TRANSCRIPTION

Peter McCormack: Hi Tuur, how you doing?

Tuur Demeester: Hey Peter. How's it going?

Peter McCormack: I'm good man. Saw you recently, didn't I?

Tuur Demeester: Yeah, we met in Austin!

Peter McCormack: So thanks for coming on again. This is your third appearance, you're joint top now with Lopp. So thank you!

Tuur Demeester: Thank you, I'm honored!

Peter McCormack: All right man. Well listen, I've read your report and I think it's very interesting. "Bitcoin is in heavy accumulation", as we both said, the term heavy is a strong term, but it really kind of meant something to me. So I dived in, I've read it twice now. I'm pretty convinced, but it would be good to work through it.

So not everybody will know your entire background and I know you've been on twice before, but because we're going to go through the report, can you just start by telling people who Adamant Capital is, what is your background and the reason you have an expertise in this area and why they should care about your report?

Tuur Demeester: Sure. Adamant Capital is a Bitcoin Alpha Fund. So that means that we use Bitcoin as a performance benchmark. I've been doing research in this space since 2011. I was pretty much a gold focused macro investor back in 2008/09 and I was always looking for some strategy or combination of strategies to protect yourself during a financial crisis, especially during inflation, because that's what I saw coming in the long run for both Europe and the US

So when Bitcoin came along, I discovered it in Buenos Aires and that was a really, really intriguing potential answer. So I've been exploring ever since whether Bitcoin could be one of those fantastic assets to be in, like safe harbors for a financial crisis. But of course, in the meanwhile, it's become clear that it can be a lot more and it already is more than that.

Peter McCormack: Did you just say you discovered it in Buenos Aires?

Tuur Demeester: Yeah!

Peter McCormack: I don't think I know that story. What's the background there?

Tuur Demeester: Yeah, so I was pretty spooked about what was going on in Europe. This is kind of the aftermath of the 2011 crisis. I don't know if you remember, but in 2011, there was the sovereign bond crisis in Europe and it looked like several nation states were about to fail on their bond payments.

So what usually happens if you look in history books, is that rather than actually fail on their bonds, they just print money to pay for the bills, they print their own money. So I was really worried and that's why I was in Latin America to explore how do people live and thrive in financially volatile times. So Argentina, every 10 years they have their collapse and so people are used to it! I had friends there who both introduced me to Bitcoin and also showed how it can be used to move money across borders even if it's prohibited to do so, which at the time was the case.

That's what happens if there's high inflation, governments don't want you to move all your money out of the country, they want to keep it there. So it was the perfect environment and they got their Bitcoins by mining it in their basement, literally because they could not sign up with Mt. Gox because of all these financial restrictions. I think I attended the very first meetup in Argentina, which was a barbecue of five people in 2012 and then later it of course grew and now it's a huge meetup.

Peter McCormack: Wow. I've never actually been to Buenos Aires. I don't think I've been to South America. No, I haven't. I should go. You must've had a good Buenos Aires steak then?

Tuur Demeester: Yeah, I stayed there for several months. It used to be the Paris of the south and it used to be very wealthy. Before the Panama Canal, ships had to go all the way around and also it was a very prosperous country. It's the country with the most European heritage of Latin America. I think about 60% of the population, maybe more actually, it could be 80%, has European ancestors. So people call it the Italy of the Americas. It has amazing architecture, obviously tango, with lots of cultural heritage too. Yeah, it's a super interesting place!

Peter McCormack: All right, well let's get into the report. As I said, I've read through it twice now. Firstly, can you give me the background to the report? Obviously this bear market has been playing and you've noted you've written two similar reports like this before. So at what point did you realize, "okay, the bear market has happened.

It's going to be coming to an end, it's about time to start doing this report." Also how much work goes into this report? How long does it take? How many people contribute to it? Just to give the kind of background to the effort that's gone into this.

Tuur Demeester: So in 2018 we put out a piece in August saying, "hey, we don't think this bear market is done. We don't think $6,000 Bitcoin is going to be the bottom. We're expecting sideways and lower prices for the rest of the year." So then the question was, when that happened, when Bitcoin broke down and we went all the way almost to $3,000, the question was like, "well, what's next?"

So we started thinking about it and the original idea was just to do another blog post, like a follow up piece. But then, as we did the research and we put a lot of work into methodology. So in February, 2019, we put out a piece on how to value Bitcoin, because I think it's important to not only look at price, to really have different angles to look at Bitcoin.

But then the follow up piece was going to be a blog post, but it kept snowballing into something bigger. Also I started thinking about the weight that I wanted to give this and in my mind, reports usually carry more weight than if it's just a blog post. They're able to circulate more, they're more able to circulate also in institutional environments, because then people just share the PDF. Also, I've only published reports on Bitcoin very few times, when I thought I had something important to say.

So the previous reports on Bitcoin and Bitcoin valuation were in 2012 and 2015 and so we thought it was appropriate to do a follow up. A lot of work went into it. I've written most of it. Michiel, my co-founder, contributed significant amount and also helped a lot with crunching the data. Then we also got feedback from probably about 20 analysts in the space on the draft version that we had.

Peter McCormack: Did you say how long it took you to pull together?

Tuur Demeester: I mean it's hard to say. I'd have to look at the original Medium draft. I would say three months, maybe more?

Peter McCormack: Interesting!

Tuur Demeester: Always with these reports, I have a standard of quality that I want to achieve, but then I also feel urgent because now is the time. I don't want to be late. So that's kind of the struggle. So I'm glad we got it out! Ideally, I would have wanted to publish it earlier, but this was the best we could do to still have a high quality report.

Peter McCormack: All right, well let's start working through it. So firstly, Bitcoin is significantly undervalued right now?

Tuur Demeester: Correct. If you look at the Blockchain and you look at all the Bitcoin, at the last time that they ever moved, and then you compare that price, with the current price, you can come up with what we call unrealized profit and loss, which of course makes the assumption that every time a Bitcoin moves, it possibly is sold. But we call that, value realization events.

