January 2019 Commentary

May 18, 2020

It is exciting every day to see the cryptocurrency industry make huge strides in technical development. Lighting network capacity increased by 82% just in the past one month. This rapid pace of growth has not slowed down even a little bit despite all the bear market trends in price. What is even more exciting is that, this second-layer technology can be built on other alt-coins as well.

From a layman’s perspective, what is Internet? I would define it as an unstoppable network to transmit data packets from one computer to the other. Just above the hardware layer, resides the software code to transmit data across network. TCP(Transmission control protocol)/IP (Internet Protocol) enables the data packets to transmit with extreme reliability. TCP/IP transmits information by digitizing it and breaking it up into very small packets with address information. After being released to the network, the packets can take any route to the recipient. Sending and receiving nodes at the network’s edges disassemble and reassemble the packets to interpret the encoded data. This created an open, shared public network with no central authority responsible for its maintenance and improvement.It also eliminated the need for dedicated private lines and massive infrastructure, which were required to communicate data in the previous telecommunication architecture based on “circuit switching”. 

It is clear that TCP/IP has a huge impact on the economy and reshaped the world as we know it. It provided a reliable mechanism to transmit data packets, which was foundation for the entire Internet.

Bitcoin is very similar to TCP/IP. TCP/IP allows packets of data fly through the network reliably. Bitcoin protocol allows pieces of digital gold fly through its unstoppable network. One deals with data packets and other deals with ‘value packets’. Money is nothing but a store of value, of someone’s labour. Both enable these packets to fly through the network reliably. I would compare lightning network protocol to be similar to SMTP (Simple Mail Transfer Protocol). SMTP protocol enables people to send and receive emails. Many people may not know the name, but still Gmail, Yahoo mail, Hotmail are just various clients built on the top of SMTP protocol, which in turn relies on TCP/IP. When TCP/IP was originally introduced in 1980s people could not imagine all the things that will result from it. For example, in 1990s no one could have imagined all the applications that will come on the top of TCP/IP protocol. No one could envision all the applications like email, the whole Cambrian explosion of dot com companies, Google, Facebook, twitter, Netflix, Uber or Wikipedia that were built on the top of TCP/IP.

Bitcoin will evolve as protocol suite for transferring value across the network. Bitcoin as protocol is native to the internet. It was conceived on the internet, built and tested on the internet and is borderless just like internet. Sound money is much more fundamental to humans than sending data across the network. I believe, as the infrastructure for bitcoin network is built it will unleash the creative energy of the entrepreneurs and bring about a Cambrian explosion of new applications. We cannot even imagine the use cases for these applications, as someone in 1992 could not have imagined an application like Whatsapp or Skype. This revolution is going to unleash capitalism as sound money is fundamental to the existence of capitalism and borderless commerce.

Lightning network is enabling payments for something as small as 1 millisatoshi. 100 million Satoshis make a 1 BTC. Recently an artist, who created an artwork, which measured just as small as 1.44 X 1.75” and depicts a black swan collaged from the details of United States dollar bill and was sold for 1 millisatoshi ($0.000000037). Since we are able to spend amounts as small as a billionth of a dollar, transaction costs are pretty much dropping down to zero. This will enable new ways of paying, which was previously not possible by fiat money. You could pay for a movie or video clip based on how many seconds of the video you have watched and pay continuously every second to the content provider. If your transaction costs are close to 1 millisatoshi, you could have 100s of transactions every day as an individual and only pay as small as a millionth of a dollar. As the transaction costs slowly go down to zero, it will eliminate huge number of trusted intermediaries like PayPal, Mastercard or Visa.

Most investors like know ifthe bitcoin bear market is over. I use the charts put together by Willy Woo a lot, as it includes lot of fundamental on-chain metrics to derive the Bitcoin network value. One such indicator that I follow is Delta Cap. Delta cap is calculated as difference between two long-term Bitcoin moving averages.

Delta Cap = Realized Cap – Average Cap

When we calculate the market cap of bitcoin, it used the current price and multiplies by the current number of coins in circulation. In case of Realized Cap, it takes the price of the coin when it last moved through the blockchain. Realized Cap approximates the USD value paid for all the bitcoins in circulation. If I have purchased my 100 bitcoins at $1, it only counts as $100 instead of using bitcoin’s current price. Moving averages are good, but indicators like 200-DMA are only limited to what happened in the last 200 days. Average Cap indicator is updated every day. It is a life-to-day, cumulative simple moving average that serves as a true mean of the whole history of market cap. This is a slow-moving average, as it removes all the volatility. Notice that Realized Cap bounces between market cap and Average Cap, in the chart above.

It is possible to calculate the ratio of Market-Value-to-Delta-Value (MVDV) Ratio, which based on the past history indicates that we are close to the bottom. As shown the chart above, the signal ratio touched 1 in December of 2018. This does not mean it will bounce above 2 very soon, but based on this indicator, we hit the bottom last December. Very few investors will catch the exact bottom, but we want to be roughly right instead of being precisely wrong.

Managing Partner
Email: sam@ikkurty.capital