The Pomp Podcast - #777 The Bitcoin Ecosystem Report w/ Yassine Elmandjra

Episode Date: January 10, 2022

Yassine Elmandjra is an Analyst at Ark Investment who heads up their Crypto research. They recently released a report about on-chain metrics and the Bitcoin ecosystem. In this conversation, we break down the paper and discuss on-chain metrics, why Ark believes this data is so important, and how you can use this information to educate yourself. ======================= Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp ======================= Circle is a global financial technology firm that enables businesses of all sizes to harness the power of stablecoins and public blockchains for payments, commerce and financial applications worldwide. Circle is also a principal developer of USD Coin (USDC), the fastest growing, fully reserved and regulated dollar stablecoin in the world. The free Circle Account and suite of platform API services bridge the gap between traditional payments and crypto for trading, DeFi, and NFT marketplaces. Create seamless, user-friendly, mainstream customer experiences with crypto-native infrastructure under the hood with Circle. Learn more at circle.com.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Yasin Elmandra is an analyst at ARK Invest who heads up their crypto research. ARK Invest and Yasin recently authored a brand new paper in concert with David Puel about on-chain metrics in the Bitcoin ecosystem. In this conversation, we talk about that paper, we talk about on-chain metrics, why it's so important, why ARK believes that this is some of the most important data in the entire financial system, and how you at home can start to learn to use it. I really enjoyed this conversation with Yasin, and I hope you do as well. Before we get

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Again, circle.com slash Pomp and book a meeting with one of their experts. Big fan of Circle and I think you will be as well. All right, let's get in this episode. I hope you guys enjoyed this one. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions

and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Let's just jump right into some of the stuff from the report. We have your, you know, kind of, I guess, like hierarchical layer overview, if you will. And what you talk about in the report is that you think that market participants can source on-chain data to analyze Bitcoin in more depth than is possible with any other traditional asset. So before we get into

this kind of hierarchy, talk a little bit about that specific sentence, right? So market participants can source on-chain data to analyze Bitcoin in more depth than is possible with any other traditional asset. Sounds like a big statement. I tend to agree with you, but elaborate a little bit. It absolutely is, but I believe it is true. And I think that goes back to the nature of, you know, what these assets represent and what they are at their core. So first off, when you think about an institutional investor's approach to gaining exposure to different asset classes, they always want some sort of fundamental framework or some sort of framework to analyze fundamentals. Now, the interesting thing is that Bitcoin doesn't really fit in the framework of

traditional asset classes. And so because it doesn't, they automatically assume that it's impossible to analyze fundamentals because it doesn't have any fundamentals. When in reality, if you look at what they are at their core right these public blockchains they're they're auditable they're open they're transparent software which means that today anyone can pretty much download a bitcoin client install a node and extract insightful network data with pretty much no barrier century the analogy that we give in the piece is that you know in the same way that a government statistical agency might publish data about a country's population or economy or a public company is going to publish quarterly financial statements disclosing growth rates and

earnings bitcoin and by extension public blockchains provide this real-time global ledger that publishes data about the network's activity and inter-economics and so anyone at any time can go and really understand you know buyer and seller behavior long-term fundamentals and and see you know where where uh where the market is at any given time all right so let's look at this uh kind of, I'll call it a hierarchical structure that you have here. You basically have broken on-chain data into three layers, if you will. So you have layer one, network health, layer two, buyer and seller behavior, and then layer three, asset valuation. And on the right side, you kind of have who each one of those layers are. So walk us through kind of how you've thought about this

and why are you breaking down the various data kind of across this framework? Sure. So, you know, The public blockchain offers a wealth of data, some, you know, relevant depending on your on your time horizon than others. So we basically, you know, are organizing the type of data where the lower layers serve as building blocks for the higher layers. And ultimately, to your point, each of these layers kind of appeal to a different set of stakeholders, with the top layer being a subset of the bottom layers. So you can think of it almost like layer one is the most raw, the rawest form of data, and layer three is the most transformed form of data. And so going to layer one, it really just is the core of the network health and kind of assessing that Bitcoin is working as designed. So you can almost think of it as like the basic fact sheet of the network. It's not going to necessarily tell you where price is.