So it doesn't even really matter if it's sold or not. The owner of that coin had the opportunity to liquidate it at that time and so we see that as like a psychological marker, that is important. So then we aggregate that data and then we can tell whether or not in the aggregate, the market is either in the plus and has unrealized profits or in the red and has unrealized losses. That will impact sentiment a lot, at least, that's what we strongly believe. So that's how we came up with this sentiment chart, the relative unrealized profit/loss in Bitcoin. Of course what we saw was that in late 2013, early 2014, there was a lot of unrealized profits.

The same pretty much in 2017, summer to the end of 2017, a lot of unrealized profits. Investor psychology then, is kind of in the mindset of greed and then as the bear market sets in, those profits reduce, but people often still hold onto them. It's only once they go into the negative, that sentiment really changes and especially retail investors give up and walk away. So the fact that we've had that in Bitcoin, that was what happened in November 2018, when we went from $6,000 to $3,000 in a of matter weeks.

That was the capitulation. So the fact that that's behind us and that there is significant evidence that people are both holding Bitcoin and accumulating more of them, that's what makes us feel comfortable that this is what is known as, it's not a new word that we came up with, it's what is known as the accumulation phase of this market cycle.

Peter McCormack: So the cycles are driven by whales essentially? There's a side aspect of utility, increasing knowledge, increasing institutionalization, all the side points to come along with it. But they always seem to be secondary to what the whales do. The way I've seen the cycles is that we have a big price move, then as the price starts to crash, then lots of really interesting things start to happen.

Tuur Demeester: Yeah. I think whenever you want to value something, you have to decide, "well, what is the purpose of this thing, of this phenomenon?" Then to what extent is it achieving that purpose? So with Bitcoin, I think a big misconception is that the purpose of Bitcoin is payments. So the way we measure success is by looking at what volume in payments are being done.

Even though I don't think that's totally worthless, to look at it that way, I think you miss a lot if you don't look at Bitcoin as digital gold really, which is quite different! It means that it's being used as a store of value and that the longer you hold it, the more you are expressing your desire to make use of that function and you can measure that in Bitcoin. So that's why when you said the word "whale", that's what I think of as people.

It doesn't mean that this individual has a lot of Bitcoin necessarily, but just the fact that there's evidence that they've held onto it for a long time, that becomes more and more meaningful. So you can measure moves in old coins on the Blockchain. So based on that, you can see that every time, when the previous all time high is achieved again, that's when Bitcoin whales, in the aggregate start discording.

It doesn't mean that they sell all their coins, but they start selling some coins and you see that on page 4 in 2013, 2014 and that of course at the end of 2017, throughout 2017, where long-term holders were selling coins. So when whales selling is exhausted, then all what needs to happen is sufficient new demand to come in to create a bottom in the market. Does that make sense?

Peter McCormack: Yeah, no it does. Have you seen any evidence during these cycles of the volume of Bitcoin that maybe some of these large holders actually hold, in terms of number of coins? What I'm trying to get at is, as we go through cycles, do they tend to end up owning less Bitcoin, but hold more in Dollar value or do you see there's an actual pattern where they play the cycle so well where they actually increase their number of Bitcoin?

The reason I ask is twofold. Firstly is, are we seeing a wider distribution of Bitcoin and also is there then a potential risk that as the market grows, say in potential into hundreds of billions again, even trillions, they're going to be some people sat with so much Bitcoin, that they have a very strong control over the market.

Tuur Demeester: I think the answer is very clearly that we're seeing more and more coins distributed over time. So while you could say, "oh, the Gini coefficient of Bitcoin is worse than North Korea," Gini coefficient is a measure for income inequality or wealth inequality. Yeah, of course you can say that, but that was the same with Microsoft stock during the first 10 years.

Not a lot of people owned it and it was only with the company growing and more people buying the stock or owning the stock, that that changed. But yeah, with Bitcoin, especially with institutionalization, if you think about large funds that are buying Bitcoin, those funds are representative of thousands or eventually even hundreds of thousands of investors.

If a pension fund buys Bitcoin, then they are exposing their entire client base to the asset. So that is just a massive amount of distribution that's happening just by virtue of Bitcoin being more and more financialized. Then of course there's the whales, who own a lot of Bitcoin, they have to pay the bills, they make mistakes, they occasionally get hacked, they diversify, maybe they convert some of their Bitcoin into equity and Bitcoin startups or completely different places.

So that is from both those sides, that the Bitcoins are more and more distributed in the world. So yeah, of course there is great "inequality". There's only maybe, I don't know what the latest estimates are actually, I think like 60 million Bitcoin holders in the world and I believe it's going to go to billions. So that means that of course, the Dollar based net worth of the top Bitcoin holders is going to go up much more than it goes up today, but the distribution is going to be a lot more flat in the long run.

Peter McCormack: One of the interesting points in there is that, you've talked about potential institutions or pension funds holding Bitcoin and when they hold Bitcoin they hold a Dollar value of Bitcoin. They at some point we'll have to realize that value? At some point they would have to sell their Bitcoin to close the fund. Again, I don't really understand this market, but that's a potential as well. If everybody has to start realizing their value, it will bring the price down. So can you explain how institutions tend to hold assets like this and how they tend to buy and sell and how it affects the market?

Tuur Demeester: It depends on what the bent of the institution is. If it's an algo hedge fund, which just is market neutral and is always looking at inefficiencies in the marketplace, and there are a number of Bitcoin trading firms from Chicago for example, they just care about about that. So they don't have meaningful long-term exposure to Bitcoin.

Of course they probably hold it a little more often than they don't and so if the price goes up, they probably do better. But it's different from directional funds that are either wanting to catch the next wave. There are discretionary funds, discretionary managers who are just always looking to sail the next big waves in the macro world.

