About Bitcoin’s Retracement

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  • Sat, Jan 23, 2021 - 06:47am

    #1
    VTGothic

    VTGothic

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    About Bitcoin’s Retracement

I have some thoughts for those interested in something less than a hyperventilated perspective on Bitcoin’s current downside move.

First, some perspective, here’s a Tweet from Anthony Pompliano a couple days ago that says it perfectly:

Bitcoin just crashed to levels not seen since….earlier this month

Everyone relax and zoom out.

Yep. The decline numbers are big, but the percentages are quite normal. Even in the stock market a 25% consolidation after a bull run is not cause to panic.

Our memories are short, especially when fear tosses us back into our monkey brains. And we’ve never been good at thinking in terms of percentages or exponentials, both of which help us see more clearly.

Bitcoin is doing just fine. If anything, the $42,000 moment was but a temporary aberration that poked above the PlanB model the way a few skyscraper trees tower over the high canopy of average tree cover. Not only is Bitcoin not falling apart, it is now moving right in line with PlanB’s Stock-to-Flow (S2F) model prediction:

Personally, I’d like all of the institutional and Big Money buying that’s been taking place recently to make a difference, to drive the price higher faster. Apparently, however, Bitcoin has its own ideas.

As this next chart shows, a lot of Coins are moving off of exchanges into private wallets – and more so as FUD helps Bitcoin’s price retrace.

It seems to me that the fact that increasing numbers of large buyers can gobble up Bitcoins and remove them from the marketplace and still not drive Bitcoin’s price above the model is an indication of just how highly liquid the Coin has become. That speaks to its increasing robustness – which we’ve wanted to see in order to have increased confidence in Bitcoin as a viable store of value and future means of exchange.

But all that buying must soon accumulate into a price increase as the dwindling supply and increasing demand intersect over the coming months.

Second, FUD.

I’m amused to see that just the other day Guggenheim CIO Scott Minerd said the prudent investor will take some BTC money off the table because he expects the coin has reached its 2021 high point and is going to retrace back to $20,000. But I remember that last November Guggenheim announced they were going to invest up to $530 million in Bitcoin via the Grayscale Bitcoin Fund at some unspecified point in the future. Minerd was not happy about the then-high price of $20,000. Coincidence? This week’s FUD from Minerd makes me think he’s ready to act and he’s looking for a discounted premium.

I’m also impressed (but not in a good way) with the mainstream media’s gaslighting FUD in the form of resurfacing 2017’s talk about Bitcoin being subject to a double-spend software glitch, which (they want me to think) means the 21 million Coin hard cap could be breached some day. The truth is that there was a found and disclosed 2017 glitch in the code that resulted from a couple upgrades that, combined, had an unintended consequence that was not caught for a while. But this is old news, and to sow doubt is the only reason to resurrect it.

There is also a natural function of how the blockchain works that can briefly cause two different solutions to a block to have different records of what a coin was spent for. If those block solutions were reached at nearly simultaneous instants, both could be transmitted across their networks of nodes, creating a temporary forked chain. However, the protocol resolves that, typically within 2 or 3 subsequent blocks. This is the reason Bitcoin waits on 6 confirmations before finalizing a block. Each confirmation is another block solved. For a thorough explanation of this aspect of the chain, and how and why it is resolved, see Andreas Antonopolous’ excellent video on it from yesterday.

The facts are that no double spending has ever actually taken place on the Bitcoin blockchain; nor has it ever been hacked – and many have tried over the last decade, including several governments. It’s a tasty plum for anyone who succeeds, preventing which is why the Bitcoin universe has always had robust support and constant eyes watching the chain. The bad actors’ failure shows the power of tens of thousands of people voluntarily running nodes 24/7/365 out of personal passion; and the value of a developer community staffed by both avocational and vocational programmers. No other computer network has as robust a system nor as dedicated a corps of protectors as does Bitcoin – that’s simple, verifiable fact – and they’re a tribe that also watches each other. Their creed: Don’t trust, verify.

Third, government interference.

