WBD550 Audio Transcription
Has the Bitcoin Price Bottomed Out? With The Rational Root
Release date: Monday 5th September
Note: the following is a transcription of my interview with The Rational Root. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
The Rational Root is a Bitcoin on-chain & cycle analyst and in this interview, we discuss developing & using Bitcoin price models. We look in detail specifically at his Bitcoin Spiral Models, Bitcoin hodl price models and Bitcoin halving & cycle charts.
“A model is just a way to try to predict something, but this got so popular that people just started believing in it completely, and stopped being rational about it. You always have to be a bit sceptical about models that predict the future, they can be wrong.”
— Rational Root
Interview Transcription
Peter McCormack: Welcome to the UK, Mr Carrotman. How are you?
Rational Root: Thank you. Yeah, it's a pleasure to be here in Bedford.
Peter McCormack: It's a pleasure to have you here in Bedford, and we've got a lot to talk about.
Rational Root: I think so.
Peter McCormack: So, can you predict the market?
Rational Root: No!
Peter McCormack: Listen, lots of stuff's been happening, lots of charts, lots of models over the last few years. I follow some on-chain people and it's got to the point where I'm like, "You know what, I'm just going to ignore this shit, I'm just going to buy Bitcoin and forget about it". It doesn't seem like anyone knows what they're doing or sometimes they get a bit lucky, but then along comes Root and the first thing I saw of yours that really stood out to me was that circular chart; you know the one I'm on about?
Rational Root: The spiral chart, yeah.
Peter McCormack: The spiral chart; I said, "Okay, this actually makes sense".
Rational Root: Yeah, I like those charts the best, because it's kind of cool to try to visualise Bitcoin's data in a way that you don't really need a model to see where it's going, and I think the spiral chart is one of those charts that really shows this.
Peter McCormack: That's in your selection that you're going to take us though.
Rational Root: Yeah, we can look at some slides to guide the conversation, I guess. I put that chart in there, yeah; it's the first chart.
Peter McCormack: Yeah, we used to do this monthly show with Willy Woo, which was really super popular for obvious reasons, it was our biggest show ever. I think something like three or four of our top ten shows ever were Willy Woo shows.
Rational Root: They were really good.
Peter McCormack: They were great, and we are a numbers-based business, this is a business, it's a podcast but it's a business, so it's a numbers-based business. Sponsorship is based on downloads and we have to take all this equipment, these people around the world to make this show, so to walk away from a successful show like that is quite difficult; but at the end, you've got to focus on your product as well.
We couldn't do it in person, because Willy's not based in the UK or he doesn't travel much, and also, in some ways it was kind of like, "Are we just doing this for the numbers and how you source the information?" Willy was always really honest, like, "These are just models, etc", but we decided to get away from doing that. But, like I say, Mr Root, I do like your charts and I do like your work and it's great to connect with you.
Before we get into some of this, because I've got loads of questions, I know Danny has, how much can you tell us about you without telling us who you are and giving away -- because everyone watching right now, I don't know how we're going to do this, maybe we'll have a big carrot over your face, but how can we do it without doxing you?
Rational Root: Yeah, well, I can tell a little bit about myself, I suppose. I have a scientific background, always been an entrepreneur in life, and I did a lot of data analysis before, so I kind of rolled into the field naturally. Yeah, I started my Bitcoin journey in 2016, I actually got some computer science skills as well, like programming, and I know quite a bit about distributed systems. So, I got into Bitcoin actually because of hearing about the Byzantine generals problem, which was solved, and then that caught my attention.
I already luckily had the flexibility to work on the things I liked. So basically, from day one that I found about Bitcoin, I started working on that full time; I started building some tools to analyse Bitcoin's blockchain data and I started out with my own node, of course, and looking at the raw data itself at first, building some indicators. I was building out a bit of a platform for strategies and that, it allowed me to create these cool charts, and I started sharing some of those on Twitter and that got --
Peter McCormack: Very popular.
Rational Root: -- well received by the Bitcoin community which, yeah, it's nice.
Peter McCormack: So, I'm going to talk about one particular model, not yours, but it was from one of your compatriots, should we say. The stock-to-flow was a very popular model.
Rational Root: Yeah.
Peter McCormack: I thought it was cool, believed it because lots of people I trusted believed it, it kind of made sense, like it mapped logically to the Bitcoin cycles. I think Cory was one of the first people to come out and say, "Not sure about this". Where were you with stock-to-flow? Did you originally think this is a useful chart, it's a useful model?
Rational Root: Yeah, I mean, I like creative things as well, so from a creative perspective, I thought it was a really cool idea to look at the data in that way, and some of the critique on the stock-to-flow is definitely valid and so, yeah, you had to be cautious with it. I had some people in my circles that were early on kind of sceptical about it, but I do like to model from this creative perspective and obviously, it's quite a bit below the model value and so people stop believing, obviously.
Yeah, it's a pity in a way that it got so popular, because it's just a model. A model is just a way to try to predict something, but this got so popular that people just started believing in it completely and stopped being rational about it, right. So, yeah, you always have to be a bit sceptical about models that predict the future; they can be wrong.
Peter McCormack: Is there any possibility that, because the model became so popular, everyone was following it, well not everyone, but a lot of people following it, a lot of people perhaps taking positions thinking, "Well, this means Bitcoin's going to go somewhere between $100,000 and $200,000 because the model says so, the model's worked before", and then whales watched this and observed this and said, "You know, I'm going to countertrade this"?
Rational Root: Well, I don't believe so that intentionally they were countertrading that. I mean, there might be certainly some out there that, you know, it happens. I actually will go into it with some so my charts, because I made a model myself as well, it's called the HODL Model, we'll go into some of these things, these concepts. It's also a bit about Bitcoin's scarcity and it also shows perhaps where the stock-to-flow model went wrong, in a way. So, I think it's an interesting perspective, but maybe it's easier to explain with some of the charts if we put them up.
Peter McCormack: All right, well we'll go through the charts, but just one question before we do go into that, I do want to know, what's your personal Bitcoin thesis? What's your conviction behind it; is it purely as a tool to trade; do you see it as a human rights tool?
Rational Root: Yeah, I know, I believe that the financial system, the current financial system is, you know --
Peter McCormack: Fucked?