To them, I don't know, there could be a bull market in oil and a bull market in Bitcoin and they just want to ride both up. Then they get out at what they think is the top, because they are focused on quarterly results or annual results for those to be positive year after year. Then there are value funds, who are just looking to buy something when it's undervalued and then just hold onto it for the long term, as long as they think it's still undervalued, first as it's relative potential and that's more like the Buffets or the Bill Millers of this world.

There is also a significant amount of tax efficiency in that approach. If you don't jump in and out all the time, then that's going to serve your investors usually in the long run. Then there is also a consideration of, as a fund manager, whether you need your assets to be liquid or not. So Bitcoin is one of those rare assets that are actually extremely liquid. So it's very easy to move out of the asset or back into it and that has the advantage, is that it's a cushion in bad times.

So for example, if you've levered up to some extent and you're faced with margin calls, either as an individual or as an investor, you can dip into your Bitcoin portfolio to kind of compensate for that. Or, I'm trying to think what the other point was, or it's good to have that Bitcoin in there, because it's easy to redeem.

If you have investors who decide to leave the fund, you can send them to physical Bitcoin or you can just liquidate it very quickly and so in that sense, it's starting to fit better into the portfolios of large funds, than it used to, because that liquidation has become a lot easier.

Peter McCormack: So one of the interesting things Tuur, going through your report and hearing you talk about this, is I kind of get the realization whenever I do this, is how much more mature the Bitcoin market is to any other cryptocurrency in terms of how it is used, how it can be used by institutions or individuals, how many use cases that there are, the technology, the custody, it's light years ahead of any other cryptocurrency.

It then puts me back in that position where I'm going, "oh great, now I get it again. That's why none of these shit coins have any value. That's why none of them are really worth trading because they're hot potatoes and probably have no future." I assume you get the same feeling because I know you're bent with regards to this and things like Ethereum etc?

Tuur Demeester: Well, I think I've always been a bit of a contrarian when it comes to these alt coins. In 2012, 2013, even 2014, everybody hated them and I was quite positive at the time, in the sense that they serve a certain function and they are probably always going to be around. I was still arguing that I thought Bitcoin would would have 80% of the long term market share. Then in 2017, I think I was a contrarian in the sense that I was just not as excited about the alt coins as a lot of other people, even 2016 with Ethereum.

So I think now, the sentiment is turning more towards like, "oh, it's only Bitcoin that matters," and while I think that's maybe by and large true, I still think even if Bitcoin gets a longterm dominance of 80%, we assume that that's going to be, multi-trillion Dollar value. Say that Bitcoin eventually captures $2 trillion, well that means that there's still $200 billion - $400 billion worth of opportunity left in the alt coin space.

So I don't want to just throw that out and say, "oh, we don't have to pay attention to that market at all." That is going to be a battle for the next 10 years. Who is going to be in the top 10 alt coins? It's a free world! There's going to be niches, there's going to be reasons why people want to have some of these other assets. The question is more like, how big is that slice going to be in the pie?

But I mean to the gist of what you're saying, I do think Bitcoin is by far the most mature platform. It's becoming more and more clear that we can do asset issuance on Bitcoin, so ICOs are coming to the Bitcoin platform. Much better privacy, much better to financialize, so that means that if you want to build an institutional product on Bitcoin, it's by far the best candidate to do that.

If you want to do it on Ethereum for example, even just trying to answer the question in your prospectus, of "what is Ethereum?" "Our asset is 100% backed by Ethereum." Then, "okay. So what is that?" What if Ethereum forks, what is it then? What if the properties of Ethereum change, how do you deal with that? What if Ethereum turns from a commodity today into a security tomorrow? All that is possible and it’s kind of a nightmare for these firms who are trying to build reliable, long-term products.

That's a lot less problematic with Bitcoin, because it's so much more stable and all the things that people accuse it of being, like slow and, and not subject to a lot of change, all of a sudden that is becoming an asset or at least it's being recognized as an asset. So it's more like Bitcoin is the tortoise in the race and a lot of these other coins are more like the hares, who don't have very solid architecture.

Peter McCormack: Oh and Bitcoin is so much simpler!

Tuur Demeester: Yeah, I mean its basic function is very simple, but at the same time you can build on top of it. So if you want more functionality, you just build a new layer on top of it. So yeah, I agree. It's a lot more straightforward!

Peter McCormack: So working through your report, because there's six key points before you get to the conclusion. But in your first key point, I'm going to backtrack a bit to what you said earlier, you talked about Blockchain analysis indicating under valuation and the start of accumulation. But this is based on your fundamental value thesis, which it is a store of value?

Tuur Demeester: Yeah, of course. Any kind of valuation analysis is always going to presuppose some kind of fundamental analysis and fundamental conclusion. So yeah, our fundamental analysis is that Bitcoin is a store of value and it's gradually becoming more and more a store of value.

But then it oscillates in these cycles and then the question is, "when does Bitcoin have fair value?" Or when is it over or undervalued? That's what we're trying to answer. Investors want to know, when do we get in? When do we want to take some profits? That those are the practical questions that investors ask.

Peter McCormack: And it's funny because undervalued or overvalued seems to be indicated by the behavior of people, less so than the price. The price is the result of the behavior, but the behavior indicates overvalue or undervalue. So when everybody's going crazy and CNBC is reporting that the price is now $15,000 and $20,000 and people are FOMOing, it's overvalued, but mainly because of the behavior of people and then the price drops because of that.

Tuur Demeester: Yeah. If you could measure the average understanding, that would be a great valuation indicator. If you could have a way to quantify, of all the people that own Bitcoin today, how many of them actually understand what it is, on a very basic level. So you'll see in periods of mania in 2017, most people don't have a clue what it is. So of course, if something happens that they didn't expect, they'll just scare away and sell and so gradually the market gets more and more educated about what it is.