It's not going to tell you what holders are doing at any given time. But it's going to tell you that, you know, Bitcoin's monetary policy is predictable, that every 10 minutes you have a specific number of Bitcoin that are being issued, that the miners are working as designed, that transaction volume and active addresses, you know, are at specific levels. So it basically gives you the general state of the network. And so if you're a Bitcoin proponent or a Bitcoin believer or a Bitcoin holder, this layer one is going to say, OK, I'm checking the boxes and Bitcoin is working as designed. Now, a layer above that, it delves a little bit deeper. And that's and that's basically by by wallet address. So it's really unique here is that that the public blockchains, they offer two data points in every address on the Bitcoin ledger. The first is the number of coins located in each address.

So the volume and then the amount of time the coins have been each address. So that's time. And so if you if you kind of draw what that would look like, let's say in the equity markets, it would be the same thing as if, you know, anyone interested would be able to track the ownership of company shares by quantity, by holding period and by purchase sale and prices. So data in the middle layer really allows for you to understand what buyer and seller behavior looks like. So things like realized capitalization, I think, is a foundational metric that would fit in layer two, which is basically a proxy for the cost basis of holders. So that's something that's very informative, especially when you think about how Bitcoin derives value really based on supply and demand. It's a relatively nonproductive asset. And so value is going to accrue based on reservation demand.

And so knowing the cost basis of holders is really informative to and suggests, you know, whether or not the market is being controlled by longer term or shorter term holders. And then finally, the data in the top layer basically leverages the two lower layers and provides, you know, relative valuation metrics that might identify short to midterm inefficiencies in Bitcoin's price. So, you know, while we're long term focused, while I think that, you know, every Bitcoin holder should be long term focused, I also believe that on-chain data provides some really interesting insight that allows for you to identify inefficiencies in price in the short to midterm and effectively come up with these really compelling, you know, oscillators or signals, maybe similar to like an EV to EBITDA ratio in the public equity markets. And these basically leverage kind of, again, the bottom two layers. I'd say the most prominent of the metrics that I'm sure your audience is familiar with, if they have dabbled a little bit in on-chain, is something like the NBRD ratio, which basically is the market cap over the realized cap and tends to identify generational bottoms when the realized cap exceeds market cap for brief periods. the last time that that happened was during the COVID crash, which, which, you know, in hindsight was a generational bottom. Yeah. It's pretty incredible when you, when you kind of think through these three components. And I think that I don't want to go through the entire report because I really want people to go and read it for themselves. You know, it's 28 pages. It'd

probably be some of the best 28 pages you can read if you're into Bitcoin and a lot of this data. but I do want to dive into, if we go back to the bottom of the pyramid, kind of layer one, you've got a section in the report that says assessing the health of the Bitcoin network. And we have this table where you basically break down, okay, if we're going to assess the health of the Bitcoin network, there's kind of three ways that you cut it. You cut it by monetary integrity, you cut it by security and you cut it by usage. And so talk us through kind of why are these three pieces, the three kind of aspects or cuts that you look at when you evaluate that layer one of assessing the health of the Bitcoin network? Like why these three?

Sure. So I think it goes back to the core of what Bitcoin is as a, you know, non-sovereign monetary system. You know, when people talk about what Bitcoin's value proposition is, it's not, you know, all the bells and whistles that Bitcoin has to offer. It's the fact that it's really competing as a global-based money in a decentralized way. And so the paradigm or the mental model that needs to be adopted when analyzing the fundamentals of the Bitcoin network, I think should resemble how you'd analyze a monetary system. So first and foremost is around monetary integrity. I think the reason why Bitcoin distinguishes itself as a monetary asset relative to other public blockchains is the predictability in its monetary policy.

I believe that at least what Bitcoin is competing on isn't a monetary revolution, not a technological revolution. And as such, being able to not only verify your holdings at any given time, but then verify this total circulating supply is a fundamental feature in Bitcoin. And if it were to break, it would ultimately not bode well for its underlying fundamentals. Now, how does monetary integrity remain intact? Well, you need to have a secure and robust chain where the economic incentives are well aligned. And so, you know, when you think about specifically the dynamics between miners and, you know, and nodes and developers, users, you know, making sure that the network is being secured as designed is, again, a fundamental, it's fundamental to understanding the health of the network.