Peter McCormack: Yeah, pretty much, and so we're going to transition into Bitcoin and it's either this dystopian future where we have a WeChat, but then a western version which we're going to use here, or it's going to be like freedom money, which is Bitcoin. So, I do believe in Bitcoin and hyperbitcoinisation, and it's hard to look at the timeframe on which is this going to play out. I mean, maybe it's 5 to 10 years, it could also still be 20 years, we'll have to see, it depends on how far we get in each cycle.
Peter McCormack: Awesome, all right, Danny?
Danny Knowles: Shall we pull the slides up?
Peter McCormack: Let's pull the slides up. Okay, so listen, if you're listening to this on the audio, we're obviously going to recommend you go and check the video out, the YouTube, because we're going to be using a lot of charts here. At the same time, I will do my best to try and explain what's going on, but we're going to start with the Bitcoin spiral based on halving. By the way, this is a chart you should definitely go and check out. I think this is the one that really stood out to me, realised like, "Okay, this guy's cool, we've got to talk to him". Do you want to explain what this chart does?
Rational Root: Yeah, so this one, well actually maybe I can say a bit about the history of this chart first. I was not the inventor of this chart by the way, so it actually started out with like a pendulum chart, like a pendulum was swinging and it was kind of drawing Bitcoin's price. Then some other account, also on Twitter I think, @clockwork_parts, they created some of the first polar charts, similar to this one, and I really loved that concept to explore Bitcoin cycles, because I think cycle theory is very interesting, and I try to make them cooler and more attractive and added some stuff to it.
So, in this particular chart, we're looking at the spiral chart based on the halving. So, the halving is initially the catalyst for each cycle, and so this one, basically each round in a circle, each rotation in a circle represents one halving. Then, the blue dots that you can see, those represent the days that we made all-time highs, or the blocks in this case, that we made all-time highs. So, one rotation is one halving, which is 210,000 blocks, which is about four years, a little less than four years in general.
Peter McCormack: Okay, and what is this chart? How is it useful for you? What does it tell you?
Rational Root: Yeah, the fact that you can just see that it's spiralling out, right, so it shows that with each halving, like Bitcoin's price in this chart, it's expanding, and so without any model, we can see the price has never crossed itself, so we can kind of see what is the bottom, in a way, through this chart.
Peter McCormack: But how does that work, because the prices have gone up to all-time highs and come back down?
Rational Root: Yeah.
Peter McCormack: Is it because it hasn't hit itself because it's based on time?
Rational Root: Yeah, this chart is based on block time, but if we switch to the next chart --
Peter McCormack: Oh, hold on a second, so what we're basically saying here is Bitcoin is volatile, but on a cycle basis, the price has gone lower than previous all-time highs, but on a cycle basis, it's never dipped below itself?
Rational Root: Yeah.
Peter McCormack: So, basically every four years, you're pretty safe.
Rational Root: Yeah, and that's because there's seasonality involved in Bitcoin. And that's why, if we go to the next chart, which is also the spiral chart, we continue with this, but I changed it now. So, this one is based on time, so instead of looking at the halvings, here we look at time, and the reason why that's useful is because, as humans, we think in human time, we don't think in block time.
Peter McCormack: Okay.
Rational Root: So, for market analysis in general, human time is better in my opinion. The thing that stands out here is that, in this chart, so if we take the four-year chart, so every rotation in a circle now represents four years, starting in 2009; we see now that all the blue dots, all the all-time highs, fall in the first quarter circle, you know, in the first quadrant.
Peter McCormack: Apart from the first couple of years.
Rational Root: Yeah, apart from really when Bitcoin -- in the early days, in 2009. But the last three cycles, all of those all-time highs fall in that first quarter, and why is that? Well, that is because of the cycle pattern that we have, which is kind of initialised by the halving, but seasonality tends to play a role as well. So, you see that mainly around Christmas time is when, every four years at least around Christmas, there has been this blowoff top and then a fierce correction.
Peter McCormack: Right, okay, and the interesting thing about this is that you can tell with the cycles, the gaps between them are starting to constrict, so it's taking a bit more effort for the price to rise. Is there a logarithmic version of this?
Rational Root: This is on a logarithmic scale, so you can see --
Peter McCormack: Oh, I can see, yeah, okay. So, it is starting to get tighter.
Rational Root: Each ring in this cycle is a time standard.
Peter McCormack: We don't want to make this too popular, because if we make this too popular…!
Rational Root: Yeah, who knows? Eventually the price might fall and cross below. I think that will happen at some point in the future, because with an increase in market cap, it becomes more difficult for the price to rise, and so there is a likelihood that at some point in the future, perhaps it will cross the previous cycle. Also, because cycles are shifting, so at least it's likely that they will shift in the future in some shape or form, so then it's more likely that the price might cross a previous cycle at some point.
Peter McCormack: So, we've got about two-and-a-half years of bullshit to go though. 2025, it's going to start getting interesting again.
Rational Root: Yeah.
Peter McCormack: I hate this chart now!
Rational Root: Yeah, so in this one we can look at the halving, so actually the green dots in the fourth quadrant, there you see some dark green bigger dots, those are the halvings. So, you can see that each rotation, they move a bit back, right, so that's because halving is usually a little less than four years. If we go to the next slide, so the bear market bottoms are marked, and you can see that they are usually in the south of the chart, so they also happen around the same period.
Peter McCormack: Sell, sell! Are you selling?
Rational Root: No.
Peter McCormack: Yeah, okay, this is really interesting.
Rational Root: Yeah, but this is the perspective over a four-year cycle and we'll get into some different perspectives. You can look at cycles in different ways, but indeed here it shows that usually, at the south, which we are kind of approaching, which would mean the end of the year is where we would potentially make a low, based on this chart.
Obviously, there are some differences this cycle, and that is because the high top was actually in April, so we kind of have been correcting. We made some higher highs in November and that again, I kind of blame on this seasonality. I think people, everyone, me included, we were expecting prices above $100,000 at least. So, it was kind of like this self-fulfilling prophecy that around Christmas, we were going to again see new all-time highs and it happened because of it, but it was actually not because there was any hype in the market, it was just because holders of Bitcoin, hodlers, they were just kind of believing that it would happen.
We managed to make a few all-time highs in November again, those last blue dots that you can see, and yeah, I think after we have been correcting. But one could argue, and I think it's actually more reasonable to argue, that we have been kind of correcting since April, since we had the China mining ban and all that stuff. So, now I added the blows, and here I coloured the cycles, so each cycle just has its own colour so you can differentiate a little bit better between them.
