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Alpha Zeta

Apr 5, 2023 • 21 tweets • 8 min read • Read on X

Nakamoto Portfolio Theory
-----------------------------
Schrödinger's Coin Model 🐈
Valuing Bitcoin as a Store of Value

How #Bitcoin will demonetize other assets and why it's significantly undervalued by 13x today
This is quite the thread. Hang tight🚀▶️

@SwanBitcoin @samcallah

This model considers Bitcoin's potential to capture the monetary premium of traditional assets like real estate, stocks, and bonds, leading to a shift in capital allocation and reevaluation of their worth ▶️

Central banks, flooded with excess currency, have fundamentally broken the value of money, leading investors to seek protection against the negative effects of money printing. This phenomenon has resulted in the financialization of the economy and huge monetary premiums ▶️

The explosion of ETFs and the popularity of second investment properties or REITs have resulted in the monetization of assets. Resulting in many of these, including housing, being valued well beyond their utility values ▶️

Inspired by the original idea from @saylor, presented here with @timevalueofbtc, it's expanded to include major asset classes and a method to apply probabilities to each and also take time value into consideration ▶️

The Schrödinger's Coin Model is based on the concept of quantum superposition, where Bitcoin is considered to have two possible outcomes: it either fails and is worthless (Dan Peña scenario) or captures the monetary premium of traditional stores of value (@saylor scenario) 🙀 ▶️

How does it work?
Let's use Gold as an example.
Gold's current market cap is around $10T:

Assume that 60% of Gold's market cap is due to monetization, not utility. This is an assumption and, of course, can be modified. Close enough for a base case IMO ▶️gold.org/goldhub/data/h…

This would imply that the present value of a gold demonetization event to Bitcoin's price is equal to $87k. TODAY.
The gold demonetization by itself should justify a much higher BTC price in this scenario. ▶️

Now, let's add other asset classes to the mix and include an intertemporal discount rate of 12.5%.

Here's the potential price contribution from each asset class.

This represents a Bitcoin Fair Present Value of $379,823. ▶️

Here are the assigned assumptions to each of these assets. In other words, in this scenario, with these probabilities, Bitcoin is undervalued by a 13x factor. ▶️

In terms of expected value, here's the path to HyperBitcoinization as this scenario plays out; leading to a Bitcoin price of +$3mm in 20 years. ▶️

This is our base case scenario ▶️
github.com/pxsocs/Schrodi…

Now let's look at a bullish scenario ▶️
github.com/pxsocs/Schrodi…

And a bearish scenario ▶️
github.com/pxsocs/Schrodi…

The first conclusion is that the current market price of #Bitcoin represents extremely low probabilities of these events happening.

It highlights the massive asymmetry in potential returns.

#Bitcoin is still (and by far) the most asymmetric bet within any asset class. ▶️

A curiosity about the model and how it has some parallels to the Black-Scholes model for option pricing ▶️

github.com/pxsocs/Schrodi…

Full model description, sources and more info here:

I'm figuring out a way to share the dynamic application below as open source. This way anyone can make their own scenarios and assumptions. Soon...

Bitcoiners run the numbers. ▶️ github.com/pxsocs/Schrodi…

Bitcoin's Schrödinger Model 😼

Model description PDF available below

The cat is out of the box and is now the observer...

[EOF]github.com/pxsocs/Schrodi…

For everyone that asked. Here’s the web app version of the model. 🐈 📦

nakamotoportfolio.com/apps/shrodinger

Link to the live app:

nakamotoportfolio.com

Live application here:

nakamotoportfolio.com/apps/shrodinger

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More from @alphaazeta

Alpha Zeta

@alphaazeta

Jun 4

1/ I just recorded @Swan Signal with @samcallah and I briefly highlighted how I think game theory has been shaping my thinking of Bitcoin. But I don't think I did a great job in our discussion so let me try to make it better here. 🧵

2/ Bitcoin is an individual revolution. It starts at the individual level, which is a beautiful thing. Unlike other adoption cycles, where those with broader access to information or resources adopted first, Bitcoin has the most ethical and fair adoption cycle ever seen. Those who truly understand its value proposition are the ones with the advantage. Knowledge is the barrier.

3/ If that's the case, how do we know that individual interests will lead to the broader good? Enter game theory. Game theory studies strategic decision-making, where the outcome for each participant depends on the actions of others. It balances self-interest with the collective good.

Read 16 tweets

Alpha Zeta

@alphaazeta

Apr 15

How hard it is to forecast bitcoin's price?

Using history as a guide, we can run a simulation to forecast 1-year returns using a Monte Carlo Simulation.