Uh, so, you know, on a weekly basis, we go through these on-chain metrics just because we, we manage around some of the volatility and, uh, and the most recent sort of metric on hash rate, where we've seen a full recovery. Well, if you don't count yesterday's, uh, drop off from the Kazakhstan internet shutdown, uh, since like basically China's migration or hash rate migration out of China. So the ability for Bitcoin to recover within six months, that hash rate levels and effectively put to bed that China controls the Bitcoin narrative is really important to understanding and having high conviction in long term fundamentals. And then finally, around usage, it's really thinking about the Bitcoin is being used as this global settlement network that active addresses are hovering between 800,000 to a million at any given time. That transaction volume this year, I think adjusted transaction volume, we've seen $13 trillion worth of volume settled, which exceeds now Visa's total transaction volume and is within an order of magnitude of the Fed wire.

So there's a lot of interesting and compelling data points that allows us to assess the long-term fundamentals, but that won't necessarily inform us on what price is going to do. And when you think about these kind of on-chain data points, obviously ARK is known for, one, disruptive technology, two, being very kind of research heavy, three, open sourcing a lot of this, which is right in line with this type of report. How do you guys think about using this data? Is it just so that it kind of informs kind of more macro thoughts around the asset? Is there specific trading that you can do off of it? Just how do you think about as an asset manager, obviously having this kind of really robust, transparent, near real time data set at your disposal? We use it extensively. And I alluded to this, but we actively manage Bitcoin and leverage the volatility. I think volatility is our friend. And, you know, we have kind of different areas of research that we focus on that basically, you know, informs us on what the market looks like at any given time. It obviously starts with kind of the macro backdrop of, OK, you know, Bitcoin is an extremely compelling asset to have exposure to in this and, you know, in this environment. But then when you kind of look at on a week to week basis, you know, we rely very heavily on on chain data, second and third layers to inform us on where we're at in the market. And we will trade around that based on based on what the market is telling us. So a combination of on-chain data and then general market structure, liquidity, and sentiment.

So things like, you know, funding rates and just the perpetual swap futures market. And then we'll put like a little cherry on top of where we'll, you know, corroborate with just traditional technical analysis. But that's really the least of our priorities. I think what's interesting is that on-chain data has really kind of replaced the traditional TA. And in fact, a TA is what on-chain data or on-chain is what TA aspires to be, but is not. And so I think that, you know, increasingly people are going to start to rely on on-chain data to inform them of sort of the midterm sentiment. And over time, you know, some of the metrics that we rely on today are likely going to be arbitraged away. Uh, but it's an active emerging field where we're constantly iterating on, you know, basically

figuring out ways to generate alpha. Got it. And in terms of, um, as a traditional asset manager, I guess one of the things that, uh, to me, uh, really catches my attention. Once you have this data set and you don't have it with the legacy assets, will we see asset managers either one maybe not demand the the data points right because you know let's use public equities versus bitcoin as kind of an easy example so bitcoin i have transparent ledger near real time i can do a bunch of different stuff with the data uh but it's kind of there for me to use

at the same time with public equities i basically get every quarter an update the data that they provide is what they provide and you get some of this you know i always love in the like uh quarterly report something like hey we're not going to break out uh amazon's not going to break out their revenue for aws this quarter or maybe they do break it out right so like there's some what do we want to release what do we not want to release on a product by product basis or anything like that um and then obviously inside some of these companies we don't know things like the volume of transactions they may just tell us uh kind of revenue but not uh anything else so from that standpoint um how do you think about traditional asset managers as they start to see the benefits

of this? And will there be changes to the legacy assets or legacy markets because of it once they realize that this is valuable? You bring up a really good point. And I think that it probably is not going to come from the asset managers themselves or the companies themselves. It's going to come from the investors who are going to demand and expect transparency regardless of the asset class. I think what crypto and Bitcoin is providing is almost, it's adding pressure to the status quo of, look, if you're not going to abide by the standards that we expect you to abide by, then we're going to leave. There are other options out there. So I could very well see a scenario where maybe private companies start disclosing and have like this transparent

dashboard, or public companies maybe have a way to disclose their numbers in more granularity than they do today or at a higher frequency than they do today. And it almost reminds me of what Bitcoin is doing to like, you know, the central bank regimes of at the very least, if Bitcoin doesn't replace them, it figures out a way to discipline them. So there is a there is a we are going to discipline monetary authorities. We are going to discipline, you know, traditional assets and transparency is at the core of all of this.