Peter McCormack: The first peak, the first all-time high.
Rational Root: Yeah, there are some quite interesting things. So, if we compare in this chart the peak of the 2013 cycle, 2013 was a double-top, right, so the first top of the 2013 cycle actually coincides exactly with the first peak of the April top that we had this cycle.
Peter McCormack: Oh, really?
Rational Root: Yeah, that is kind of incredible, you know, on this timescale. And the first all-time high we started making, after this whole summer correction that we had, was also exactly at the same moment in time. So, that shows how cycles are kind of --
Peter McCormack: Self-fulfilling prophecies.
Rational Root: Yeah.
Peter McCormack: Do you think part of that might be, you know there's that chart that shows the different kind of emotional states of markets, do you think that's just the next one's playing out? It doesn't matter whether it's Bitcoin or oil markets, it feels like every market seems to have that same kind of structure in price.
Rational Root: Yeah, it's human psychology, and in a way that's cool how Satoshi was able to record this human psychology on the blockchain, and actually this collective unconsciousness is recorded on the blockchain, so that's interesting.
Peter McCormack: Yeah.
Rational Root: In this one, so again we're looking at the spiral chart, but here I'm actually using some on-chain data to show. So, I used the short-term holder cost basis, which is the same as the short-term holder realised price. The realised price is the average purchase price of all Bitcoin, so the last price that has been paid for each transaction on the blockchain, and if you count those up, you get the realised price. The short-term holder realised price, or short-term holder cost basis, we actually look at that price but then only for the last five months, and so we get a more recent view.
We can use it to colour the price, so we go from dark red, which means heavy bear market, to dark green, which is then a heavy bull market. We can see that the darkest green is the colour we obviously have again in that first quadrant, with some sudden red corrections in the middle; those were the summer dip that we had and also, in the 2013 cycle, we had this mid-cycle dip. But all the dark red is basically in the second quadrant, which we are in right now.
Peter McCormack: But the bear markets seem to start a little bit earlier each time, based on this chart.
Rational Root: Yeah.
Peter McCormack: And same with the bull markets, the start of the bull markets.
Rational Root: Yeah, it's not always a perfect view, right. There are ways to look at the cycles, so you can look at them from the halving to halving, or you can look at them from previous all-time high to previous all-time high, or you can look at them from the bear market bottom or, in this case, we're looking at the four-year cycle starting at the start of each year.
So, there are different ways you can align them, but in this alignment, and I think it's a very good alignment to look at it this way, but indeed cycles are slowly shifting, and that's because the halving always has been the catalyst, and the halving is based on block time, and so it's a little less than four years, and that's why you kind of see this shift.
Peter McCormack: Yeah, but it implies therefore, by the end of the year, we could start getting back into bull territory.
Rational Root: Yeah, the south is the end of the year and, yeah, we could potentially make a bear market low there. Although if we look at on-chain data, and I think on-chain strength, on-chain is not ideal perhaps to predict what is coming, but it's very good at looking what is the current state of the market. We have seen true capitulation on this red dot, which is marked now at the south-east; we have seen real capitulation there.
So, it is likely that the bottom is in, but yeah, obviously nobody can predict the future, and actually I do expect some downside perhaps again later this year, and it might again this self-fulfilling prophecy that usually a bottom happened in the south and so perhaps it does again, or at least we'll make some low maybe, like price might go down a bit, but the next two years look pretty good.
Peter McCormack: Have some dry powder just in case.
Rational Root: Yeah.
Peter McCormack: Sorry, Danny, just go back a second. So, there has been quite a bit of criticism pointed at on-chain data and on-chain analysis. What parts do you think are valid and what are the most useful parts of on-chain data that you use?
Rational Root: Yeah, so as I said, on-chain is not ideal to predict where Bitcoin's price is going exactly, especially not on the short term, it's more like on the long term it does a bit better, but it's very good at looking at what is currently happening, like where are we kind of at? So, in that sense, it's very useful.
Yeah, so this is the last spiral chart that I wanted to show. So, instead of looking at Bitcoin's price, we can actually also plot Bitcoin's market cap, and why is that useful? Because we can compare it to, for example, other assets like in this chart, we included silver, gold and real estate. So again, yeah, I love this chart because --
Peter McCormack: I love this chart.
Rational Root: Yeah, without any model, right, it's just data that is shown, we can see where Bitcoin is going. And so this cycle, the past cycle, we were kind of trying to surpass silver's market cap but we kind of rejected off of it two times.
Peter McCormack: Did we get above it at all?
Rational Root: Maybe slightly at some point, I think.
Peter McCormack: Oh yeah, we got over $1 trillion, didn't we?
Rational Root: Yeah, we got over $1 trillion; yeah, I think silver is $1.2 trillion or $1.3 trillion. But I think we might have gotten over it for a short time, but barely; we kind of rejected off it.
Peter McCormack: I like this because it can be a rallying call for Bitcoin, it's like, "Come on, let's fucking take down silver".
Rational Root: Exactly, and gold next, right.
Peter McCormack: And then Peter Schiff!
Rational Root: Yeah, and then Peter Schiff is going! Yeah, I was actually thinking of making one of these charts with Peter Schiff's face inside it.
Peter McCormack: Well, we used to have him up on the board, we fired him, we've replaced him with Jerome Powell; he did a good year or two as our mascot.
Rational Root: Yeah, I always saw him up there.
Peter McCormack: Yeah, I think you should change the gold line to the Peter Schiff line! I love you, Peter. Very cool, this is my favourite one, okay, so the HODL Model.
Rational Root: Yeah, I think it's an interesting topic to get into. We can also talk a bit more about the differences between stock-to-flow. To give an introduction to what the HODL Model is about, we first look at a chart where I plotted the circulating supply, so we basically go from all the way back, 2009, to today which we have today 19 million coins in circulation, and so you can see just the issuance, the supply issuance of Bitcoin.
In that, you can see the illiquid supply, so that is coloured in blue, we can actually see the amount of coins that are relatively illiquid now. Maybe I should define what illiquid supply is, it's useful, and that's again the strength of on-chain, is that we can classify Bitcoin supply, we can put them in different buckets. So with supply, we can look at, for example, the age of coins, so we can say, "Oh, this is supply that belongs to short-term holders or to long-term holders"; that's one useful way of looking at it.
