Louis Liu, CEO of Mimesis Capital, discussed investing with the belief that fiat-denominated funds will cease to exist.
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For most investors, bitcoin is still just a hedge. It is a small allocation with tremendous upside. The majority of retail and institutional investors alike have yet to fully accept what hyperbitcoinization is going to do to the world of finance.
On this episode of the “Bitcoin Magazine Podcast,” host Christian Keroles sat down with Louis Liu, the CEO and founder of Mimesis Capital, an institutional investor investing with a Bitcoin mindset. Liu, a young, energized and brilliant investor, cut through the legacy investing hurristic with a sharp and clear reason why Mimesis, and eventually any other serious fund, will have to adopt and outperform a Bitcoin standard. According to Liu, fiat-denominated funds in the future will not exist and he believes that all serious investors will have to outperform bitcoin in order to prove their worth.
Scarcity drives every aspect of Liu’s investment mindset. Liu and Mimesis Capital have been investing heavily in bitcoin directly since the beginning of the pandemic. Following the large run up in price, Liu had also allocated capital to uniquely bitcoin-oriented businesses, like Unchained Capital, Swan Bitcoin and many more Bitcoin-only and Bitcoin-centric ventures. Liu believes in investing with a long-term mindset and in investing in organizations that make Bitcoin stronger. He does not see allocating bitcoin to these startups as losing out on a direct bitcoin investment, but rather as further investment in the bitcoin ecosystem.
Liu and Mimesis famously purchased the fractile encrypt sculpture from the Bitcoin 2021 art auction — another investment into scarcity.
Mimesis Capital: Inside The Event Horizon, Report #17
Why Hash Ribbons Predict Local Bitcoin Bottoms So Accurately
Theory: When the bitcoin price hits a certain level, selling pressure starts to exponentially disappear.
Bitcoin mining is a ruthless industry. Over the long run only the most efficient mining firms will survive.
The tendency for the mining industry to attract large amounts of competition combined with simplicity and beauty of the Bitcoin protocol could give us a method to predict local “price floors” for bitcoin.
Halvings
Blockware Solutions, a bitcoin mining firm, released an in-depth report last year on how halvings directly affect miners and how much sell pressure is removed from the market post-halving.
Take a look at the entire report to get a good idea of how they reached their specific conclusions, but they estimated that USD-denominated forced miner selling would fall 70% after the halving with no change in price.
Blockware Solutions
This was likely a major catalyst for the current bull run.
How Does This Work?
Sell pressure drops due to miner capitulation.
Directly after a halving miner capitulation occurs because the block subsidy is cut in half, but the operating expenses of mining firms do not change.
Revenue being sliced nearly in half, while expenses remain unchanged, is obviously disruptive for any business.
This situation purges the most inefficient miners from the network. As a result, difficulty falls and the most efficient miners actually become more profitable. This free market process removes the miners who are forced to sell the most bitcoin to cover their expenses and rewards the most efficient miners by giving them more bitcoin.
The miner capitulation process occurs until sell pressure has decreased significantly. As price falls, sell pressure exponentially disappears due to the most inefficient (high forced sellers) miners being eliminated from the network.
When Can Miner Capitulation Occur?
The most obvious form of miner capitulation is post-halvings. A 70% reduction in sell pressure, as estimated by Blockware Solutions, clearly had a massive effect on the market price of bitcoin.
However, this inefficient miner purge occurs naturally over time and especially around price drops.
New efficient miners are constantly being brought online (better ASICs, lower electricity rates, fully financed publicly-traded mining firms, etc.). The most inefficient miners get purged when difficulty increases, electricity rates increase or price drops.
Simplified Miner Capitulation Bottom Examples
The first model is assuming peak hash rate and a bitcoin price of $60,000.
Looking at the model, the mining network is divided into five different layers.
The first layer is the most efficient and is roughly 20% of the total network. This likely would consist of publicly-traded firms like $RIOT, $MARA and $HUTMF that have access to unlimited amounts of capital available in public markets and that do not have to sell any bitcoin.
The fifth layer is the most inefficient and is also roughly 20% of the total network. At the current bitcoin price, their operating expenses are roughly 80% of their revenue (mined bitcoin). This means their margins are very sensitive to drops in the price of bitcoin, electricity price increases, rent increases and network difficulty increases.
Now let’s look at the second model. In this model, the price has dropped from $60,000 to $35,000 and the hash rate has also fallen 20%.
The fifth most inefficient layer of the network has now been eliminated. Due to the sudden drop in the bitcoin price, layer five’s operating expenses ($41.4 million) now exceed the amount of bitcoin they can mine ($37.8 million). This causes them to shut down their operations and the remaining layers obtain a larger share of the hashrate.
The interesting idea here is that USD-denominated sell pressure decreased by 40%.