So I think that you bring up a really good point. And then when you start to think about Bitcoin itself, if we kind of just zoom out a little bit, how has that been changing in the kind of the institutional asset management world? You know, you guys talk to tons and tons of your peers, some folks that maybe you think of yourself as competitive to some that you think is complimentary. But what's the conversation been like throughout 2021 going into this new year around Bitcoin as, you know, you guys start to publish great reports like this and really starts to showcase like, hey, this can be evaluated using frameworks that they would be familiar with, or at least they could wrap their heads around. Yeah, I'd say that the narrative has definitely evolved in the right direction. You know, I think the question goes from should I gain exposure to Bitcoin, which was, you know, maybe the 2018, 2019 era to how do I gain exposure, which is like the 2020 era to now how do I gain the most efficient exposure, which is what we're seeing. I think we're starting to see Bitcoin for the institutional investor be much less of a contrarian bet as well. It's hard now to dismiss it.

It's gone from this weird internet money Ponzi scheme to a potential threat to monetary authorities. So I think at the very least, people are going to allocate just in case. By extension, we start to see more interest in assets beyond Bitcoin. Just, you know, basic human psychology says, OK, if I miss the Bitcoin vote, you know, what do I do to make sure I don't miss the others? So I'd say that people are starting to recognize that gaining the most efficient exposure to Bitcoin might require some sort of active management strategy in which, you know, you leverage all of this on chain data to to to make sure that, you know, if you see a 65K top that you can do something about it. You know, I think a lot of people in the 2017, 2018 cycle were really happy to see Bitcoin go from 3K to 20K, but it then went back from 20K down to 3K. And a lot of people just held all the way down. So, you know, if there's a way

to kind of manage around that volatility while remaining long-term focused, I think that's the sweet spot yeah joe john what questions you guys have for you seen you seen hey how are you doing thanks for coming on uh so my question would just be around kind of what the average long-term holders should be looking at so i think a lot of people that watch this show some of them are certainly interested in uh some of these charts and all of this metrics and on-chain stuff for sure but then there's a portion of people who just hold bitcoin right and they believe in the long-term value of it and don't want to check these things every day maybe don't even check the price but once or twice a week or maybe even less than that what should they be looking at is

it where they just look at the security the hash rate or the addresses every once in a while or should they be do something more in your eyes i i honestly think that the second layer is core to investors who are really interested in you know bitcoin as uh as a long-term holder but that doesn't that don't necessarily you know want to trade around it or you know think about it on a on a month-to-month basis uh but also like you know want something a little bit more than okay bitcoin's monetary policy is predictable um so things like understanding that the holding behavior is becoming longer term focused is is a really easy way to you know add conviction to um you know your your bitcoin holding so something like something as simple as like

looking at hodl waves for example which is basically just um you know uh taking the age bands of bitcoin circulating supply and showing basically how much what percentage of bitcoin has been held by you know what group of holders um over a specific time frame and you can basically you can you can see versus the 2017 market cycle just how much bitcoin's holder base has matured uh and so you know a lot of people like to use these four-year market cycles and take you know historical uh kind of behavior and say okay well what we saw in 2017 is probably what we're going to see in 2021 i think one of the biggest divergences that we've seen relative to 2017 is that the holder base is much longer term focus today than they were four years ago

um so i i would say that that would be the biggest thing i'd pay attention to is you know where where the money is and who's holding it and how much conviction they have. And so even when you see a massive drawdown, so for instance, the 2020 COVID, where we draw down from like 9K to 3K in the span of a week, if you look at who is actually controlling that sell-off, they were all short-term holders. They were all holders that were holding Bitcoin for fewer than six months. And so as investors, when we're looking at that, it's like, OK, if my long term holders are holding strong here and these are all kind of weak holders, you know, I'm either going to add to my position and I'm definitely not going to sell. And, you know, I can I can go to sleep in peace knowing that that the fundamentals remain intact.

John, what questions you got? Asim, how do you think about Bitcoin as an asset in the macro environment? right? So it currently sits around $1 trillion asset just below. Does it have to take capital from other places? How do you think about all that? Yeah, I mean, I think the beautiful thing about Bitcoin's potential market opportunity is that all the use cases are additive, right? So you have a fixed 21 million supply, but for every Bitcoin that's being used as digital gold, that Bitcoin can't be used as like an insurance policy against arbitrary asset seizure. And for every Bitcoin that's being used again as an insurance policy can be used as a remittance

asset. So I think that what we're starting to see is questions on the dynamics relative to inflation. Some people are saying that Bitcoin is going to be good in the face of all this inflation, but others are expecting that we might see a surprise and go through a deflationary environment catalyzed by technology, in which case, where does Bitcoin stand there? I'd say that it really doesn't matter because we're starting to see that people are stacking their stats in different ways. We have a big ideas report coming out in a few weeks, and you'll see how we size the opportunity. We have basically eight different use cases that we've sized, everything from Bitcoin being an economic settlement network to Bitcoin being digital gold