Another classification is to look at it in terms of spending behaviour, and that's actually what illiquid supply does. So, you can divide supply into highly liquid, liquid and illiquid supply, and in this case, what does that mean? So if I stack Bitcoin, imagine I DCA into some hardware wallet, and if I spent less than 25% of that Bitcoin, which I'm stacking, then I'm a relatively illiquid entity, so that's what illiquid supply means. So, you can still spend some of that, but it's just that the majority you will hold, so you're a hodler. If you spent more than 25%, you get into the liquid or highly liquid bucket.
So, why is this useful? Because, it's kind of like a proxy for hodling behaviour, right. There are different ways to look at hodling behaviour, so long-term holder supply is one, another one which will look more at the age of coins, but here we look at spending behaviour. So, the interesting thing and the trend that you can see is that obviously, Bitcoin has its own supply issuance schedule. Pre-halving 1, so when the block reward was 50 Bitcoin per block, we had about 7,500 Bitcoin per day that were added, and illiquid supply grew with about, let's round these numbers, 6,000 Bitcoin per day more or less.
Now, after the halving, obviously the block reward halved into 25 Bitcoin per block per 10 minutes, and that resulted in more or less an average of about 4,000 Bitcoin per day. Now, the illiquid supply grew then with 2,500 a day more or less. So, the supply issuance was actually always outpacing the illiquid supply growth, and that's because obviously, most of the supply of Bitcoin has been added in the last 13 years, so we're actually now already at, what is it, 90% or so of all supply, 19 million of the 21 million have been issued, so the next 2 million will be issued over the next 100 years.
So, in the second halving then, we said the supply issuance was still outpacing illiquid supply growth, and so we then had 2,000 Bitcoin a day on average new supply entering Bitcoin, but we only had about 1,000 Bitcoin per day with illiquid supply growing. The special thing about this halving is that we've started to outpace --
Peter McCormack: It flipped.
Rational Root: Yeah.
Peter McCormack: This is the real flippening.
Rational Root: This is a real flippening, yeah, this is a trend reversal. So, we now have been adding 900 Bitcoin a day more or less, but the illiquid supply has been growing by double that, so that's a very interesting trend reversal. I think it's kind of an underrated trend reversal that's not been talked about much.
Peter McCormack: Well, listen, if you're listening to this, you definitely need to go onto the YouTube and check this chart out, because what you're seeing is you're starting to see the gap between the two get closer, and if that continues over the next halving, that's going to create the market conditions -- because you know what's going to happen is, you can see the chart, the illiquid supply should continue to grow but the circulating supply is going to start to level out.
Rational Root: Exactly.
Peter McCormack: Yeah, interesting.
Rational Root: Illiquid supply will keep outpacing circulating supply, because eventually this was doomed to happen because --
Peter McCormack: Of course, yeah.
Rational Root: -- the circulating supply is halving every halving, so it was obvious that, also with Bitcoin being a store of value, which means most of the Bitcoin will be hodled, will be held in cold storage, so it's kind of obvious that illiquid supply will keep on growing with the store of value narrative.
So maybe then to get to the next chart, so what does the HODL Model do? So, the HODL Model actually tries to model this growth of illiquid supply, so it's a log growth curve and it actually has a high R-squared value of 98%. So you can see with the HODL Model, and it's called "the inflection point", is that. So, if we keep on this trend then we make -- in the bottom chart of these two charts which are shown here, you can actually see illiquid supply as a percentage of the total supply.
So, you can see that started out as more or less 100% illiquid, because when supply got added nothing got spent at the beginning, so it started out as 100%. Then it started dropping, but we made a low of illiquid supply around 70%, and since that we've been rising, so illiquid supply has been rising. So, that looks very bullish for the future of Bitcoin, because that is actually what Bitcoin scarcity, what the digital scarcity is about.
Danny Knowles: What's the dotted line on this chart?
Rational Root: So, the dotted line is the HODL Model.
Danny Knowles: Oh, okay.
Rational Root: So also in the bottom chart, that is actually the HODL Model mapped onto another perspective which is the illiquid supply as a percentage of the supply, and you can see that there, the HODL Model, it makes this low in the inflection point because that is where the trend reversal is starting to happen.
So, another way to look at it is, and maybe we can go then to the next chart, is the available supply for trade. So, instead of the illiquid supply, we're looking now at the liquid supply, so the actual supply that's available for trade.
Peter McCormack: Does that mean for trade generally, or that's on exchange being traded?
Rational Root: Yeah, we look at the blockchain, right. So, all Bitcoin is kind of seen as liquid, which is moving a lot, we can look at that. So you can see it, you can look at that and say, "This is liquid Bitcoin, so this Bitcoin is available for trading and for buying and for selling".
Danny Knowles: Does that assume that any Bitcoin transaction is for a trade transaction, like going to an exchange?
Peter McCormack: Yeah, that's a really good -- let me just add to that and see if Danny's thinking about it in the same way. Do you consider Bitcoin that is liquid because it's being spent as also available for trade, and therefore is every purchase really a trade? If someone goes onto my website and buys a Real Bedford jersey with Bitcoin, do you consider that a trade?
Danny Knowles: Or would that be part of the liquid supply?
Rational Root: That would then become part of the liquid supply, depending on the spending behaviour of that person. Now, imagine I'm stacking sats all the time, I'm DCAing, but I love Real Bedford FC and I want that shirt, so I decide --
Peter McCormack: Do you?
Rational Root: Yeah, I do.
Peter McCormack: Have you got it?
Rational Root: Not yet.
Peter McCormack: You need to increase that liquid supply!
Rational Root: So, if I buy a T-shirt online and I spend a little bit of that Bitcoin, if it's less than 25% of my total stack, then I'm still considered illiquid, so that doesn't change, but it looks in general at the spending behaviour. Now, if I'm an entity that spends a lot or I'm constantly trading, that is seen as a liquid entity.
Peter McCormack: Oh, I see. So, if there's a big stack there, you see a wallet address with a bunch of Bitcoin in it and I just buy one jersey, that whole stack you consider illiquid.
Rational Root: Yeah.
Peter McCormack: But, if I'm a trader with that big stack and I'm trading lots, you know at any point I might trade that.
Rational Root: Exactly.
Peter McCormack: Okay, that's interesting. But that is a point though, I'd never thought of it like that; every time you purchase something with Bitcoin, you're making a trade, you're making a trade between holding that Bitcoin and spending it. If you spend it on a jersey, which is priced in pounds because we do price them in pounds, that's no different to going on an exchange and selling Bitcoin.