But we can't do that. So we always have to approximate it by various other things. So it's in a way, this educational process that we're witnessing and yeah, you're right, it's in a way driven by price, but it's not fundamentally what makes something overvalued. At least there's different ways to look at whether or not something is overvalued.

Peter McCormack: It also seems to me, that the cycles are driven by a new influx of people who don't understand enough. It requires those people to come in and join in the market and help boost the price and increase demand.

It feels like then during that cycle, one or two things happen, but most new people come in and will probably get burnt in some way and it's whether they then sit and educate themselves, they can survive a bear market to go through another cycle or whether they leave the market. But it's almost like the whales need these, essentially retail buyers to come in, uneducated and just become part of this.

Tuur Demeester: Well, yes, that's true. Although I do think that there are savvy retail investors too, who just say, "okay, a lot is happening here. Let me just buy a little bit and kind of see how it goes. Dip my toe in it," and then they see. I had a friend like that in early 2013, she saw the price go from like $30 to $250 and she was like, "man, I need to get some exposure to this." So she bought a little bit and then it crashed down to $80, but she was in the driver's seat!

She never sold and she then saw eventually the price go a lot higher. So in a way the price did its work to her, like it signaled, "hey, something's happening." So you don't want to throw the sink at it, you just maybe want to buy a little bit to get an idea.

So I think maybe a lot of that also happened at Thanksgiving of 2017, the kids were talking about their Bitcoin profits and then the uncles and the grandfathers, hopefully for them, only bought a little bit to get familiar with it. Or at least they heard the conversation and then a year later, they see our reports quoted in their investment newsletter and then they're like, "oh, this Bitcoin thing, maybe it really is not dead."

Peter McCormack: I'll tell you the most important lesson I think I learned during the whole last couple of years and it's a fundamental shift in the way I've started to think about things in that, I lost a huge amount of Dollar value, but actually I'm more upset about the Bitcoin value I've lost, than the Dollar value.

By trading shit coins, I probably dropped 80% in terms of my Bitcoins I held as well. I only hold Bitcoin now. I sold off every single shit coin I had, every single alt coin and now I'm in that position where I've got a base level of Bitcoin. If I don't lose it, I don't get hacked or I don't spend it, my Bitcoin value never drops, and I don't care so much now about the Dollar movements.

If it goes up, great, but if I accumulate some more Bitcoins, someone gives me a tip, I buy some, my Bitcoin value will always go up. It's something I've become really comfortable with, but it's taken me a whole cycle to realize that. Is that something that you have experienced or you've experienced from others?

Tuur Demeester: Yeah, thinking in Bitcoin is very powerful and it takes time. It's a difficult... I remember when when I was a kid and we converted from Belgian Francs to the Euro, it's this mental switch, where you have to just have a different denominator in your head when you think about things and not always convert back. So I think it's a little similar.

But then of course it's a lot more as well because the nature of Bitcoin is so different. So thinking in terms of Bitcoin I think is important and it also allows you to make some projections in the future. Just the fact that there are already less than 20 million Bitcoins that will ever be in circulation, as it's probably about 3 million Bitcoins that are lost. So right now there's maybe between 13 million and 14 million Bitcoin in circulation. If you look in the world, well there's only 20 million millionaires in the world.

So by definition, not every millionaire in the world can ever hold 1 Bitcoin. So that's kind of interesting that if you have 1 Bitcoin or even 0.1 Bitcoin, that puts you in a very small minority in the world, no matter where the price of Bitcoin goes. So I think that's appealing! That allows you to, with relatively little money, to secure that position. Then it's all about just making sure your coins don't get stolen and things like that. So, yeah, I think that's very, very powerful.

Peter McCormack: All right, well listen, going back to your Blockchain analysis. So you notice that November 2018 was the capitulation period, where the drop from $6,000 down to just about $3,000 happened and the unrealized losses doubled in a few weeks. You also notice the pattern from Google that the buy Bitcoin sentiment had dropped. You obviously do value that Google measure?

Tuur Demeester: Yeah. I mean it's not something that I would lean on fundamentally. It's just something that I look at, to see whether or not it confirms our suspicion. Obviously it's a lagging indicator. If you want to predict the price tomorrow, you don't want to look at what Google trends does. But it does kind of reflect where the retail market's mind is and in order to find a bottom in a bear market, retail has to be out.

They have to be done, they have to hate it or just not care anymore. So that was where we looked at Google to see if that was confirmed and yeah, I mean the interest was as low as in March, 2017, when Bitcoin was below $1,500. So I think it's picked up, of course with the Bitcoin price doubling recently. But that's important I think. The bottom of a bear market will only happen when retail is not around. When James Altucher doesn't sell anymore newsletters, that's when you want to get in!

Peter McCormack: Also in November, you noticed that 70,000 Bitcoin days were destroyed between the 14th and the 16th. What are Bitcoin days?

Tuur Demeester: Yeah. So that's a concept that goes back to 2011, somebody came up with that. So the idea is that if you hold on to 1 Bitcoin for 1 day, you create "1 Bitcoin Day". Then if you hold onto that coin for a 100 days, well then you've saved up 100 Bitcoin days. Then if you send it to someone, you move the coin, 100 Bitcoin days are destroyed.

So you can follow all the Bitcoins on the ledger and then see how many destroyable days are there, how many days are there saved up in the system, so to speak. Then you can start measuring like, "oh, well we've seen a lot of old coins moves. So that means a lot of Bitcoins days are destroyed." So it's like a way to measure liveliness of Bitcoin.

Peter McCormack: All right, well 2019 has been kind of a steady year. Last couple of months things are starting to improve. But you put your marker in the sand and said, "okay, start 2019 is kind of the official start of accumulation." Feeling pretty confident about that?

