Re: $BTC/Crypto: The Beginning of the End of the Liquidity Lottery.

I’ve been wanting to write a thread about BTC supply/demand for a while now. Here it is.

I’ve already written at length about BTC/Crypto valuation in several threads. You can find a directory of them here:

I’ve noted the parallels between the Crypto Bubble and the Dot Com Bubble several times. This was over a year ago:

This was today:

Now I want to hone in on why the various stock-to-flow/halving models are nothing but Siren Songs designed to lure in late-comers for the benefit of early-adopter HODL’ers and why this is setting up for a very dangerous dynamic.

Many immediately counter with arguments about how well the model has “withstood the test of time.”

Here’s the problem with that argument: BTC HAS NEVER EXISTED WITHOUT THE LIQUIDITY LOTTERY.

If you accept my argument that financial cycles exist and that we are in a new era of structural commodity shortages conducive to a stagflationary setup akin to the 70’s...

...then you have to worry about the BTC demand narrative reversing course from the last 14 years.

I love to say that the Sword of Inelastic Supply is SHARP and that it cuts both ways. It certainly has benefited HODL’ers thus far, perpetuated by an endless Liquidity Lottery and the expectation that the USD will be forever debased.

Put into Econ 101 terms, when DEMAND shifts up and to the right (D->D2) against a steep (inelastic, on the right) supply curve (S), all it takes is a little incremental demand to move price UP by A LOT (P1->P2).

But what happens when the narrative changes and DEMAND SHIFTS DOWN AND TO THE LEFT against the same inelastic supply curve? The exact OPPOSITE: a little demand withdrawal moves price DOWN by A LOT.

You saw it last week when Luna Foundation Guard (LFG) puked its 80k BTC and moved the price down ~25%. This was lauded by many as an example of how resilient BTC was.

I don’t quite see it that way.

The way I see it, one of the following is likely to happen in this new era of the END OF THE LIQUIDITY LOTTERY:

1. Demand shifts DOWN (D2 -> D1) against inelastic supply (S1)

2. Supply becomes more elastic (S1->S2)
3. A combo of 1 & 2

In every single scenario above, PRICE GOES DOWN UNLESS DEMAND KEEPS GOING UP. But why would demand keep going up?

As many of you know, I like to think of Bubble Assets like BTC as INFLATION CAPACITORS. Without the endless Liquidity Lottery from the Fed, what is going to drive demand up and keep these capacitors from discharging?

Not only is the Liquidity Lottery ENDING it is about to REVERSE.

This is the counter I hear most often: HODL’ers will just keep constricting supply ad infinitum.

I am fond of Mental Models and thought experiments to intellectually test investment hypotheses. So let’s play the above thesis out then and borrow a concept from calculus and “take it to the limit” to see what happens ad extremum.

Let’s suppose this keeps happening and HODL’ers keep constricting supply until the supply curve is PERFECTLY INELASTIC (VERTICAL). What then?

You guessed it. Tiny movements in demand (D1 vs. D0) in either direction move price A LOT (P1 vs. P0).

Indeed, the BTC Maxi’s wet dream is a situation where supply will be so inelastic that BTC will be worth $1 mm+ per coin.

Then what?

Questions abound:

1.WHO will pay you that?
2.HOW MUCH can you sell at that level?

3.WHY won’t everyone else sell?

These are inconvenient questions no one wants to ask.

Somehow, there is an assumption that there will always be a GREATER FOOL to take BTC from you and only you (otherwise, supply would be ELASTIC wouldn’t it?) at a high price dictated by ever-INCREASING demand.

This is why, when I wrote a thread a while back about 4 asset categories and their associated EXIT STRATEGIES, BTC fell into “Category 4: Greater Fool Backed Only By Technicals.”

You be the judge whether that’s an asset worth HODL’ing into the Beginning of the End of the Liquidity Lottery. Let the arrows fly.