Rational Root: Exactly. Yeah, well, Bitcoin on an exchange often is not seen on-chain.
Peter McCormack: Well, yeah, okay, that's how you classify which is -- okay, I see.
Rational Root: Well, we can differentiate between Bitcoin on exchanges, we know most of the exchange addresses and we can kind of see.
Peter McCormack: So, this HODL Model, this part of the chart, the available supply as a percentage of total supply, it's kind of telling you the same thing though, right?
Rational Root: Yeah, it's kind of the opposite, instead of looking at the illiquid supply, we're now actually looking at the liquid supply, yeah, so there's liquid and highly liquid, but here I combine them; I called them available supply. It's not a perfect representation of what is happening; we try to estimate, but it still shows interesting data.
Peter McCormack: But there's common sense logic to it as well.
Rational Root: Yeah, and so here you can see, in the 2013 cycle which it kind of starts, we can see that the available supply for trade was around 20%, it's started more or less around 20% of the total supply. So, in this chart, I account for growth of market cap, so that's why we look at it in percentages. But if we look at the second halving, so the catalyst basically for the 2017 cycle, we start out around 25% of the supply being available for trade.
So obviously, it goes down when we go into the bull market because some of that supply gets captured then, and you can see that in the bear market again, it rises, in the 2018/19 bear market it rises heavily actually, and so at the third halving, we start at 28% of the supply being available for trade. Then we go into the last bull market that we had, and we start going down.
Peter McCormack: This is a significant drop.
Rational Root: Yeah, it's really a significant drop, yeah, but the hype in the market was only on the first part of the drop, but the second part of the drop, and that's part of this trend reversal, as I was saying, since the third halving, something changed. What did change? Well, the halving cost at the supply issuance got lower and so the illiquid supply growth has been faster, and that's why the available supply has slowly been going down; that's the trend reversal, so that's what the HODL Model tries to map. So, this is very --
Peter McCormack: Very bullish.
Rational Root: Very bullish for the next cycle, very promising because what if we start the next halving, again, let's say at the current --
Peter McCormack: Well, go back a chart, Danny, it might be two charts. Yeah, go back one more. Okay, so the average circulating supply will be 450-ish, the average increase per day?
Rational Root: Yeah, after the fourth halving, yeah.
Peter McCormack: But if the average illiquid supply goes up…
Rational Root: Yeah, imagine it's just --
Peter McCormack: Stays the same.
Rational Root: -- stabilised, let's just say it's stabilised and it just stays around the same level currently, even then Bitcoin will get more scarce.
Peter McCormack: Yeah, but if it goes up as well, you've got compounding effects.
Rational Root: Yeah.
Peter McCormack: Danny, we're going to need more Bitcoin!
Danny Knowles: So here, this is people selling the bottom in 2018, right?
Rational Root: Yeah.
Peter McCormack: That was you, right, Danny?
Danny Knowles: Yeah, no actually I did all right in that time. But then we're not had anyone sell in the bottom this cycle?
Rational Root: Well, we had, it's just that the trend reversal, which is what I tried to explain in the first chart, so there's this trend reversal because supply issuance halves every halving so, at some time, illiquid supply is going to outpace supply issuance. That is, in my opinion, what happened in the third halving, and therefore available supply has been going down just because of this trend reversal.
Peter McCormack: Again, if you're listening, you've got to go and check these charts out. Can we link them in the show notes? Can we make these charts available?
Rational Root: Yeah.
Peter McCormack: Is the presentation online?
Rational Root: Yeah, or I can make a thread with all these charts maybe on Twitter and then we can link to that in the show notes.
Peter McCormack: Yeah, do that, I think people need to see this.
Rational Root: Yeah.
Peter McCormack: Okay, this stock-to-flow…
Rational Root: Yeah, so here I used the HODL Model to actually make a HODL Price Model, and now we get a bit into the stock-to-flow territory. I have not heavily promoted this model because of that reason, because I don't want it to be next stock-to-flow model in any sense or way, but there are some caveats with this model as well, and I will get into them.
So the interesting thing, and maybe also to differentiate between stock-to-flow, so stock-to-flow is a model based on scarcity but it's a model based on Bitcoin's total supply, but what's interesting about the HODL Model is that we actually look at the --
Peter McCormack: Daily.
Rational Root: -- available supply.
Peter McCormack: Yeah, available, yeah.
Rational Root: What did we see? We saw that the available supply for trade during the last bull market was the highest it had ever been, therefore it's kind of an explanation for also why maybe the last bull market might have been more disappointing than we expected, and also a reason why stock-to-flow has underperformed so much, because stock-to-flow is based on scarcity but it does not hold into account the actual available supply for trade. So in a way, the HODL Model tries to look at the available supply for trade.
Peter McCormack: Which is a much more accurate number to use. What is 1SD?
Rational Root: One standard deviation.
Peter McCormack: I mean, it literally bounces off that twice.
Rational Root: Yeah, so I published the first version of this chart six months ago and I have not even posted this update at all, ever on my Twitter, because I didn't want to create a next stock-to-flow model.
Peter McCormack: You are, and then you'll have like 1.2 million Twitter followers.
Rational Root: Exactly, and then the model will --
Danny Knowles: It's 1.8 now.
Peter McCormack: Is it 1.8?
Rational Root: There are some issues with this model as well, so therefore I don't want to really pump it.
Peter McCormack: Okay, for the non-mathematically analytically-minded, including myself, explain what a standard deviation is.
Rational Root: Yeah, so a standard deviation is, we look at the price history and we look at how far does it go away from the mean, so from the average price, so from the model line, in this case the dark blue line, which is the model line; and then we can look at what is the distance between the model and the actual price value?
So one standard deviation is a common term in data analytics where we can see how far is the distance. It updates; if there's new data available the average changes, and so that's what the standard deviation is.
Peter McCormack: So, we should approach $100,000 around the fourth halving?
Rational Root: According to this model, but I do want to say it's not my --
Peter McCormack: Come on, say it, you can have your disclaimer.
Rational Root: I'll definitely have a disclaimer, yeah. So, that's the next interesting thing to get into is like one of the more famous charts, which is a relatively conservative chart, is just the log growth curve; you have seen that many times I suppose.
Peter McCormack: Yeah.
