Variant Tenants
In this article we wanted to outline our philosophy so to speak, the tenants we believe in and adhere to as we navigate investing in Bitcoin. Our three macro tenants we bullet point below…
- HODL most of your stack
- Trade a small amount responsibly (via Options)
- Education: Teach people about Bitcoin
Thats basically it, if you just want the main idea you can stop reading now. However, I want to take a second to explain each one of these briefly because they are thought out.
HODL
The first tenant is fairly simple. We all know that 98% of people will likely not beat a buy and hold strategy, that might look a lot more like 99% in Bitcoin. This point was articulated rather well by Sam Chepal on twitter, so rather than re-hashing what he already said we will repost his thread here.
It’s as simple as that, by missing just three days in the market this year you will have effectively underperformed by 30%. Now imagine being net short on those days.
Trade
So why trade at all? Well, for a couple reasons. One, because it happens to be fun and we like the options game. Two, when planned and executed correctly (unemotionally) there is money to be made in trading, and lastly for insurance purposes. In fact, we love options for many reason, among them the creativity involved in building the strategies themselves. Trying to find mis-priced vol then structuring a trade that pays no matter which way the underlying moves is a unique puzzle most people never have the pleasure knowing. But we aren't going to dive into that here, instead let me layout a very simple insurance scenario.
Say you own 1BTC = $20,000
The price starts in a downward trend and your model tells you the momentum is now bearish. Do you sell all your BTC? What if price jumps 30% over the next 2–3 days? You would have lost out on 6k.
Instead what you could do is buy a 16k (30 delta) Put option for around $900.
Now if the price jumps 30% you will have only lost the premium for the “insurance” ($900) effectively still up +$5100. But if the price nukes to 10k and your option expires the math looks something like this…
16k (strike price)-10k (price at expiry) = 6k
6k-900(premium paid for option)=$5100
Your underlying bitcoin is down 10k (It went from 20k to 10k)
-10K+5100= -4900
You have essentially cut your loss in half. Now, there are better ways to do this, but this example was meant as a very simple example for those of you new to the options space as a way to hedge your natural long position.
So we can see that there is real utility in understanding options. Even if you don’t trade options and you just like buying and selling spot, or futures, understanding option flows and greeks will give you an insight into how the market could behave and what the pros are pricing in. At this moment in time the option market in bitcoin is nascent but just like the traditional markets it will soon be a powerful player/indicator if it isn’t already.
Education
There are two ways to look at this third tenant, selfishly and selflessly. Let’s start with our selfish reason to educate people about Bitcoin. We believe that Bitcoin is a slave to Metcalfes law, or network economics. Metcalfes law states that a networks (like bitcoin) value is proportional to the square of the number of nodes in the network. In a research paper title “Bitcoin Spreads Like a Virus” (which we will link below) it states,
Specifically, price changes tend to be highly correlated with changes in non-zero addresses, active addresses, unique addresses, and transaction activity.
Or in other words prices moves with the amount of people participating in the network, more people, higher prices. This could also have to do with a bitcoins 21 million supply cap, but for now let’s just focus on networks.
Below we see internet users vs BTC active addresses. They have similar curves. The second chart is Facebooks Metcalfe values against bitcoins, again we see the same trajectory. The point is that the network effect is present in many things whether thats a virus or a tech company and bitcoin is no different. This would seem to indicate that price will follow a similar trajectory as the network effect takes hold, much like it did with Facebook.
By way of numerical example, we show that bitcoin’s long-term price is described by a function consistent with the logistic growth of number of users n over time. From observed data, we derived the relationships between price, number of users (proxied as active addresses), and time, and show that the growth rate is described by a Gompertz sigmoid growth function.
Bitcoin’s lognormal price P with respect to time t moves along a near-perfect horizontal parabolic arc. The elegance of this relationship between price and time is by no means a coincidence.
We wont go deeper into this topic here but you can see why this tenant is selfish (kind of). We teach people about Bitcoin > more people become active in the network > the network grows > the price goes up (theoretically) = we make more money.
This obviously isn’t really a selfish endeavor (we were only half kidding in the paragraph above) because we truly believe in Bitcoin and the benefits it will have on society as a whole. It’s become our life’s mission to teach people about sovereign money, and help empower them to save for the future. The people we educate on the topic will benefit financially over time and we are very proud of that.
Conclusion
Simplicity is key. These three tenants are a simple high level breakdown of what we believe, and how we want to invest in Bitcoin. They are the foundation of Variant that we can build upon.
Eventually we will dig into topics which deal with more complex issues, but we will always come back to these three ideas as a company, HODL, trade small and responsible, educate others about Bitcoin.
Follow us on Twitter: https://twitter.com/ResearchVariant
Metcalfes Law Paper:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3356098