Tuur Demeester: I mean we don't have a crystal ball, but we just think that all these indicators, like all the institutional gates are opening, it's just incredible! Bakkt is coming out, so that's the New York stock exchange that is going to have their own Bitcoin platform. We have Fidelity that's pretty much live. I mean these are huge platforms that are making it possible for these funds to finally, after 10 years, get some real exposure to the market and we're seeing family offices are actually accumulating.

Then that event in November I think is just such an important psychological marker, that capitulation. There was so much hope and positivism before that and then it just all got slashed and we saw so many coins move in that month. Not only Coinbase moved coins, but other coins as well. I just think that, to me that reminded me of what happened when Bitcoin dipped below $600 and then below $400 in 2014.

A lot of people thought and me included, that $400 might be the bottom. But then it went all the way down to briefly $150 even in 2015. So to me this represents something similar. It doesn't mean that we can't go down again, but at least psychologically we've moved from hope over capitulation to now accumulation.

Peter McCormack: How much of this kind of crazy ICO phase and alt coin market of 2017 do you think impacted Bitcoin and impacted the price drop? And do you believe without such a crazy market in 2017, that the Bitcoin bear market, do you think it would have been shorter or shallower, because it felt like a lot of money got distributed into all these other projects that eventually just went to nothing?

Tuur Demeester: Yeah, I remember actually I re-listened to a Real Vision video that I made. So that's like a Netflix for investors, I make some videos for them sometimes. So I made one, I think it was in early 2016 when Bitcoin was like $400 and I was just trying to project how high the market might go. I think I said like "$3,000 is a reasonable target, a 10x from where we are here." In 2017 in the summer, I really did feel uncomfortable when we went above $5,000.

Uber drivers were talking to me about doubling their coins and so yeah, I think that the ICO phenomenon really threw a lot of oil on the fire and Bitcoin was a funding mechanism. I mean, people always talk about Ethereum. Obviously Ethereum did very well because of the ICOs, but Bitcoin was a funding mechanism to get into a lot of the exchanges, to buy tokens, it was the first thing that people probably bought.

So yeah, I think that the Bitcoin mania was definitely driven by the ICOs also. There's so many more stories. I think bull markets are always driven by stories and there were just so many more stories available for people to get excited about, and use as an excuse to buy more Bitcoin. Likewise, the demise of the ICOs is then pushing the price down further than it would have gone. So if you look at the draw downs, every time during every cycle, they've gotten more shallow. In the first Bitcoin cycle, we went down 92% from the all time high in 2011.

Then the next peak, we dropped 85% and you would think that the third peak, well we would drop less because Bitcoin is maturing, it's growing, it has a slightly less volatility over time. But we still went down 84% from the all time high, so from almost $20,000 to around $3,000. I think the reason for that is because it was such a crazy mania, that it just went higher than it otherwise would have gone and so that's why it also had to go lower to correct.

Peter McCormack: I worry that the next phase will be dominated by the IEO, which to me is just another ICO in a different name, with the same faults, the same problems and same risks for investors.

Tuur Demeester: I've seen that float around, I think Bitfinex is now doing an IEO. I actually don't know what it stands for?

Peter McCormack: I actually don't know. Investment.. I don't know! But I've read a lot about the Ocean protocol one that's already 80% down. It just seems like it's history repeating itself.

Tuur Demeester: Well, I mean to be fair, I think that there is clearly a need for different ways to offer equity to investors and more directly to the market. There's a lot of entrenchment that has happened over the years and I think that somehow, issued assets are going to become a thing and Bitcoin could be kind of a backbone to platforms like that.

I mean even in 2012, Bitcoin denominated stock markets. You could go to GOBSE and buy shares in a mining company in China. It didn't matter where you were, because of Bitcoin you could trade those shares. So I think that there is something there where equity and startups, they want to have access to global markets. The question is, how is it going to happen and on what platform is it going to happen? In the end they're still startups, so there's still going to have a failure rate of probably plus 90%.

Peter McCormack: All right. Let's go back to your report. So the next point was, does your Blockchain analysis fit reality? You talked about that in 2016, 2017 the market climbed a wall of worry where dominance decline shifted in favor of alt coins and ICOs.

I started to look at how that drove the market up, but actually since the markets dropped back down, so many other cool things are happening. Marty Bent put out a tweet, the things that didn't exist last time, Bitcoin hit $5,200. He said Cash app wasn't selling Bitcoin, Ameritrade wasn't offering BTC contracts. Fidelity wasn't custody for institutions, E-trade wasn't in the fray. He talked about a whole bunch of things. It feels like we're such a different place now!

Tuur Demeester: Yeah, I mean and so it's the battle of the bulls and the bears. So the bulls are seeing all this and they're like, "man, we're in such a better place." But then the bears are the sellers, they are looking at how many Bitcoin are still left in these ICO treasuries, how many more Bitcoin exchanges could get in trouble now that regulators are really on their tail and so that's where to me it makes sense to think about Bitcoin trading in a range.

At least as long as we don't break above $6,500, I still consider this to be accumulation, because like you say, those things are happening that are totally valid, they're long-term very positive evolutions. But we may have some dirt to get rid of, that was that we've inherited from this crazy bull market and also some maturation that needs to happen still. Often markets mature in quite painful ways, like Mt Gox failed and so that's something that I'm still wary of. We could still see bad things happen because we were talking earlier about concentration of Bitcoin.

I think it's not so much that the actual owners of the Bitcoins are concentrated, but a lot of Bitcoin are concentrated in exchanges who are pooling that and of course they have their role and that's efficient. But it does create risks as well. Like if those coins are touched or stolen or if a regulator cracks down and freezes them or something like that, then that could really spook the market.

Peter McCormack: The other interesting thing there is you talk about trading in a range, but my experience here with Bitcoin is thinking, "well, if we push towards $6,500, I could just see another round of the FOMO beginning." I can see press articles coming out saying that Bitcoin has recovered or Bitcoin has doubled.