Rational Root: So, the difference between this chart and the log growth curve chart is that this chart actually starts similar, so before the inflection point it actually starts just like a log growth curve chart, but then at the inflection point, it starts to slowly go up. So, actually, the rate of growth is the lowest at the inflection point for the model, and that's because this is an inversed S curve, so the adoption of Bitcoin goes in an inversed S curve, so we tend to go up there. Several reasons why this inversed S curve is a logical adoption pattern, one is because the dollar will eventually hyperinflate, so it's not so much because the Bitcoin's going to gain more value but --
Peter McCormack: Do you think that's inevitable?
Rational Root: Eventually, it's the destination of every fiat currency, right.
Peter McCormack: Yeah.
Rational Root: But another reason to make this inversed S curve to go up is scarcity, like digital scarcity, and that's also the problem with this chart and perhaps why it's too bullish and it's also one of the reasons why I have not really been promoting it much, is because a growing market cap is a reason why we would get a log growth curve, so there are actually forces that are at play.
So a growing market cap means basically that we need more money to move Bitcoin, if the Bitcoin price increases, you need more money to move the price each time. So that's a force, a downwards force, and that's what we have experienced since 2010, volatility has been decreasing kind of, but also we have diminishing returns. And that's because of this force, like a growing market cap, so we have this downward pressure on Bitcoin, because the market cap's growing, it's harder to move the price, so that's why we have less gains in each cycle.
Peter McCormack: But could this get more volatile again as the supply, the daily liquid supply, decreases yet there's an increase in demand?
Rational Root: So that's basically the hypothesis of the HODL Model, is that because scarcity will increase again, Bitcoin will again become more volatile in the future. And maybe a good analogy here is, imagine you are a creature and you only live one year and you start on 1 January of that year.
Peter McCormack: You'd go fucking mental!
Rational Root: Yeah.
Peter McCormack: You'd go partying, get pissed and then you're wrecked, you need to calm down and then, as you approach the end of your life, like, "Fuck it, I'm going to go for it again!"
Rational Root: Yeah, that's a good analogy as well, it's not the one I was going for but…
Peter McCormack: Oh, okay, that's what Danny was thinking about.
Rational Root: So, if you start on 1 January and then you start measuring the length of each day, then by the time you get to the summer, you've kind of made this theory, days are lengthening, so we have diminishing returns, days are lengthening because it's an observable pattern, and that's looking at Bitcoin's price history practically from the third halving and back. If you look back, you could look at it as this year or this half a year to six months, the past six months we have lengthening days. But then suddenly you get to the summer and you get to the longest day and we get this reversal, Bitcoin's available supply is decreasing, suddenly this trend reversal that we just talked about in the HODL Model, and so suddenly days are shortening.
So, the problem with the log growth curve, like this model, which obviously it's a conservative model, so in that way it's a better model, because if you're wrong to the upside it's not as bad as being wrong to the downside, right.
Peter McCormack: "Oh well, I'm only slightly richer", yeah. Your analogy's obviously better than mine.
Rational Root: Yeah.
Peter McCormack: "Yeah, shut up, dickhead!"
Rational Root: Yeah, so that's the idea with the HODL Price Model. So, we talked about these pressures, so the thing that's not accounted for in the log growth curve is actually digital scarcity increasing, right. So, if we get less available supply and more upside because of it, that's not accounted for in a normal log growth curve.
Now, the problem with this model is that we account for the digital scarcity going up but we don't account so much for the increase in market cap, so therefore perhaps it's too bullish and that's why I'm kind of careful with promoting --
Peter McCormack: I understand that as well, like this is very good data but you don't want to live and die by it.
Rational Root: No.
Peter McCormack: So, here's a model; if it works, test it.
Rational Root: I put this out as a hypothesis rather than a predictive model. The thing is I don't want to generate a next stock-to-flow, and Twitter is always black and white, as you know. Like, if I put this model out, and I would put it out a couple of times, people would say, "Yeah, Root said the price is going to $100,000 by the next halving", right.
Peter McCormack: That's the title in the next show!
Rational Root: Exactly! So, the problem there is that this is just a hypothesis, this is one model; we never should live by one model only.
Peter McCormack: Well, my tip for you on that would be is, if you put out the model and it doesn't work or it fails, say, "The model's failed", don't try and keep breathing life into that model.
Rational Root: Yeah, for now it has kept up with the standard deviation and we've kind of bounced off it so that's kind of bullish, but I do think there's really this potential that it's perhaps too bullish in the sense that we don't account enough for the growing market cap. So, perhaps the best model out there --
Peter McCormack: I mean, hold on, because you're saying by 2028, worst-case scenario, that looks about $250,000; best case, we're over $1 million, maybe $1.1 million.
Rational Root: Yeah, I don't know, if available supply keeps shrinking, perhaps. I'm not saying it will happen, but we do see a trend reversal.
Peter McCormack: These charts also miss purchasing power of those dollars.
Rational Root: Yeah. So, the purchasing power of the dollar is one reason also why we would go up faster, right, so that is actually one of the forces as well which kind of helps this model give reasonable predictions. So, there are two forces to go up: one is just inflation in the dollar, so the dollar value goes down and therefore the inversed S curve, it will go up steeper; the other one is digital scarcity, but the downwards pressure is the increase in market cap.
Peter McCormack: Danny, what's my new bet with HODL?
Danny Knowles: Do you have one?
Peter McCormack: Yeah, we did one on that last show, it was something like, he thought Bitcoin would go to $1 million within a decade.
Danny Knowles: Was that it? I can't remember.
Peter McCormack: Because I'm fucked if that's right.
Danny Knowles: Yeah, you are fucked!
Peter McCormack: It's your fault!
Danny Knowles: Presumably though, on the purchasing power of the dollar, this chart will only take into account previous inflation. It's not going to be taking into account any kind of hyperinflation, is it?
Rational Root: Well, so it's an asymmetric inversed S curve, which is quite difficult to explain. So, the first ten years, we curved to the flattest point, which is the inflection point, which is the third halving. Then, at that point, the growth rate of the model is the lowest, but the curve upwards is actually taking four times as long, and that is because of the trends. We tried to get the best fit possible, and it's actually based on the HODL Model. So, when is illiquid supply approaching this 100% of the total supply? That's in 2088 or something, the HODL Model predicts that is then approaching.
Peter McCormack: 2088? We'll be dead!
Rational Root: Probably.