Last, let’s look at the third model. In this model the price has dropped from $60,000 to $20,000 and the hash rate has also fallen 40%.
The fourth and fifth layers of the network have now been eliminated. Due to the sudden drop in the bitcoin price, both layer’s operating expenses now exceed the amount of bitcoin they can mine. This causes them to shutdown their operations and the remaining layers obtain a larger share of the hashrate.
The interesting idea here is that USD denominated sell pressure decreased by 70%.
Hash Ribbons
Hash ribbons are an indicator to help measure miner capitulation.
While the hash ribbon indicator is not perfect, it can illustrate points in bitcoin’s history where selling pressure starts to exponentially disappear.
The indicator releases a buy signal when miner capitulation has ended and price has cooled off. Charles Edwards from Capriole Investments explains hash ribbons in detail.
When sell pressure starts to exponentially disappear due to the dynamics of hash rate falling, we can be more confident bitcoin has bottomed.
Another interesting thing to point out is that the indicator never goes off near tops (2011, 2013, 2017). As the price begins to fall after every local top, hash rate continues to rise. Since hash rate is still rising as the price falls, sell pressure is likely increasing across the network until miner capitulation occurs and signals the bottom during a bear market.
This is how deep bear markets occur. Price gets way overheated for what the network, users and miners can sustainably handle. When price momentum shifts, miners are still being deployed because it is still highly profitable to mine bitcoin. Then you get a period where negative price action scares away new buyers, but more sellers (capitulating miners) still appear due to more miners getting deployed and increasing network difficulty.
Since bitcoin is the best monetary good ever created and we are watching the world begin to monetize it, it’s likely a fantastic idea to stack more sats when it begins to get exponentially more scarce, as indicated by hash ribbon bottoms. This is about to occur again for the twelfth time in history.
TLDR: Use hash ribbons to time bitcoin buys when price has dropped and sell pressure is likely exponentially dropping too.
This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Mimesis Capital: Inside The Event Horizon, Report #16
Bitcoin Versus Ethereum And Other Alts
It’s been “alt season” for the past couple months. Bitcoin has remained situated around $50,000 while Dogecoin, Shiba Inu and Ethereum are soaring.
While short-sighted gamblers like to make bets on the next big dog meme coin, it’s important to review the basics of why bitcoin has accrued value and compare bitcoin to other tokens.
Bitcoin is the best monetary good.
Why? It has specific credible properties: scarce, durable, portable, transactable and so on.
From these properties, we can derive two unique characteristics:
No counterparty risk
No dilution risk
These two characteristics can only be maintained by having the ability to hold your own private keys and run your own full node.
No other coin or token can even compete with bitcoin on these properties and characteristics.
Therefore, no other coin or token can compete with bitcoin as being the best monetary good.
Like the invention of the number zero, “Bitcoin is a path-dependent, one-time invention; its critical breakthrough is the discovery of absolute scarcity — a monetary property never before (and never again) achievable by mankind.” — Robert Breedlove, “The Number Zero and Bitcoin”
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The point of money is being able to send wealth through time and space. Bitcoin’s unique properties enable it to do that better than any other good. Since money is a winner-take-all, network effect–driven good, individuals game theoretically converge on bitcoin as a Schelling point due to its specific properties and characteristics.
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“Each digital value network carries a network effect, the strength of which can be approximated by the $ value of each. (Shown here as size of circle, with accurate scale.)
With your hard-earned money at stake, pick which circle others will value most.” — @croesus
Why Do Ethereum And Other Alts Have Value?
First, ETH is a token.
Before its launch, 71% of ETH was premined. Some of this ETH was given to developers, but it was mostly distributed to ICO investors.
ETH clearly has not and cannot compete with bitcoin on being a monetary good as its monetary policy has and never will be credibly perfect like bitcoin.
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Instead ETH is “pitched” as a promise to be useful in a variety of different applications. Since ETH is a token and not equity in a corporation, the community attempts to create both supply and demand narratives to incentivize speculators to buy and hold the token.
The ETH community must continue to come up with unique narratives that rationalize a reason for holding ETH. It must continue changing if it wants to bring in new buyers.
Some of these include demand use cases like issuing ERC-20 tokens, DeFi, NFTs and DAOs.
Other narratives are supply driven, like “Ultra-Sound Money,” where the community has recently started to argue that ETH supply could potentially decrease over time.
The unethical part of this is some people pitch ETH as “ultra-sound” money, something that is supposedly “better” than bitcoin.
This idea of ETH being “ultra-sound” money is scammy and misleading.
In fact, ETH is actually copying the monetary policy of an ERC-20 token built on ETH, $BOMB. This token has a monetary policy that dictates that supply will forever decline.