It seems like the volatility of Bitcoin might come back, because one of the things I heard recently, I can't remember the number, but the amount of Bitcoin that is available to trade on a daily basis actually isn't that high. It's just the same coins moving back and forth. I think somebody told me it's around a million Bitcoin that are actively, regularly traded.

Now I've got to say that number might be wrong, but if we start just using positive sentiment, you can very quickly see how $6,500 could suddenly fly back to $10,000?

Tuur Demeester: Of course. Anything can happen and Bitcoin is a secular bull market, so it's been in a bull market since inception. So I never want to discount bullish scenarios, that's why I don't like to short Bitcoin. But on the other hand, I would say an argument for why we may not be on the rocket ship to the moon yet, it's just that usually markets don't bottom in a V-shape.

They usually bottom while trading in a range and you have this bull/bear battle going on for a while until the bears are just exhausted. They don't have any more coins to sell. So that's why I'm not ready to say yes, we are in a new bull market. I do think we're definitely in the last phase of the bear market for sure.

Peter McCormack: Okay. Let's go on to point 3, clues from historical data, Bitcoin's history of price volatility. Do you think is at all risky to use past behavior as a future indicator? Because the old saying says, "never use past performance as a future indicator", or do you think it's pretty reliable now?

Tuur Demeester: No, I mean, you have to be careful. You always have to keep in mind that historical data is going to give you hints of what may happen and patterns, but in the end it's always a probability game. Patterns allow you to say things, to consider outcomes with a higher probability than others and make that distinction, so that you're not totally blind.

But yeah, I mean obviously nothing ever perfectly repeats itself and actually you see a lot of Bitcoin technical analysis that people use these fractals where like, "oh, look, the shape of this graph looks exactly like this market in that time" and "oh, this is exactly like the Nasdaq and so now we're going to follow the same pattern going forward." That's dangerous. So what we try to do is to not rely on a single metric or a single source of data, for example, not just on the price. We look at the behavior of long-term holders for example, like we did earlier.

We look at what kind of sentiment might be happening. We look at retail activity and volatility is part of that. So I think that is a reasonable way to think about markets, is you look at it from many different angles and then you make an analysis. The nice thing about markets is that if you get it roughly right, you do get rewarded.

If you manage your risk in a good way and you get it roughly right, like tops and bottoms and things like that, then the market is going to be very generous with you. Of course if you don't manage your risk and you do a 100x leverage on Bitmex, you are going to get wrecked! So yeah, be careful!

Peter McCormack: But not everybody is cut out to be a trader as well. Most people should probably just buy some and hold. People ask me and I'm like, "look, if you're going to do this, if you're going to buy Bitcoin, buy it, hold it for 10 years and forget about it.

Do not try and play it, because as soon as you start playing it, you're going to lose money." People who really know what they're doing, who have been trading for years and a lot of them lose money as well. So my kind of view on it is always, just come in and put it away for a long period of time, maybe a decade.

Tuur Demeester: That's great advice. I agree with that. I would say that even if you are a long term holder and you've dug a hole in your yard and your Bitcoin is sitting in there and they're extremely hard to extract, so you're not going to be tempted to sell. Even then I think keeping an eye on where the market is going and reading some analysis, I think at least for you to psychologically consider different scenarios, I think that can be helpful, to just have less stress when it actually does happen.

I remember when Bitcoin was at $20,000, I did the mental exercise of like, what if it goes down to $1,000 and it stays there for two years? How am I going to feel? What am I going to do? So in a way you're hardening yourself for these... I usually do it with bad scenarios, but I think it's even helpful to do with positive scenarios too, because this market, it just beats you up! It's so volatile!

I think this mental gymnastics may be a good idea even for people who don't plan on selling at all. It's just so that they're prepared, because everyone is always calculating like, "oh my Bitcoin is worth this much, it's worth that much," it's human nature. You want to keep track of your portfolio. So yeah, that would be my reason to still follow some analysis, even though you're never selling.

Peter McCormack: Do you think there's many of these cycles left? Or do you see there's going to hit a point where Bitcoin does become a lot more stable over a multi-year period?

Tuur Demeester: Yeah, I think the cycles are slowing down. They will keep slowing down until Bitcoin hits saturation and they're going to just lengthen and sync up with long-term commodity cycles in general, like gold and things like that and that'll be in relation to it's market capitalization. So if we have a $2 trillion market, that is probably going to have slower cycles, then if it's only a $100 billion dollar market like today. So if Bitcoin becomes twice or four times as valuable as gold, maybe Bitcoin cycles are going to be a bit slower than gold as well.

Peter McCormack: Well, I can quote you on this, because you said, "as Bitcoin matures into a globally traded commodity, it seems reasonable to expect its cycles to continue lengthening, until eventually they're on par with the multi decade cycles visible in commodities like copper or gold." So you see that and I guess I would also then reflect the point Murad made in his interview with Pomp, where he said, "you can't go from zero to a global commodity worth trillions of dollars without volatility."

Tuur Demeester: Exactly, that's just the way you get there. I mean a startup currency, how in the world is that not going to be volatile? I think Michael Goldstein has pointed this out, is that a lot of the critics and Bitcoin detractors, they fall into this nirvana fallacy, where they paint this perfect picture of what a currency should be and then they say, "oh well, Bitcoin fails to meet that standard.

Therefore, it can never become something like that." That's the nirvana fallacy where you create an impossible standard and then you're like a teacher who's giving it a D- or something. It's just, "failed! Sorry!" But that's not how it works. Markets change, assets change and ecosystems mature and that's what's happening with Bitcoin.

Peter McCormack: But you do you not feel like there's post rationalization there by some people because they're actually just a little bit bitter that they've missed out on what is probably the best asset they could have invested in modern time? They're doubling down.