Peter McCormack: It's fucking bullshit!
Danny Knowles: I might not be.
Peter McCormack: Dude, you will be. Hold on, 2088, you'll be like 95 or something. Hold on, when were you born?
Danny Knowles: I'm rich as fuck!
Peter McCormack: Yeah, but no one will care! You'll be that rich old dude that no one visits. This looks like that one where it compares shitcoins to Bitcoin. What is this? One halving, two halving, three halving.
Rational Root: No, well this is just the Bitcoin halvings plotted out in a chart.
Peter McCormack: Okay, yeah.
Rational Root: Now we get actually into some charts which talk a bit more about the recent situation; we can look at some from a cycle perspective and use some on-chain. So, here we look at the halvings, and the previous halvings here are scaled to the current halving, right.
Peter McCormack: Okay, so this implies volatility is decreasing that much.
Rational Root: Yeah, so this is the volatility decreasing, but yeah, the third halving was kind of this inflection point, so perhaps available supply was the highest; well that's the HODL Model theory, right. So the available supply was the highest for actually the past bull market, and the next bull market, it should be lower, so perhaps we can see more gains.
Here we can see, timewise, if you compare the cycles from the halving, these red dots which represent the lows that we made, the bottoms that we made, in this chart timewise, we're kind of aligned, right, so it's this different perspective. As I said, you can look from the halving, we can look from the tops, and it's often useful to look at different perspectives, because there's no one right way to look at Bitcoin cycles, right. It's just we should look at the state, and therefore on-chain is so interesting, because actually we can look at the state that we're in, and then maybe one representation or one perspective on a cycle is because of that more valid than another one.
So, I think it's reasonable to look, like we didn't have the gains here that we all hoped for, like prices above $100,000, but in terms of the rest, it kinds of looks like, yeah, diminishing returns, but we made the bottom more or less at the same stage, and so that kind of gives a bit more confidence that the bottom potentially might be in.
Peter McCormack: Interesting, very cool. This is a very bullish session.
Rational Root: So in this chart, we again look at the halving, so it's kind of the same to the previous chart, we look at the halvings, but they're not scaled, they're just shown on the log chart, so we can look at them. And here I include realised price, so the average purchase price of all Bitcoin. So we can see again also that, at these bottoms that we made, we all fell below realised price, so at more or less the exact moment in time in the cycle, if we count from the halving, so that again gives this confidence. We've been above it for a bit now, again, we might have the low in.
We can also see that I think, in 2013, it can stretch out quite a bit, so therefore I wouldn't be surprised if price goes relatively sideways for the next six months; one warning signal would definitely be falling again below realised price. If we fall again below realised price, that could mean that we perhaps might get another low, let's say.
Peter McCormack: Yeah, but we had that in 2013.
Rational Root: Yeah, there we kind of rejected off realised price, so we tried to get above it but we rejected off it two times, and only the third time we kind of managed to get above it.
Peter McCormack: But when you say, "Rejected it", that implies there's some trading against that, and really, it's more just --
Rational Root: Yeah, so the reason why you would reject off realised price is because realised price is the average purchase price of all Bitcoin. So, when we're below realised price, most people are at a loss, and so when we get to that level of realised price --
Peter McCormack: They sell off, yeah.
Rational Root: -- they sell to get their money back practically.
Peter McCormack: Yeah, that makes sense.
Rational Root: But we've been above it now, but the warning signal would be if we get below realised price, which I definitely think is possible. I think we're in this extreme value zone.
Peter McCormack: But we're haven't dipped that far. Like, the previous few cycles, we dipped below, quite significantly below realised price.
Rational Root: Yeah, we also didn't have the upside this time, right.
Peter McCormack: Yeah.
Rational Root: So, do we need to get to downside? I don't know, perhaps we do, but again an increase in market cap would also perhaps mean less volatility, right. So, we don't necessarily have to, but I do think this is really a value zone that we're in, which might still take another six months or so.
Peter McCormack: Accumulation zone.
Rational Root: In an accumulation zone, yeah, and perhaps one warning signal is going again below realised price. We might make another low, but if we don't, yeah --
Peter McCormack: Just buy the shit out of it.
Rational Root: If by the end of the year we manage to stay above realised price, then it becomes quite obvious that low was in, based on historic data, obviously.
So in this chart, and this is one of my favourites at the moment as well, so here we look at the cycles aligned by the all-time highs that we made, and I took the April all-time high for the last cycle, because that's when the hype was really in the market, and I'll show in another chart why that is again. So here we align the cycles from the all-time high again, and we scale them actually by realised price. Why is that useful? Well, realised price is the actual money that flows into Bitcoin, so it's quite a useful tool to scale by the money that flows into Bitcoin for each cycle, it gives a better representation than just the intraday volatility that we have in general in Bitcoin.
So, you can look at the pattern of the realised price, it kind of aligns. You can see that we went steeper into it in 2013 than in 2017 and, again, we went steeper in 2017 than the current cycle, and that is because of, again, these diminishing returns, right, this volatility decreasing. So, we scaled by realised price, but since then, since the drop when the top is in, realised price goes relatively sidewards for each cycle.
So, we can also really distinguish here between the distribution top and the blowoff tops very well. Yeah, so we've fallen below realised price, and here we can see that in 2017, or in the 2018/19 bear market and the 2014 bear market as well, we went to a price of around $13,000, but mainly we stayed around that price of $17,000. And in 2022, we actually touched $17,000, so we had this spike down to the $17,000 line. So, yeah, it would indicate that it's possible that this was it again, but we cannot rule out a drop to the $13,000 mark in the next 6 months or so; it is possible, yeah.
Yeah, this is the on-chain, just a short-term holder supply. So here we look at how much supply belongs to short-term holders, so it's again this classification of supply, and we can see these spikes within these bull markets where you can see the peak also, like short-term holder supply is kind of peaking when it makes it top in each cycle.
I use this as a proxy for hype, like it's really kind of one of the better ways to measure how much hype there is in the market. We can see for the current cycle that in the April top, we had a lot of hype, there was this huge spike in short-term holder supply; whereas for the actual all-time high that we had in November, it was based on long-term holder behaviour, short-term holders were not really involved, and so that's why that we've kind of been correcting since April --
Peter McCormack: Interesting.
Rational Root: -- which would again imply that it's more likely that the bottom is in, because we have been correcting actually for quite a long time. We had, coincidentally, this higher high or this new all-time high which barely surpassed the all-time high.