Quick results:

. Average expected price in 1-year = $144k

But the average here is not a great indicator. This is the same as saying you will stick your head in a refrigerator and your feet in the oven and (on average) you are fine.

. 95% of the simulations fall between $30k and $448k.
. The worst simulation ends at $6.5k
. The best one ends at $901k

Conclusion? Prices are close to be impossible to forecast.
Anyone picking prices with certainty did not run the numbers.

The good news?

77% of the simulations are positive

The returns compared to the vol are among some of the best you can find in any asset class.

[1/n]

"But Bitcoin is too volatile."

Would you rather invest in bonds? Fun... Let's run the numbers!

Here are results for TLT (iShares 20yr Treasury ETF).
. Average returns are 3% (compared to 70% on the Bitcoin Monte Carlo)
. 60% of times you get positive returns (compared to 70%)
. 95% of values give you a return between -25% and +43% (yes, bonds have volatility).

14% annualized vol with 3% annualized returns
compared to BTC:
70% annualized vol with 72% annualized returns

5x the vol = 24x the returns

I'll take the vol every day on BTC....

[2/n]

"But bitcoin is not a store of value"

Here are the results for GLD (Gold ETF)

9% annualized return with 17% vol

I would take BTC's 70% vol (4x higher) to get BTC's returns (7.7x higher) all day long.

[3/n]

Read 4 tweets

Alpha Zeta

@alphaazeta

Jun 13, 2023

Nakamoto Portfolio Theory
-----------------------------
Real Estate as a store of value

We ran the numbers, studied historical returns, and scrutinized the fundamentals to determine if real estate truly delivers on its promises.

Our findings ▶️nakamotoportfolio.com/static/docs/Fr…

1/ How does residential real estate stack up against inflation?

The traditional notion of real estate as a hedge against inflation is not as foolproof as you may think.

Avg. 2.33% return above CPI since 2000

We could have stopped here...

nakamotoportfolio.com/apps/case_shil…

2/ The concept of liquidity in real estate is tricky.

Unlike stocks or bitcoin, you can't sell a part of your house instantly. The infrequent updating of your property's value can mask its true volatility.

Investors usually analyze returns only when they buy or sell a home.

Read 9 tweets

Alpha Zeta

@alphaazeta

May 31, 2023

Nakamoto Portfolio Theory
-----------------------------
How are bitcoin's historical returns distributed?
Turns out there's nothing 'normal' about them.

We've tumble down a rabbit hole, ending up deep in the world of #Bitcoin forecasting.
(1/n)

Why does this matter? Good forecasting helps us understand risk.
To run Monte Carlo simulations (a key forecasting tool), we need a statistical distribution that accurately mirrors Bitcoin's historical returns. But first, we need to see if we can even find one that fits!
(2/n)

After analyzing various statistical distributions, a generalized hyperbolic distribution seemed to fit Bitcoin returns best. It's a flexible model that can handle Bitcoin's unique characteristics better.
(3/n)

Read 8 tweets

Alpha Zeta

@alphaazeta

May 1, 2023

@FossGregfoss

Nakamoto Portfolio Theory
-----------------------------
Bitcoin Valuation based on Fixed Income

Inspired by @FossGregfoss's work, we'll explore how to estimate the value of Bitcoin using credit default swaps (CDS) as fiat insurance.

You know... "for the kids".
1/n

In line with our other research pieces, this one comes with a web app so you can also run the numbers.
In this one you can change pretty much all assumptions (numbers in blue can be edited) including CDS levels, debt levels and other assumptions.
nakamotoportfolio.com/apps/foss

2/n

Just like in our previous pieces, the idea is to give a framework to understand potential scenarios. Although I keep referring to them as models, these are frameworks. We provide some initial assumptions and you can create your own.

3/n

Read 13 tweets

Alpha Zeta

@alphaazeta

Apr 20, 2023

The Rat Poison Portfolio 🐀
An equally weighted portfolio of Berkshire Hathaway, Microsoft, JP Morgan and BlackRock

Guess what happens when we add #bitcoin to this portfolio?

Higher volatility?
Higher drawdowns?
Higher risk?

Let's run the numbers

Since 2014, that portfolio returned 16% annualized (assuming quarterly rebalancing). Not bad.

BUT by adding a 2.5% allocation to Bitcoin the Portfolio increases returns to ~20% WITH reduced risk.

Bitcoin would have actually reduced the drawdown of the original portfolio. This may be a bit counterintuitive. How can it be that including such a volatile asset actually reduces risk?
The answer is below. Bitcoin has VERY low correlation to these assets.

Read 6 tweets

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