Tuur Demeester: Yeah. That's why you just have to look at the fundamentals. If you always base your analysis on other people's opinions, you're always going to be blind. You just have to actually look at the facts and actually look at the technology. Then of course people's behavior is important for relative valuation, like where are we in the cycle and things like that.

But in my opinion, fundamentals is all about facts. The market is not an election. It's things that win that nobody... Most of the technologies we use today, there was a time when nobody believed that this could ever work. So markets have a great ability to prove people wrong in the long run.

Peter McCormack: Volatility has dropped recently you've said, so this tends to coincide with phases of consolidation, apathy and accumulation?

Tuur Demeester: Yeah, I mean there are no retail gamblers so much anymore. So that's why it starts to trade in a range because it's more like professional traders that are ping ponging, "oh, once it hits this resistance, now I'm selling" and then "oh now it hits the support and now I'm buying" and so they kick the ball back and forth, rather than in retail times. Retail traders don't care about these technical indicators. So they just kind of go berserk, buying or selling!

Peter McCormack: All right, so let's move on to point 4, risk analysis. You broke this down into four areas and you already touched on this. So the first point you talked about is Bitcoin exchange hacks and failures and we don't have the risk of a Mt. Gox level hack, because you talked about them having the percent of Bitcoin they had. But also the large exchanges now are really pretty hot on their security.

I think most of the hacks we tend to hear about, they don't tend to be from a Coinbase or a Kraken. They tend to be from much smaller exchanges. I also think that naturally leading investors to stay away from some of these exchanges. I know myself, there's no point risking yourself with a small unknown exchange where you don't know who owns it or where it's run from. But you think that's a very important point?

Tuur Demeester: Yeah, because in my opinion, sure you can have an exchange that has been around for five years, but whether or not something is secure is always in hindsight. Of course, five years, it's not meaningless to have survived this wild market for five years, but it also doesn't guarantee that tomorrow there's not going to be a hack. Some of these exchanges, like Coinbase, they have 5% of all Bitcoin under management, so that's very significant.

That means that a significant amount of people have meaningful amounts of Bitcoin on that exchange. I think a lot of retail investors or new investors, don't really understand that it's different from having Dollars in the bank, where there is the Federal Reserve as a lender of last resort. If your coins get hacked, they're gone. It's over! It could be because you're using SMS based 2FA or something like that, it could not be entirely the exchange's fault. But when looking at credible catalysts for lower prices, to me that's still number one. It's still the risk that I think that most people are underestimating.

I don't think people saw this problem with Bitfinex coming, but we are looking at a serious problem, like an exchange with a $850 million shortage of cash, that then cycled it into Tether. Then with regulators on their tails... I'm not questioning the integrity of Bitfinex, but it is clear that they are in hot water and that regulators somehow don't like what they're doing, at least for the moment. So that's something that I wish I had mentioned as well, is that regulatory pressure.

There's lots of ICO treasuries that could be forced to liquidate, to repay their investors and just have to sell their entire inventory. So in a way, those are also holders that could be forced to liquidate still. So I did that survey in the summer of 2018 asking these experts, "what do you think about the space? Are we going to see serious hacks in the next two years?" Several of them thought that 20-30% of a Bitcoin exchanges are going to be meaningfully hacked before 2020 is over.

I don't joke around. That's important information to me. These are some of the top Bitcoin custody experts in the world, that have serious concerns about the state of the ecosystem still. So anyway, I don't want to be Doctor Doom or fearmongering. It's just that I think this is the most significant risk. If you want to think about lower prices, I think this is a credible driver of that.

Peter McCormack: You also mentioned BIP33, in regards to institutions might reject the privacy side. Do you think this is because there's going to be a fear from regulators?

Tuur Demeester: Yeah, I mean it's more by proxy. Bitcoin companies might fear the reaction of regulators to certain changes in the protocol and then they would start pressuring developers or miners to not accept a particularly change, especially one that would add a lot of privacy to the core layer.

Because part of why regulators are comfortable with Bitcoin, is that there's all these forensics that can be done to figure out where the money comes from. So I don't know if it will happen, but it's a possible controversy. It could be the final fork controversy and it's not going to be the death of Bitcoin if BIP33 doesn't get approved. It'll just be merged on another level. It'll be in side chains or whatever.

But eventually Bitcoin will ossify and we've already seen how dangerous it is to propose contentious forks, with the whole Bitcoin Cash debacle and before that, what was it again? B2X and all these others, where when miners were rolling their muscles and trying to cajole the community into accepting certain changes. Yeah, it's something to keep an eye on, but I don't see it as a big concern.

Peter McCormack: All right. Key point 5, you talk about accumulation and where it leads us. It was a very interesting point that you said some of the people who've got realized losses right now, as the price goes up, they might start selling early just to almost get back to a break even point. Is this a pattern you've seen before?

Tuur Demeester: Yeah, I mentioned it earlier where if we get closer to the previous all time high, that's when a lot of people psychologically are like, "ah man, I'm break even again. Let's make sure that I at least cash in that value. So that I don't lose that again." So I think a lot of investors are like that, where if a lot of people, for example, bought Bitcoin at $6,000 because they thought the bottom was in they have those Bitcoins, they've been underwater ever since.

We're now at close to $6,000 but not $6,000 yet. So that's what creates resistance in the market, in the price. If a lot of people accumulated at $6,000 and then we went below it for a long time and then finally we recover, a significant amount of those people might choose to sell.

That means that even with the same amount of demand, the price is not going to go above $6,000 for a while. So that's why technical analysis in my opinion is not complete bunk! If a lot of a lot of buying was happening at certain levels, then that has repercussions down the road.

Peter McCormack: Okay. Before we get onto the conclusions, the last thing you talked about in point 6, was the fundamental drivers of the Bitcoin price. Now we've touched some of this financialization, we've talked about Bakkt and custody, but there's a couple of other interesting things you talked about.

