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Discussion in 'The Kruse Longevity Center' started by Jack Kruse, Feb 20, 2021.

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  1. Jack Kruse

    Jack Kruse Administrator

    Why do some go irresponsibly long in #BTC? BTC is the only asset that has a Sharpe ratio of greater than 1. The Sharpe ratio describes the increased rate of return received for the extra volatility sustained when holding a riskier type of asset. To understand the Sharpe ratio, one must take into consideration the returns of holding a risk-free asset, compared to holding a riskier asset with higher returns. In this case, a risk-free asset is considered something like a US treasury T-Bill, which is backed by the full faith and credit of the US government, along with the world’s largest economy. This includes FAANG = FB, Apple, Amazon, Netflix, Google. None equal BTC Sharpe ratio.
    From 2015-2019 Bitcoin’s 4-year Sharpe ratio was constantly above 2.0, and it has reached above 3.0 in 2019 and was 2.65 for 2020. So far in 2021, BTC is above 3.

    How to interpret a Sharpe ratio?
    A ratio higher than 1.0 is considered acceptable.
    A ratio higher than 2.0 is considered very good.
    A ratio of 3.0 or higher is considered excellent.
    A ratio under 1.0 is considered suboptimal.

    The negative Sharpe ratio means the risk-free rate is greater than the portfolio’s return, or the portfolio’s return is expected to be negative.
    The Sharpe ratio is the difference between the returns of the higher-returning, more volatile assets when compared to the risk-free, much lower returns of a safer asset like US T-Bills. It is important to note that Sharpe ratios only measure the returns based on the amount of risk and the ratio doesn’t actually measure the volatility of the underlying asset itself.


    The Sharpe ratio filters out the noise of investor psychology to find the nuances of Bitcoin risk and reward at different stages of its macrocycle. This can be done by using a simple rolling Sharpe Ratio that analyzes Bitcoin risk-adjusted returns over time.
    Ultimately, with respect to BTC timing is critical. It matters deeply: while the individual investor may be satisfied with long-run outperformance, Bitcoin’s macrocycles urge further nuance. Historically, the trade following the Halving represented the most attractive risk-adjusted opportunity in BTCs history. May 11, 2020, was the most recent Halving. Investors with personal savings and unconstrained time horizons will find comfort in the story of Bitcoin’s long-run outperformance. 90% of days BTC has been higher. This is an astounding ratio. Bitcoin returns are disproportionately skewed to the upside, timing matters. Much like a call option, Bitcoin risk-adjusted returns rapidly decay or improve depending on market timing. The implication of this record? Over any rolling four-year period of BTC history, Bitcoin’s Sharpe Ratio historically outperformed virtually every other asset class. If an investor had held for at least four years during any point in Bitcoin’s history, they would have demonstrated superior risk-adjusted returns relative to almost all other investment opportunities. Nothing is better than it.


    Thinking about Bitcoin’s Sharpe Ratio over four-year intervals may be correct in theory, but it is limited in practice. In reality, markets are governed by animal spirits – the swings of fear and greed – and most investors are more likely to enter the market after periods of non-linear growth. Many new entrants are thus destined to enter mid to late-cycle, fated to experience grueling drawdowns after buying local or even global highs. The assumption that investors can and will HODL underwater positions for multiple years is unfeasible, especially with the prospect of underperformance relative to other asset classes. The financial and emotional burden of drawdown will likely lead many to capitulate their positions before they are able to realize an entire four-year cycle.

    Given the path dependence of returns, the long-term Sharpe Ratio fails to adequately capture Bitcoin risk.

    Oscillating around a value of 1, the one-year forward-looking Sharpe Ratio peaks at the beginning of Bitcoin’s price inception, 2012 Halving, and several months following 2016 Halving. After these three periods, an interesting dynamic at play: aggressive Sharpe Ratio decay from a high of 3 (spectacular) to a low of −1 (abysmal).

    Further, examining the 1-4 year forward-looking Sharpe Ratio for Bitcoin from the Halvings (see pic above), we find a similar effect:

    • Exposure to Bitcoin for 1 year after the 2012 Halving nets a Sharpe Ratio of over 3, and holding for an additional 3 years degrades this to approximately 1. From a spectacular investment to a “good” investment.
    • Exposure to Bitcoin for 1 year after the 2016 Halving nets a Sharpe Ratio of over 2, and holding for an additional 3 years degrades this to less than 1. From a great investment to a sub-standard investment.
    How important is market timing when managing Bitcoin risk?
    Analyzing Sharpe Ratio decay gives us a powerful risk framework for BTC. Not all Bitcoin investments are made equal: Bitcoin acquired at different points in a macrocycle should be treated differently as part of a diversified portfolio. To illustrate this concept, consider the idea of “time-to-profitability” (TTP) demonstrated in the picture below:

    • Bitcoin acquired at the 2011 high has a ≈2 year TTP
    • Bitcoin acquired at the late 2013 high has a ≈3 year TTP
    • Bitcoin acquired at 2017 high achieved profitability in November/Dec of 2020.

