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Root: This was a fantastic presentation, my big peeve was that you were not showing the charts when you were discussing. What I saw most of the time was your sponsor and a big carrot. :-). Perhaps a different way of seating might be considered the next time.

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@Root, would it be possible to add a calculator (for fun) that predicts year end price taking the expected monthly ETF flows (which we input from your charts) and the BTC multiplier (which we can input by looking at your charts).

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I wonder if diminishing returns will bottom out and then reflect back up along with diminishing supply. If so, we could see 20x again in the future. Time will tell.

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Yes, time will tell. I’ll argue that we are seeing the early vestiges of a breakthrough beyond the preceding diminishing return limit. The new breakthrough is the additional market capture of the eyeballs of bitcoin ETF issuers and their clients.

In preceding epochs, there have probably been several mini-market captures that introduced “new” bitcoin participants to the market. These were low SNR, low demand events that stimulated much less net demand rate than the existing bitcoin creation rate - this low SNR of new demand versus new creation rate.

Among those might have been the futures offerings. New bitcoin adherents took the form of traders who traded for quick gains or losses. Coupled with the fixed amount of BTC during this market capture, demand increased so price increased. No idea quantitatively how this event influenced price over time, but assuredly the effect was non-zero.

Enter the ETFs. Grayscale dumped, Blackrock and the other issuers bought. Presumably the issuers saw new demand from institutions and retail. This new demand pointed towards a new, larger market capture, where the daily net inflows of BTC (~4,000 per day) dwarfed the BTC creation rate of 900 per day. At halving, the ratio, assuming steady net inflow rate, increases 2x. So the ratio of etf’s net inflow rate over creation rate is near 10x! That is likely much more than the ratios of previous market capture events. Bottom line: we’re probably seeing a “new” diminishing return limit that is much higher than the “old” diminishing return value.

A “next” major market capture event that might represent another high signal-to-noise demand is gold and silver store of value markets. There is some tenuous evidence already that investment in gold ETFs is decreasing, notwithstanding the increase in the USD price of gold.

The ETFs push the diminishing return level higher. In turn, more investor eyeballs get glued to bitcoin. Classic technology adoption lifecycle behavior a la MSFT, AMZN, NVDA. But it’s early. Blackrock could announce a Faustian bargain with the Russians and the new, frightened adopters abandon bitcoin for whatever.

But the adoption cycle is pointed towards the inevitable: fiat money will self-destruct over time. Something will take its place. The adoption lifecycle will dominate. My bet is that BTC eventually becomes the best store of value money. As the “currency” features of the bitcoin stack mature, it will eventually become the best means of exchange money. And best unit of account money after that. But there will be massive financial, economic and cultural pain between now and then.

In 1517, Martin Luther nailed a copy of his 95 Theses to the door of the church at the University of Wittenberg. Centuries of war and pain befell western civilization. That document was the extremely high SNR document that stimulated an enormous market capture of a new kind of believer. Adoption lifecycles are not limited to technology. But currently the high pace of technological innovation dominates influence on economies and culture more than any other influence, save war and natural catastrophes.

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Thank you for this note. A great read.

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Root, I look to your detailed analyses before any other. There is digital gold in the raw data. You mine it and refine it and produce charts that present their own story. Fascinating stuff. You are the Stephen Wolfram of bitcoin analysis.

The behavior of this flow model is akin to the behavior of several interconnected compartments in which there is an airborne contaminant concentration circulating in and between each other compartment. A STH compartment. A LTH compartment. An illiquid compartment and an “other” compartment that contains traders and etf issuers.

A common contaminant is introduced to the “other” compartment at a decreasing rate over time. Each compartment is connected to each other compartment and flow sensors detect net contaminant particulate flows across each connection. It seems possible to model this mathematically and identify the effect of introducing a “new” compartment, call it the “gold” compartment.

Fluid flow modeling is a thing. It can be used to predict the time required to evacuate airborne radioactive contamination from a multi-compartment ship. It’s useless in a fiat-controlled fluid dynamical system because the inbound rate of particulate introduction varies chaotically over time.

On-chain analysis such as what you’re doing offers a more simplified means to measure particulate liquidity flows between the compartments. That’s something that is not available in fiat-world.

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