Peter McCormack: But if you look, each one of those highs, it's got like a little child mountain next to it, so we could do the same again.
Rational Root: Yeah, we might do the same again, we might go down, and that's why I think sidewards price behaviour is quite obvious, but you can also see that even though we went down, the low was already in.
Peter McCormack: Okay, yeah, I see, I see it's a different thing, yeah.
Rational Root: So, who knows, over the next six months, we might see, you know, another rally and then a dump again.
Peter McCormack: A test pump.
Rational Root: Yeah, a test pump, yeah, exactly. Yeah, these are some bottom indicators I used. This is actually based on the short-term holder cost basis again, which is the same as the short-term holder realised price, so the average purchase price of short-term holders; that's the green line. Then we have some bands that we can draw from that which I used this floorplan to kind of see how low can the Bitcoin price drop.
Obviously, these bands kind of fluctuate with the price, they're like moving averages in a way. But you can see that we bounced off this floor, and it's only during bear markets or the corona crash that we had that we really touched this floor band, and we also did that this time. So, yeah, this floor has held up very well over actually Bitcoin's whole history; only in 2013 and that spike down that we had in the bear market, we went like two days below it or something, but for the rest we have only touched this floor.
Yeah, and this is the last chart actually, here I show realised losses. So again, to show the bottom that we had in June 2018, the $17,000 that we touched, that in terms of realised losses, it was truly like this capitulation event.
Peter McCormack: Right, okay, panic sellers.
Rational Root: Yeah, well and forced sellers because of liquidations.
Peter McCormack: Oh, of course, yeah.
Rational Root: So, also in the 2018 bear market, we actually had less realised losses than in the last event, and these events, they don't happen often, which is again showing that it's quite likely that the bottom might be in, or we would have to see another such event. But, you know, there can always be a catalyst for such an event, I don't know, macro circumstances don't look that great, so things can still escalate; but it is quite unlikely for these things to happen, and so, yeah, we've seen it, so it's a good chance that the bottom is in.
Peter McCormack: Wow! So things are bullish, bottom's in, we're going to $100,000, thanks, Root, go and buy more Bitcoin.
Rational Root: Yeah, well I tried to be conservative, but…
Peter McCormack: How do you personally use these charts? Do you actually use it to give yourself ideas about when you should buy and accumulate, or do you just produce this out of interest?
Rational Root: Well, I really like to analyse the blockchain also, just because I like the fact that there's human psychology that's involved in it and it's really cool to analyse these things. But I do trade, but on the longer term; as I said already, on-chain is not good. I'm not a day trader, but I like to trade the cycle, but yeah, I have a stack for hodling basically and I have a stack where I take a little more risk and do trade on a cycle basis.
Peter McCormack: What do you think, Danny?
Danny Knowles: $100,000's coming, Root said so!
Peter McCormack: Root says so! The title of the show will be, "We're definitely going to $100,000 before the end of year because Root said so, and if we don't, cancel that".
Rational Root: The HODL Model is the next stock-to-flow model.
Peter McCormack: Yeah, but do you know what, at least it comes with some kind of good analysis. It's almost like you've built upon stock-to-flow.
Rational Root: Well, yeah, it's looking at the trends obviously, Bitcoin's scarcity trends. I don't know, as I said, I'm very sceptical about this model as well, and I wouldn't take it too serious, because the increase in market cap is not maybe incorporated enough in that model, so it's perhaps too bullish because of it. But yeah, we'll see in the future.
Peter McCormack: I think it's personally important that we don't have this consistently performing cycle that it's easy to predict. I think the market needs to change, and I think that's what did happen last cycle, but I think that's useful. I don't like the herd mentality of following price, because I think that actually reks people, I think a lot of people probably got overleveraged in the last cycle and rekt themselves, I think almost certainly they did. I think people, hopefully with stuff like this, become a little bit more conservative, and hopefully, just stack a little more conservative for the longer term; the HODL Model says implicitly hodl.
Rational Root: Yeah.
Peter McCormack: You're rewarded if you do. You don't look at any shitcoins?
Rational Root: No, not much.
Peter McCormack: Good, good man.
Danny Knowles: How much attention do you pay to just macro stuff that's happening?
Rational Root: Yeah, I do follow it, but I'm not nearly as good as Lyn Alden or some of the others that are great at it that I follow and look up to. Macro became a lot more important, especially this cycle, but I never had a lot of knowledge about macro before this cycle even, so I've been catching up on it and, yeah, I don't consider myself good to give advice on that at all.
Peter McCormack: Well, we had Steven McClurg on and he's made some very good predictions about what will happen with the price based on his understanding of what he thinks the Fed will do, and there seems to be a direct link with that. Again, it's another thing I don't like; I don't like the Bitcoin price being linked to Fed decisions. I understand why it is, but I think we should be decoupling from that.
Rational Root: Yeah, we will decouple at some point, it's just that we're now in that phase where we are correlated with the stock market. I mean, in previous cycles, we were not correlated with the stock market, or not as much, and Bitcoin was not seen as like a proper asset yet to allocate to. Now we are at that phase where just a general investor will also allocate some portion of their portfolio to Bitcoin; that's why we're now correlated to the stock market. The next step is kind of like decorrelate again to see Bitcoin what it's truly meant for. So, I think this is just a phase that we're in, but yeah, eventually we will decouple.
Peter McCormack: What else are you looking at now? Are there any other models you're looking or working on?
Rational Root: Well, I'm still building out my tool. Mainly what I try to do is also educate people on Bitcoin through my charts, and I do market analysis as well.
Peter McCormack: Well, listen, we will share this out in the show notes, tell people where to follow you.
Rational Root: Yeah, I'm @therationalroot on Twitter.
Peter McCormack: A big carrot. Really appreciate you coming in and doing this, this is super cool. I don't know about you, Danny, it's made me more bullish again.
Danny Knowles: I'm pretty bullish.
Rational Root: Thank you so much for having me.
Peter McCormack: Dude, you can come on this show whenever you like. You have a free pass to call me or Danny up and say, "I've got some shit I want to show you", because that is brilliant, so thank you for doing that. Anyone listening, yeah, this was one of those ones you really need to see, so go check out the YouTube video, go check out the show notes, check out the charts. Thank you, Root, that was amazing. Appreciate you, brother.
Rational Root: Thank you.