The market cap of $BOMB is $3 million. If ETH successfully copies $BOMB and becomes worth just as much, it will trade at $0.02 per ETH, a rather large drawdown from $4,000.
Of course, since this token has a constantly decreasing supply, it should confirm that supply itself (or “ultra-sound” money) does not make a token a good monetary good.
Unlike bitcoin, whose value accrued as a game theory Schelling point from the organically decentralized, credibly fixed nature of its monetary properties, ETH’s value is derived from promises and speculation.
ETH must continue changing and promising more applications and usefulness otherwise why hold the token? The hope is simply that it becomes more scarce and more in demand, forever. Like most startups and bubbles, it’s not the underlying fundamentals that give the asset value, it’s the hope and/or speculation of what it could become.
Like stated above, ETH is a token. It’s useful if you want to use the Ethereum blockchain. It’s not money.
The ETH token is like a Chuck E. Cheese token to use the Ethereum blockchain.
ETH’s best-case scenario: There are sustainable, long-term, useful applications on the Ethereum blockchain that are not able to be built on Bitcoin or Bitcoin second layers, don’t require perfect censorship resistance or decentralization (average person can’t run an Ethereum node), and wouldn’t just be more efficient as a product or service offered by a corporation.
Potential use cases:
Buy an NFT or buy a Fortnite skin (corporation)?
Trade on DeFi exchange or trade on Binance or Coinbase (corporation)?
Get a DeFi loan or get a loan from Unchained Capital, BlockFi or HodlHodl (corporation)?
Casino, gambling or speculation (e.g., Dogecoin, ETH, and all other alts)?
The ONLY major use case for a blockchain is money (bitcoin). For money, you need censorship resistance and decentralization in order to have the best credible monetary properties.
With that said, even if some of these use cases do play out, it doesn’t mean the token (ETH) would accrue value.
When Chuck E. Cheese launched in 1977, you should have bought equity in the business, not their tokens.
ETH And Alts Are Riding Bitcoin’s Monetization
All alts are riding the success of bitcoin. On top of bitcoin’s monetization process, unprecedented monetary and fiscal policy leads to a breakdown in the pricing mechanism of “free” financial markets.
Traditional finance doesn’t understand bitcoin, and they bring their idea of diversification to the world of monetary goods (not a good idea). In addition, retail speculators are shortsighted and constantly looking for the next big thing (SPACs, GME, Dogecoin, ETH, Tron, etc.) to get rich quickly. They fall for unit bias and chase price.
At the end of the day, alts fall to the greater fool theory. Can I sell my token to someone else at a higher price?
The best monetary good (bitcoin) becomes money, and the rest are nothing more than gambling in a casino. Dogecoin (nothing more than a joke/meme) closing in on Ethereum as the number three coin should help shed more light on that.
This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
This article is a republishing of “Mimesis Capital: Inside The Event Horizon, Report #14”
Bitcoin Versus Bonds: Asymmetric Assets
Jack Bogle, the founder of Vanguard, popularized the idea of a “60-40 portfolio.” The 60-40 portfolio is the basic idea that passive investors looking to efficiently transfer wealth through time should diversify their assets into 60% stocks and 40% bonds.
If bitcoin’s performance over the last decade tells you anything, it should scream that the 60-40 portfolio is dead.
Yale’s endowment fund is a prime example of forward-thinking asset allocation. As of 2020, the endowment held only 6% of their portfolio in bonds, and they also began stacking bitcoin.
What is the catalyst for this shift by “smart” money?
Why Shift Out Of Bonds Into Bitcoin?
First, bitcoin is the world’s hardest monetary good. It is the only asset with no counterparty risk and no dilution risk and is therefore “the world’s safest asset.”
These two unique characteristics will eventually enable Bitcoin to store a near-infinite amount of wealth. This means that the upside of allocating capital (savings) into bitcoin is orders of magnitude higher than its current market price.
Additionally, the maximum potential downside of using Bitcoin is -100%, meaning that it is only possible to lose what you put in.
Asymmetry
These unequal potential outcomes create a unique dynamic called asymmetry.
The potential asymmetric return of Bitcoin becomes even more interesting because it is nearly inevitable in the long run, and total loss is nearly impossible.
In contrast, traditional fiat-denominated debt held by investors as bonds and bank deposits has a similar asymmetric return, but to the downside.
Unlike the case with bitcoin, the potential return of a 10-year US Treasury Note is only 1.63% annually. If you hold the 10-year note to maturity (a total of 10 years), you cannot earn more than that predetermined return (denominated in USD). At best, this would somewhat “retain” your purchasing power more than holding cash under your mattress.
Nominally, the potential downside of storing wealth in bonds isn’t that bad (depending on to whom you lent the money). In real terms, holding bonds could be catastrophic: ou could be risking 100% of your real capital for a measly maximum 1.63% nominal return.