At the same time media was digging up an old, brief program glitch, they’ve been ballyhooing Janet Yellen’s confirmation testimony that Bitcoin is only good for illicit activities. More FUD, easily disproved. For example, this report. Some interpret her comments as a threat she’ll move to stop Bitcoin – which general objection (that if it gets too significant, government will cancel Bitcoin) has been gaslighting the space since 2009. It’s also FUD; in this case, an increasingly ludicrous version given that the institutional entrenchment of Bitcoin deepens and broadens by the week. We now have licensed Bitcoin-centric banks, several states vying for cryptocurrency related businesses, multiple Federal agency rulings in favor of holding and trading Bitcoin, IRS tax-treatment guidelines, and a growing crypto and Bitcoin caucus on Capitol Hill. Plus, of course, the billions of dollars of large cap and institutional money now invested into buying Bitcoin either directly or through custodial entities.

The government is not going to cancel Bitcoin. It will try to manage how individuals interact with it – just as it regulates how you are allowed to interact with your savings account. We’ll see how well Bitcoin can buck those efforts. Even regulated, however, Bitcoin is a much safer protector of my savings than is USD, stocks, bonds, or pm; and I’m not counting out the likelihood that the government will have to accommodate Bitcoin’s protocol’s power at least as much as it will succeed in coercing Bitcoin to accommodate federal regulatory wishes.

Still, it is, of course, true that Bitcoin investors could lose everything. That’s equally true of investors in any stock or bond. In theory, any asset can become worthless, therefore any responsible advisor will and must caution investors – especially non-qualified investors – that they should only invest money they can afford to lose. That recognition is remarkably humdrum. Except in how some media have played it.

Fourth, my personal outlook.

Personally, I think it’s more likely stocks and bonds will go to zero value than Bitcoin. A third or more of publicly traded companies are zombies who cannot pay their debts from their bottom line profits, and so will not continue if the Federal Reserve stops providing them free loans. Bonds are not producing profit, and are trending toward negative territory. Heck, even the dollar itself is looking mighty fragile; and with the printing now coming, holding dollars looks increasingly like the most risky play I could take. Real inflation rates are in the 20% range, and can only go higher from here since the incoming Administration has a license and mandate to start handing money to average Jane and Joe, right along with continued largess for the largest and most connected enterprises.

To me, Bitcoin is looking more and more like a safe haven. But also, an investment with exponential upside potential. As Max Keiser said a few days ago, “The dollar has no bottom and Bitcoin has no top.” Exactly. That’s why I am increasingly bullish, and I’m scraping up every dollar that I can convert into Bitcoin without needing to convert back later this year, in order to buy the dip and hodl.

 

 

 

  • Sat, Jan 23, 2021 - 07:47am

    #2

    sand_puppy

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    About Bitcoin’s Retracement

Appreciate your articulate and studied explanations, VTGothic.

You said

a lot of Coins are moving off of exchanges into private wallets

What is meant by this?  Do you mean that BTC was purchased by individuals and institutions from the exchanges?  Does the exchange function similar to a retail store where people go to purchase and “take home” BTC to their private wallets?

Is this simple retail sales of BTC?

 

  • Sat, Jan 23, 2021 - 09:30am

    #3
    tobyjaguar

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    About Bitcoin’s Retracement

There are some misunderstanding here.

It seems to me that the fact that increasing numbers of large buyers can gobble up Bitcoins and remove them from the marketplace and still not drive Bitcoin’s price above the model is an indication of just how highly liquid the Coin has become. That speaks to its increasing robustness – which we’ve wanted to see in order to have increased confidence in Bitcoin as a viable store of value and future means of exchange.

But all that buying must soon accumulate into a price increase as the dwindling supply and increasing demand intersect over the coming months.

Bitcoin is not liquid, quite the opposite. You have market makers on large exchanges paid to create liquidity, but once those MMs run out of inventory, there isn’t much in the way of liquidity. What pushes the price down are futures, which there are plenty of and exacerbated by leverage. This game plays out over, and over, and over again. Price is a function of market activity, so when the price moves, a lot sometimes, there are counterparties responsible for that movement. The price doesn’t exist in a vacuum. When one buys bitcoin who are you buying from, and vice versa, when one sells who is on the other side of that trade?

Also

There is also a natural function of how the blockchain works that can briefly cause two different solutions to a block to have different records of what a coin was spent for. If those block solutions were reached at nearly simultaneous instants, both could be transmitted across their networks of nodes, creating a temporary forked chain.