    Not only were investors who purchased Bitcoin at these highs faced with absolute drawdown, but they were also faced with relative underperformance against worldwide equity indices (and possibly other asset classes). Bitcoin can be an excellent tool within a diversified portfolio, but most professional investors cannot simply buy and HODL for extremely long periods of time if they are likely to face both absolute and relative underperformance. Regular investors can if they can handle the tax consequences. This idea is critical in trading within an IRA account.

    The legacy wisdom of financial markets sometimes cautions investors against market timing, captured by the dominance of indexing strategies and the underwhelming reputation of the modern hedge fund. Whatever the merits of this argument in traditional markets, the wise Black Swan will find a fundamentally different heuristic exists for Bitcoin.

    This doesn’t mean that other strategies like buy and HODL are not valid. It is simply to say that for investors focused on managing risk, timing really matters. In this way, BTC mimics the Leptin Rx.

    A once-in-cycle trade, but don’t forget to expect the unexpected
    The historical analysis of BTC behavior leads me to conclude that, historically, the best risk-adjusted entry existed at or within several months following a Bitcoin Halving. The Sharpe ratio remains at plus 3 200-400 days post Halving. After this time, the Sharpe ratio falls off a cliff.

    How institutional investors will change this cycle is now the biggest mystery in my mind.

    This post-Halving window, when combined with hedging practices like protective puts or a managed stop loss, helps build a case that, on a risk-adjusted basis, Bitcoin will usually outperform other asset classes.

    As Bitcoin has sprung to new highs in 2021, the current reality is that investors will eventually demand exposure to this asset. Ironically, as these requests pile in mid to late-cycle in 2021, money managers and individual investors will be faced with a dicey dilemma: remain on zero as Bitcoin makes weekly headlines or enter a drawdown-prone asset at local or absolute highs. C goes up in 2021 the risk ratio rises as the market comes to a top. Rather than enter as greed floods the market (next few months), the post-Halving window (April 2020- Sept 2020) granted investors an early window to incorporate Bitcoin into their broader macro strategy. This is why the member event on July 4th, 2020 was critical. IT WAS THE BEST TIME TO GET IN.

    What drives this cycle? It is the supply and demand curves. And the supply and demand curve has an unusual twist in this current halving due to a severely curtailed supply of BTC marked by increasing institutional demand. The current post-Halving window is upon is now as BTC#18 laid out and represents a rare time to add high expectancy, low-downside Bitcoin exposure. That window will only be open for the next few months until the Sharpe ratio begins its cyclic fall. In this cycle, based upon the historical past of BTC, that fall will approximately happen August -November of 2021.
    Sean Waters likes this.
  2. Jack Kruse

    Jack Kruse Administrator

    Bitcoin kicked off the new year in 2020 with a record high hash rate, topping all previous records. On Jan. 1, 2020, hashing power hit 119 quintillion hashes per second (h/s). What does this mean, what in the world is quintillion h/s, and why is this important for investors? Bitcoin’s hash rate is an indicator of how healthy, powerful, and profitable the Bitcoin network is at any given time. Changes to hashing power are related to difficulty, the number of miners in the network, and ultimately, the profits miners receive for mining. If new miners join the Bitcoin network, this increases the difficulty of mining a block, because miners now need to make more guesses each second to solve the calculation and win the block reward. This makes it harder for miners to be profitable. If the Bitcoin network’s difficulty increases, the hash rate also increases = higher network metabolic rate.