to Bitcoin being a corporate treasury reserve to Bitcoin being a national treasury reserve. And so that's kind of the beautiful thing about this is I think there's an arms race to find a scarce, reliable, and now decentralized asset. And Bitcoin will be the beneficiary of that really regardless of the environment. Yeah. See, one of my other questions for you is, how do you think about like el salvador right it's kind of this like it's not really macro it's not really uh on-chain data related but it is definitely an external shock that maybe is on the opposite end of the spectrum as like the china mining you know migration ban whatever you want to call it so i look at those two things it's like one is obviously more positive one is

more negative uh but they're these like almost um industry developments if you will uh do you guys try to wrap your heads around that or do you try to stick to just hey is this a risk asset or not what's its relationship to like interest rates macro and then what's the on-chain data telling us in terms of like trading like how do you think about those maybe more industry development stuff yeah i think the el salvador news is is fundamental to to understanding the trajectory of of bitcoin uh and points to some of the the game theory at play amongst nation states Right. Bitcoin is borderless. It is neutral. It is apolitical. And there is an understanding that users of Bitcoin aren't really segmented by country or by IP address or by email or by name. It's by private keys. And so when something like a country like El Salvador decides to adopt it as legal tender, it's a huge statement.

And I think that will end up catalyzing a massive shift specifically in emerging markets to take Bitcoin a little bit more seriously and effectively cut dependencies on either their own fiat currency or on the U.S. You know, when you look at the evolution of El Salvador, they were able to onboard, you know, three plus million users to the Chivo wallet, which in comparison to traditional bank accounts in El Salvador is almost twice that. So the 1.9 million traditional bank accounts versus the three plus million achiever wallet users goes to show just how paradigm shifting Bitcoin is as an alternative to traditional banking. I definitely think that we're going to see more momentum from emerging markets to at the very least, you know, you know, promote it and advocate for it, if not outright adopted as legal tender or allocated into a central bank balance sheet. Yeah, makes sense. And then I guess, one of the other things that we saw El Salvador is doing some of this, we've seen some other people tried in the public markets is they're basically taking Bitcoin as an asset, and they're incorporating it into other financial instruments. So they're doing kind of Bitcoin backed bonds, where they're an issue this kind of sovereign bond, then they

take a portion of it, they're going to go buy Bitcoin, the other portion of it, they'll go kind of invest in infrastructure. We've seen some people, I don't know, to maybe varying degrees of success, say, look, we're going to have an instrument that has 80, 90% of a traditional asset and, you know, 10, 20% of Bitcoin. Do you see that becoming a more popular narrative maybe in things like fixed income where they try to juice returns with kind of a small, almost hedged allocation? Or is that something that, you know, it's cute, but it is unlikely to really find an audience in the institutional world that you guys deal with? No, I do think that there is definitely a case to be made to have that diversified exposure in these more traditional instruments,

especially given, I think, in the next five, 10 years, we're going to still see Bitcoin uncorrelated to traditional asset classes over longer term time horizons. And so it's almost like a barbell strategy of, I'm going to just do this Bitcoin thing and then maybe have a little bit of fixed income. I think increasingly people are starting to, to realize that, but then ultimately we'll, we'll just want to have, they're going to effectively bite the bullet and say, you know, I'm just going to have an exclusive slice in my portfolio dedicated to all things Bitcoin. Got it. Um, where can we send people to find you on the internet or, uh, or, or find the report? I just dropped a link to the report into the chat here, but where, uh, where should we

send people to find you on the internet? Appreciate it. Yeah. You can find me on Twitter at You Seen ARK. You can go to our website, check out the report at ark-invest.com. And really happy to be here. And thank you so much for having me. And thanks for pushing the frontier on all things on-chain. I've watched your shows and your podcasts, obviously. And I think that your contribution to putting this on the map does not go unnoticed. So really appreciate it. I'm just trying to figure out how the hell I keep up with you, David, Will, Dylan, all these people who, uh, who are on the frontier of the on-chain metrics because, uh, you guys are doing a fantastic job. So keep up the great work. If you don't follow Yasin on Twitter, go follow

them. And, uh, we'll definitely bring you back as, uh, as this all develops, my friend. Awesome. Thank you guys. Good to see the trio in action too. All right. Thanks buddy.