Bitcoin Is Antifragile And Bonds Are Fragile
Nassm Taleb popularized the idea that the opposite of fragile is not robust, but antifragile. Fragile systems break under stress, robust systems tend to remain fortified under stress, and antifragile systems become stronger under stress.
Bitcoin can be viewed as the most antifragile asset in the modern financial system, whereas bonds may be viewed as the most fragile asset in the financial system.
A fantastic example of this dichotomy is asset performance post-COVID. The global pandemic was a massive shock to the world that unleashed massive volatility, disrupted cash flows, and business insolvency.
In the short term, in March 2020, Bitcoin appeared to be fragile, and Treasury bonds appeared to be antifragile. However, massive unprecedented economic shifts took time to play out once all rational economic actors responded. The pandemic and financial shock were inevitably met by massive amounts of fiscal spending and quantitative easing by governments and central banks worldwide.
Since before COVID began, long-term treasury bonds (TLTs) are down by 1%, whereas Bitcoin is up by more than 677%.
Although TLTs have dropped by 1% nominally, the situation is much worse in real terms. For example, TLTs are down by 85% denominated in Bitcoin.
>$100-Trillion Global Bond Market
As of August 2020, the total size of the global bond market was approximately $128.3 trillion, which is more than 100✕ the size of Bitcoin at $1.1 trillion.
This massive size difference comes at the end of a 40-year bull market in bonds, meaning that rates have hit all-time lows and have nowhere to go except remain at extremely low levels, or slowly creep upward.
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For deeper insights on global debt cycles, I recommend “How The Economic Machine Works” by Ray Dalio and “The Conclusion of the Long-Term Debt Cycle and the Rise of Bitcoin” by Dylan Leclair.
Bitcoin And Macro Backdrop
In a world of extremely low bond yields and massive inflation driven by government and central bank fiscal and monetary policy, there is only one asset worth holding in size: bitcoin
Bitcoin’s relative lack of adoption combined with its perfectly increasing scarcity made it the best-performing asset of the last decade, and it will likely be the best-performing asset of the next decade as well.
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TLDR: Drop everything and stack bitcoin, and if you don’t do that, at least drop bonds for it.
This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Bitcoin, the decentralized digital currency, was established on January 3, 2009 by Satoshi Nakamoto, the pseudonymous developer(s) who pieced together its original source code. Satoshi mined the very first Bitcoin block and received 50 BTC for the work. After that, the decentralized cryptocurrency network was born, and it would begin to grow and spread throughout the world like a virus.
Bitcoin’s price has surmounted a wall of worry since this 2009 origin. It went from few people thinking it has value, to millions of people around the world buying and saving bitcoin, including some of the world’s top investors like Bill Miller, Paul Tudor Jones, Stanley Druckenmiller and Larry Fink. And one of the more fascinating things behind the rise of bitcoin is its organic nature. Bitcoin has no CEO, no centralized organization and no marketing department, yet it has still become a multi-hundred-billion-dollar asset. The objective of Mimesis Capital’s “2021 Bitcoin Investment Research Report” is to dive into why bitcoin was the best performing asset of the last decade, and provide an outlook for 2021.
In the Mimesis Capital bitcoin investment research report for 2021, we cover bitcoin’s repeated parabolic price history, why bitcoin has value, three key exponential network effects, the stock-to-flow scarcity pricing model, its potential long-term opportunity, our outlook for 2021, the idea of “escape velocity” and more. It aims to be the ultimate modern guide on bitcoin, designed to provide unique, data-driven insights that support the inevitable adoption of bitcoin as the world’s greatest form of money. Our research is specifically written for family offices, institutional investors and corporations looking to adopt bitcoin as their treasury reserve asset, but we are publicly publishing this research for all individuals.
Who are we? Mimesis Capital is a family office that focuses on wealth preservation through bitcoin, equity investment and investment-grade art.
As a firm, we believe that bitcoin has ignited a generational wealth transfer. Bitcoin is a system capable of storing monetized energy without dilution. It is a revolutionary discovery of a new digital good that has the unique properties of being scrace, durable, divisible, transactable, portable and fungible, all in a decentralized manner. We believe that Mimesis Capital has recognized the implications of the discovery of bitcoin before the world at large, and we are capitalizing on this pivotal transition.
Based on our research and unique perspective, we believe that bitcoin is the pristine primary treasury reserve asset. In addition, we think bitcoin can serve as our investment benchmark and unit of account. The rest of the world is trying to accumulate more dollars, while we are trying to accumulate more bitcoin. Dive into our publicly-available “2021 Bitcoin Investment Research Report” to understand our thought process, peer into how we came to the conclusion that bitcoin is the world’s best monetary good and access data-driven insights that support our analysis.
Access the full “Bitcoin Investment Research Report for 2021.”