A block reorganization, block reorg, isn’t common but it does happen. But this isn’t a “natural function of how the blockchain works” it is a consequence of it. Bitcoin is mined when someone running the software proposes a nonce for a targeted difficulty of transactions in the mempool. This takes a lot of computing power, but computers get a block template, add pending transactions from the mempool into that template, and then repeatedly propose a nonce value for the submitted block. Whomever finds a nonce that satisfies the conditions of the difficulty target wins. That block is added to the chain, the chain of blocks that came before the newly added block. A block is just a list of transactions that links to the block of transactions that came before it. The reward for adding a new block to the chain is minted bitcoin.

So there are many entities trying to add new blocks to the chain, in hopes of receiving the reward for doing so, minted bitcoin, this is virgin bitcoin added to the supply (not to be confused with more than the 21 million supply cap, as this minting stops at 21 million). Because there are many entities proposing blocks, you can have multiple blocks that satisfy the condition to be added next, but only one can be accepted. It can be the case that a proposer submitted an acceptable block that didn’t get added, but they proposed an additional block, and appended it to the perfectly acceptable block they proposed just previously (which did not get added to the chain). If their second block does get accepted, this second block is now added to the chain, but this particular proposer built that accepted block off of a different previous block that didn’t get added to the chain. This results in a reorganization of the blockchain. The previous block is now added to the chain along with the currently accepted block. The previous block, may have had different transactions listed in it. This would reorder the history, and ultimately could effect user balances. This can happen for different reasons. For example an entity could find a block that satisfies the condition to be added to the chain, then not broadcast it, continuing to build off of that block, and then submitting multiple blocks all at once. I don’t believe this is the case with the recent reorg, as it was stated that the reorg was due to network propagation,  but just to illustrate the possibilities.

However, the protocol resolves that, typically within 2 or 3 subsequent blocks. This is the reason Bitcoin waits on 6 confirmations before finalizing a block. Each confirmation is another block solved. For a thorough explanation of this aspect of the chain, and how and why it is resolved, see Andreas Antonopolous’ excellent video on it from yesterday.

The protocol doesn’t necessarily “resolve” this, but more whoever builds the longest chain the fastest wins. There are many debates about what happens when the chain forks. It has happened in the past, and there is a lot of writing about this topic. For other chains, such as Ethereum, there are many acceptable competing blocks that do not end up getting added to the chain. The Ethereum protocol calls these blocks, uncles, and rewards their authors for the computational work. The 2 to 3 subsequent blocks resolution isn’t in the codebase, and would be coincidental. This is also not the reason “Bitcoin waits on 6 confirmations before finalizing a block.” Bitcoin doesn’t wait to finalize. The 6 block confirmation is an industry guideline for safety. After 6 confirmations, which means 6 blocks have been added to the chain, is a recommended standard to wait because the computational power to reorganize the Bitcoin blockchain more than 6 blocks deep is infeasible with current compute power. The chain doesn’t reach “finality” so much as we assume it can’t be changed after so many blocks have been added.

Bitcoin, from a price perspective, is very volatile. Bitcoin from a development perspective is very conservative. The price is effected by many factors, and I’d imagine government regulation will be the next challenge that effects the price.

(Full disclosure I do HODL bitcoin.)

 

  • Sat, Jan 23, 2021 - 03:32pm

    #4
    agitating prop

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    About Bitcoin’s Retracement

I viewed Yellen’s comments as a shot across the bow. If I held a whole lot of bitcoin, I would cash out some of it now.

  • Sat, Jan 23, 2021 - 06:58pm   (Reply to #4)

    #5
    Mohammed Mast

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    About Bitcoin’s Retracement

AP you don’t own BTC so who cares?

  • Sat, Jan 23, 2021 - 07:47pm

    #6
    Mohammed Mast

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    About Bitcoin’s Retracement

VT Tell it Rev

 

  • Sun, Jan 24, 2021 - 03:39am   (Reply to #2)

    #7
    sekun

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    About Bitcoin’s Retracement

If you but BTC on an exchange, they stay on your virtual account at them. Just as with a bank, an exchange is a centralized entity. There are several risk with letting the exchange manage your assets: they can get hacked, they might not have as many BTC as they claim to do or they might lock your account for some regulatory reasons. Just once you withdraw your BTC (or whatever crypto) unto your wallet, you will actually own them. Remember: if you don’t hold it, you don’t own it.

