as possible.

The computing power of the Bitcoin network is measured in hashes per second, and the hashing algorithm used by Bitcoin is called SHA256.

Think of a hamster running around a hamster wheel. A hash is the time it takes for the hamster to complete one revolution of the wheel, so think of speed as hashes per second.

  • 1kHs = 1 kilo hash = 10^3 = 1,000 hashes per second.

  • 1gHs = 1 giga hash = 10^9 = 1,000,000,000 hps.

  • 1tHs = 1 tera hash = 10^12 = 1,000,000,000,000 hps.

  • 1pHs = 1 peta hash = 10^15 = 1,000,000,000,000,000 hps.

  • 1eHs = 1 exa hash = 10^18 = 1,000,000,000,000,000,000 hps.

The current hash rate on the Bitcoin network is 41 exa hashes, that’s 41 billion, billion hashes per second. The Bitcoin network generates a lot of heat, heat generation costs energy, and increased energy costs reduce miners profitability.

Depending on the total hash power of the Bitcoin network, the difficulty level (how hard it is to discover the next block) is adjusted. As hash power goes up, it takes less time to find the next 2016 blocks, so the difficulty is adjusted up, and, as the hash power goes down, finding the next 2016 blocks take longer and the difficulty is adjusted down.

Assume a Bitcoin block is discovered every ten minutes, and so this means, every 14 days, the difficulty level is adjusted up or down, depending on if it took longer than or less than the time it took to discover the last batch of 2016 blocks. The next adjustment is due on the 3rd December and, using current Bitcoin data, it suggests the difficulty will drop by approximately 15%.

The difficulty level is important because it helps regulate the block discovery time to around ten minutes.

This is Bitcoin mining economics 101, hash rate = heat = energy = running costs. If the next 2016 blocks are discovered faster than the previous batch, the level of difficulty is adjusted up. This means the hash rate on the Bitcoin network will go up. As the hash rate goes up, more heat is generated, and the energy costs go up. As the energy costs go up, the mining profitability goes down.

The 5% track the Bitcoin hashrate, difficulty and mining profitability, like a grain trader studies crop reports. Hash rate, difficulty, and profitability help the 5% build a picture of the fundamentals of the Bitcoin market.

Falling Knife



The blue lines on the Bitcoin chart represent the percentage of losses from the three previous price bubbles.

As Bitcoin falls, the 5% take notice of the underlying fundamentals of the Bitcoin market.

Over the last twelve months, the number of wallet users is up 59.4% from 19.56 million to 31.18 million.

Another metric is the number of nodes on the Bitcoin network.



On December 3rd, 2018 is reporting 10,267 Bitcoin nodes are reachable and operating globally. One year ago at the peak, the number of nodes was 11,429. As Bitcoin drops over 80%, the total number of nodes operating is down only 10.16%

But if you go back two years to the end of 2016, the number of Bitcoin nodes operating today is up 90.3%.

Hash Rate

Hash Rate

This is the total hash rate on the Bitcoin network. Yes, it’s down during November, but it’s still 153% above where it was at the beginning of 2018.

Remember the hash rate is the number of guesses the miners are taking to solve the target hash. While it’s down around 25% over the last few months, the number of nodes on the Bitcoin network is relatively stable.

As Bitcoin matches the prior percentage drops from the previous three price bubbles, the underlying Bitcoin network is showing an increase in wallet users, matched with an increase in the number of transactions. The computing power of the network is over 150% above the levels at the beginning of the year, and this suggests continued big money investment in Bitcoin.

As Bitcoin drops over 80% in price, the 5% don’t search the internet in search of opinions in alignment with their own. They grab a stethoscope and observe Bitcoin’s vital signs.

 For cryptocurrencies to replace cash does anything have to change?

For cryptocurrencies to replace cash does anything have to change?

Crowd behaviour at highs and lows and what the 5% do instead when trading Crypto

Crowd behaviour at highs and lows and what the 5% do instead when trading Crypto