You talked about bottom up scaling and really you're talking about the growth of the infrastructure of Bitcoin. We don't just have the base chain now. We have side chains. Lightning is there available to use. What this system is, it's increasing the utility of Bitcoin.

Tuur Demeester: Right. I would add to that. It's increasing the utility of Bitcoin as a censorship resistant, decentralized platform, because that's what I mean with bottom up, it's grassroots! Even if all the governments in the world cracked down on it, this is real progress. The code is there. You can run a full node on your Android. It doesn't matter where you are in the world. So that to me is really important because it's like, if we go into a regulatory holocaust, that is the stuff that's still going to be standing. So that's important I think to keep track of.

Peter McCormack: You also talk about Millennials, which I also found interesting in that, I guess the point you're making here is Bitcoin will become something that's a little bit more native to how Millennials have experienced life and experienced adoption of technology and you think that's important?

Tuur Demeester: Yeah! We got the idea initially from talking to Tom Lee from Fundstrat in New York, because they do a lot of their research into the generations. How markets are driven by... Especially if a new generation all of a sudden gets more purchasing power, then something that was very fringy or nerdy can really become mainstream because they're all buying it.

So the Millennials interestingly, today have less purchasing power than Generation X, for example. They also have less purchasing power than the Boomers, even though I think, I'm trying to think how old they are on average now, probably in their mid twenties to early thirties, that's where the Millennials are. So I think the top earning power, that only happens in your mid forties, I think that's where you hit the peak.

So that's why if you look at projections, in 2029, Millennials are going to overtake Generation X, as well as the Boomers in terms of purchasing power. So that's interesting if you know that already since the beginning, Millennials were some of the biggest advocates of Bitcoin. They were early buyers. They're still buying and I think it's because they lived through the 2008 crisis. They don't trust banks and when they were in college, they were using Bittorrent to download things.

So they know how powerful these peer to peer protocols can be and they also understand how important and powerful open source software is. Whereas I think a lot of the Boomers or Generation X, to them software, its like, "oh, that's the thing that Microsoft creates", rather than software is something that can, in a Wikipedia type way, be organically created and then just used by the world. It's not something that's run by a corporation necessarily.

Peter McCormack: Okay. Interesting. All right, let's get onto the conclusion. I think firstly, disclaimer, this is not financial advice!

Tuur Demeester: Exactly!

Peter McCormack: Okay. The first bit I wanted to point out is that you identify that lower prices are possible and that's highlighted with the risks you've identified, for example an exchange could be hacked. You even recognize the Mt. Gox coins, the 160,000 coins, which are going to be made available once the legal case with Peter Vessenes is concluded and civil rehabilitation is done.

That could lead to a mass sell off. So there are certain things that could lead to lower prices. At the same time, you also said the fundamentals are gaining momentum. So I think what you're saying, is that there is a risk of lower prices, but I just don't believe you think is going to happen?

Tuur Demeester: It's always relative. No matter when, there's always a risk of lower prices. What we were trying to argue is that the risk of lower prices is less now, than it has been in quite a long time. That because of all this selling that has happened, because of everything that's occurred through throughout this cycle, we think the risk of significantly lower prices is low and the possibility of reward is much, much higher than it's been in a long time.

So that's the whole point of the report is to make the case that the risk/reward ratio of Bitcoin is now extremely attractive. There's always risks but the potential rewards are quite extraordinary given how strong the fundamentals are, given all the things that are in the pipeline that are coming up and also just given the price level of Bitcoin compared to where it was a year and a half ago.

Peter McCormack: So there's lots of potential coming. There's lots of opportunity as you said, fundamentals are gaining momentum and I'm just going to quote you from it, "the stage is set for mass market adoption over the next five years." I guess if some people are thinking about whether to get involved in Bitcoin, now is definitely a good time because the market is probably going to look very different in five years.

Tuur Demeester: Yeah, exactly. I think that it's also that you send a signal to the market. If you think about getting professionally involved, for example, the fact that you are interested in an asset, even if it's down 70%, 80%, that means that you have studied some of the fundamentals, you're willing to just grind and create value and we've seen it too with content creators in the space and analysts and people who really acquire the skills in the bear market, that does get rewarded over time.

Whereas if you just get in at the last phase of the bull market, you are probably going to be identified, even if you're not as an opportunist. Also people don't have time and once the bull market gets into full swing, there's way less time available from the other professionals in the space. So yeah, both as an investment or getting professionally involved, I think this is just a fantastic time.

Peter McCormack: The only thing I did think that was perhaps missing, and you might have an answer for this, is you don't really talk about the halvening?

Tuur Demeester: Yeah. I don't discount it. I think that it's a significant evolution. If we're going to drop from, what is it now, 4.5% inflation, to slightly under 2% new coins being generated every year. I think that's significant. I've seen a lot of analysis argue that, "oh, like clockwork" and "it's such a strong driver of adoption". I wanted to de-emphasize it.

So that's why it didn't make it into the report. I probably should have added it to the section about drivers. I think it deserves that because it's still significant that less coins will be created. But I like the idea that the report stands on its own and so in a way, it's like a bonus argument, "by the way, supply is also going to get cut in half."

Peter McCormack: All right, well listen, it was a great report. Like I said, I've read it twice. I feel very optimistic about the market, so thank you as ever for coming on the show. It's always great to have you on Tuur and I'll look forward to catching up with you again soon in person. Can you let people know where they can find the report and how they can stay in touch with you?

Tuur Demeester: Yeah. So the report, I've just pinned on my Twitter page. So if you just Google my name, you'll see it as the first tweet and if not, you can just Google "Bitcoin in heavy accumulation" by Adamant Capital. I'm usually on Twitter. I also write on Medium. That's pretty much where you can find me!

Peter McCormack: Cool. Well I'll share that all out in the show notes and thank you for sparing me the time on your weekend, because I know your time's valuable. Thanks again Tuur!

Tuur Demeester: Always happy to chat. Thanks Peter!