(OPs claim doesn’t make any statement on whether these users are institutional or retail)

  • Sun, Jan 24, 2021 - 03:40am   (Reply to #2)

    #8
    sekun

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    About Bitcoin’s Retracement

If you buy BTC on an exchange, they stay on your virtual account at them. Just as with a bank, an exchange is a centralized entity. There are several risk with letting the exchange manage your assets: they can get hacked, they might not have as many BTC as they claim to do or they might lock your account for some regulatory reasons. Just once you withdraw your BTC (or whatever crypto) unto your wallet, you will actually own them. Remember: if you don’t hold it, you don’t own it.

(OPs claim doesn’t make any statement on whether these users are institutional or retail)

  • Sun, Jan 24, 2021 - 04:49am

    #9
    VTGothic

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    About Bitcoin’s Retracement

@tobyjaguar, I appreciate your comments. Clarity’s to be preferred.

For my part:

1. I didn’t mean to give a technical explanation of blockchain, only to indicate that the FUD I’ve recently seen around the blockchain double-spend issue is just that. I provided an intentional gloss with a link to the very recent Anton explanation that I think does an excellent job of explaining the difference between the FUD and the reality in a way that is accessible to people relatively new to Bitcoin. I thought that those who want a deeper insight would dive into that rabbit hole via the link.

2. What I meant to indicate, through a similar gloss, by the phrase “highly liquid…Coin” is that there have been enough sellers and enough stock on exchanges to, combined, meet the demand of institutional buyers at existing, declining prices. I only intended to indicate that this capacity in the trading space shows that the global network of participants has become noticeably more robust (since 2017). In itself, that’s an encouraging signal.

There certainly is a limit to available Bitcoin; no argument. It’s not only a question of how many Bitcoin exist on exchanges available for sale, but also a matter of when the sale of those available Bitcoin no longer generate an acceptable return for whomever puts them on the market. Surely, some sellers are fearful enough of continued downward price to sell at a loss, but that pool quickly dries up. From then, price discovery pushes the unit cost up.

Re: the futures market: I admit I don’t understand it. Futures is one of those things that I would have to expose myself to for a while for the ins and outs and cross-influences to cement in my brain – I periodically find things in life that require me to get a hands-on interaction with before I grok it, even though my systems-oriented brain can get many things without direct experience, and place them in relation to one another in an expanding grid of interactions. I just can’t make futures fit in my mental models; maybe I haven’t read the right explanations. If you can explain how – I mean the mechanisms by which – the interplay of futures action materially dampens price discovery, I would greatly appreciate the help (since I have no intention of playing in the futures market).

Meanwhile, it yet seems to me that the futures play, layered on top of price discovery, cannot prevent price discovery when underlying forces align. When, for instance, the available supply at a given price dries up. The current liquidity (available supply at current price) has been sufficient to absorb significant buying pressure without pushing the price sustainably beyond PlanB’s S2F model. I find that intriguing, but I think that might be coming to an end. This morning I see confirmation by way of a Willy Woo chart on SOPR (Spent Output Profit Ratio: a ratio calculated by dividing the sell price by the buy price, where result >1 reveals net profit) that indicates we’ve hit the reset point.

Selling in quantity at roughly current price or below can only happen now if sellers are willing to take a loss. It’s a likely floor. Either spooked sellers exist in sufficient numbers to trade their BTC at a loss (I imagine market makers won’t), or the price discovery function now becomes dominated by owners not so spooked. The bounce off the line is early indication the market’s now going to be in the hands of sellers who want a higher price. Perhaps that’s sawtooth sideways for awhile; likely (and inevitably) it’s higher price territory.

I don’t know how futures contract trading influences the evolution of that underlying dynamic.

  • Sun, Jan 24, 2021 - 04:50am

    #10
    VTGothic

    VTGothic

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    About Bitcoin’s Retracement

@sekun,

I’m with you 100%. I have continually encouraged people to take their coins off exchanges here on PP, and will always do. I didn’t in this post because it wasn’t one of the topics I wanted to address this time.

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