    A high hash rate = Bitcoin network is healthy/profitable = upward price swings. Historically, price has followed hash rate during bull runs. We are seeing this play out right now. The current hashrate is astounding at 153.44M TH/s for Feb 20 2021, http://ycharts.com/indicators/bitcoin_network_hash_rate
  3. Jack Kruse

    Jack Kruse Administrator

    Bitcoin Network Hash Rate is at a current level of 153.44M, up from 151.45M yesterday and up from 109.63M one year ago. This is a change of 1.31% from yesterday and 39.96% from one year ago.
  4. Jack Kruse

    Jack Kruse Administrator

    • Money, which is the representation of the work required to acquire goods and services, can also be viewed as stored energy = potential energy
    • Money is the central information utility of the world economy. As a medium of exchange, store of value, and unit of account, money is the critical vessel of information about the conditions of markets.
    • BTC Hashrate simulates the health of your money and its power to do work for you. The metabolic rate is measured by hash rate over time and represents the amount of potential energy in your money to complete a task. This creates a store of value. Energy consumption is measured by the current price of BTC which rises as financial work increases.
    Sean Waters and John Schumacher like this.
  5. Jack Kruse

    Jack Kruse Administrator

    Why people do not get math and logarithmic movements: BTC going from $57K to $1M right now is the exact same % increase as going from $3.2k in March 2020 was to the current price of 58K. So if you think 1 million is ridiculous, realize the move happened already. History tends to repeat itself.
    Martina, Sean Waters, zohar and 4 others like this.
  6. Jack Kruse

    Jack Kruse Administrator

    Nature is a decentralized energy network and so is Bitcoin’s monetary network. This means there are things in the BTC ecosystem that work like the relationship between predator and prey. It is your job to see and understand this. Why does this idea persist? The algorithm that created bitcoin is really an algorithm of time and time can be stretched and dilated. The difficulty adjustment mimics sunlight in Nature and this illuminates that timing matters a lot in the coupled system. This doesn’t mean that buy and HODL aren't valid. It says that for investors focused on managing risk, timing really matters. In this way, BTC mimics the Leptin Rx. https://www.patreon.com/posts/48819333
    GavinH, caroline and John Schumacher like this.
  7. Jack Kruse

    Jack Kruse Administrator

    Bitcoin performance since the halving : We have 92 days left in the honey pot

    BTC +566% S&P500 +35.7%
    Gold +2.58%

    Considering 2020 was the best thesis for gold ever in human history there is no justification for owning it anymore.

    GavinH, JanSz and John Schumacher like this.
  8. Jack Kruse

    Jack Kruse Administrator

    TIME and the DIFFICULTY ADJUSTMENT ARE the brilliance buried in the BTC algorithm.

    As Einstein has shown us, time is not a static thing. There is no such thing as a universal time we could rely upon. Time is relative, and simultaneity is nonexistent. This fact alone makes all timestamps — especially across large distances — inherently unreliable, even without adversarial actors. (This is why timestamps of GPS satellites have to be adjusted constantly, by the way.)

    For Bitcoin, the fact that our human timestamps are imprecise doesn’t matter too much. It also doesn’t matter that we have no absolute reference frame in the first place. They only have to be precise enough to calculate a somewhat reliable average across 2016 blocks. To guarantee that, a block’s “meatspace” timestamp is only accepted if it fulfills two criteria:

    1. The timestamp has to be greater than the median timestamp of the previous 11 blocks.
    2. The timestamp has to be less than the network-adjusted time plus two hours. (The “network-adjusted time” is simply the median of the timestamps returned by all nodes connected to you.)
    In other words, the difficulty-adjustment is about keeping a constant time, not a constant level of security, difficulty, or energy expenditure. This is ingenious because good money has to be costly in time, not energy. Linking money to energy alone is not sufficient to produce absolute scarcity since every improvement in energy generation would allow us to create more money. Time is the only thing we will never be able to make more of. It is The Ultimate Resource, as Julian Simon points out. This makes Bitcoin the ultimate form of money because its issuance is directly linked to the ultimate resource of our universe: time.
  9. Jack Kruse

    Jack Kruse Administrator

    What is the vital sign for Time in the BTC ecosystem I use?

    1. Hashrate
    2. The Reserve Risk is defined as price/HODL Bank. This vital sign is used to assess the confidence of long-term holders relative to the price of the native coin at any given point in time.
    3. If the Reserve Risk is still relatively low compared to previous peaks, it implies that Bitcoin is not at risk of nearing a macro top in this bull run. Currently, the Reserve Risk of Bitcoin is at half the level seen in 2013, 2014, and 2017, when the price of Bitcoin crashed by well over 50% and entered a bear market.

    Time in physics is relative and thought to be created and acts as emergent phenomena due to the collection of how the physical forces operate at different scales. The difficulty adjustment is the emergent phenomena in the BTC algorithm that causes time to be hidden, but the effect of time affects the outcome. The cause of time is hidden, but the result is known.
    John Schumacher, caroline and JanSz like this.
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