TUUR DEMEESTER: Where do I see real value in this market today? I see it in bitcoin. I think bitcoin is showing that it is a very liquid market, a valid asset to be diversified into. If you think about long term store of value, it has a cap supply, predictable monetary policy, it's extremely secure, it's censorship-resistant, all those features. And it's actually decentralized.
My name is Tuur Demeester. I'm founding partner at Adamant Capital out of Austin, Texas. To understand what happened in 2018 in the land of cryptocurrencies, I think you have to go back to 2017, really, maybe even a little earlier, just to understand what this bull market was that now is correcting so strongly, and in several cases we're seeing assets just evaporate that were really not viable at all.
And so the bottom of the previous bear market was 2015 with bitcoin at $150 to $200. And so what happened in the next 30 months was bitcoin rallied all the way up to $20,000. So that's 100x in value, and many other assets were created during that time, and those assets also rallied in value. And then since late 2017, we've seen this massive correction. Bitcoin, as of today, is down 83% from the all time highs.
But if you look at it from the start of the bull market, the bottom of the previous market, we're still up 14x, even in bitcoin. In 2017, I think what happened was first of all, there was a lot of misunderstanding about how bitcoin should scale and how blockchains in general should could or should scale. And a lot of better bitcoins were created. I don't think these projects were actually better than bitcoin, but they were focused on short-term results and on chain scaling, those kind of things.
And then also this idea of smart contracts, even though it's been around since the late '80s, all of the sudden the market thought we can do it, and we can do it now. And I think that was, by and large, flawed. I think there's a lot of concepts that are-- it's just way too early or even just impossible to achieve. But if it's one thing that 2017 has shown, it's that bitcoin can withstand a lot of pressure. We've seen the exchanges grow and mature. It's caught the eyes of very large institutions that are now building custody that are financializing bitcoin.
But really, 2018, it's something that we saw coming pretty much. We wrote an outlook in January 2018 about the year to come, and we thought it was going to be a shakeout year. And then we did a follow-up in August 2018 as well, thinking that the prices were going to go sideways or down because a lot of people were naming the $6,000 price level as support for bitcoin. It would bounce up and we would see the end of the year maybe even with new all time highs.
I think that that was premature. And the basic thesis there for me is just that if you have this enormous bull market that happens over a span of 30 months, and you have lots of retail involvement and there's exuberance, the hangover is going to take a little longer than eight months. And so far, it's been 11, 12 months, and now valuations are starting to look really interesting. So that's kind of my view on 2018.
What's your outlook for 2019?
So my outlook for 2019, that comes from looking at what's happening now. In 2018 we've seen a lot of people that held bitcoin for three, four, five years that finally decided to sell and take some profits off the table, especially, I think last summer, when prices went above $5,000, $6,000, $7,000. There was a lot of selling. And I think most of that selling is now getting exhausted, and we're seeing accumulation happening. People who want to be in this market for the long term right now are really ramping up accumulation.
That doesn't mean that the bottom is here. I mean, accumulation can happen throughout a bear market. But it is what eventually is going to build a bottom in the price. And then on the other hand, we just need to see the selling being exhausted. There is going to ICOs that are going to keep selling their treasuries because, in many cases, I think they'll be forced to do some kind of refund to their customers. There's also hedge funds that may be unwinding that need to be selling.
And so it's hard to tell where exactly the bottom is. I think bitcoin cycles are lengthening, like we are moving towards bitcoin as being just another commodity like copper and gold, very large market, slower moving cycles. And so that could mean that this bear market is going to last a bit longer than previous ones as well. But that being said, if I look at the value indicators that we've built, they are showing that right now bitcoin is a fair value. You can no longer say that bitcoin is overvalued.
And I see it in the sentiment as well, whereas a few months ago, there was a lot of hope still. There was excitement about where we were going to go towards the end of the year. And that's turned into, I would say, somewhat disgust. People feel betrayed to some extent. I'm getting the Twitter equivalent of hate mail, which I don't think is because people hate me. I just think that they're reminded of bitcoin because they see something that I posted.
And so that, to me, means capitulation. I think we're in the capitulation phase. And so this is where I feel best. This is the time for me to accumulate, to do business. And a lot of the noise has been stripped away. And with the tide that's receded, whoever is still standing, those are the people I think worth looking at and ideas worth exploring.
Where do you see value in this market?
So where do I see real value in this market today? I see it in bitcoin. I think bitcoin is showing that it is a very liquid market. It is a valid asset to be diversified into. If you think about long-term store of value, it has a cap supply, predictable monetary policy. It's extremely secure, it's censorship-resistant, all those features.
And it's actually decentralized, because I think that's what we're learning now, is that a lot of projects that were kind of running on that wave of we are decentralized or we are blockchain-- you know, it's becoming clear that that's not easy to actually make your token or asset decentralized and secure. We're seeing a lot of 51% attacks on the smaller coins starting to happen now and the regulators cracking down on the more centralized projects. So I think bitcoin is really shining in this adversarial environment.
There's a metric called bitcoin dominance, which is pretty straightforward. It just shows the percentage that bitcoin has as part of the entire cryptocurrency pie. So right now that's at 55%, so it's about $60 billion right now. Total market cap is a little over 100, I think. But if you adjust that for liquidity, if you take out the tokens that are totally illiquid that might have artificially inflated their market cap, then you're more talking about a 70% dominance for bitcoin already. And I think long term, that's going to go to 85%, 90%. And that's just because the network effects that comes into play, I think, is very, very strong in money.
Even historically speaking, if you look at non-ferrous metals, we could have had six different commodity currencies. But the market decided over time that it only needed one. It was only gold. And so that's why I think, long term, the value of bitcoin is going to keep growing relative to the entire space. And I think a lot of projects, when you think about scaling, can be built on top of bitcoin. I think bitcoin is very much the dark horse when it comes to privacy, issuing assets, a lot of features that people like about blockchain, smart contracts, those can all become part of the bitcoin ecosystem.
How can services be built on top of bitcoin?
So how bitcoin could be a base layer on top of which a lot of functionality could be built. This is a crucial concept, I think, this idea that you cannot cram all the functionality into the same protocol. The world doesn't work like that. The world works in terms of division of labor, where different functionality is built in, different modules that then click together kind of like a Duplo system.
And if you look at how the internet functions, that's how it works. There's layers of protocols that sit on top of each other like a cake or a pyramid, and they all interact with each other. And I think some of the flawed ideas of 2017 was we're going to build a different protocol for every different function rather than trying integrate everything in the same ecosystem. And so people are building a blockchain for x or for y or for privacy or for smart contracts. And I think that was, by and large, flawed, maybe similarly to how, in the '90s, people thought you would need a different search engine for every different function.
And so when it comes to bitcoin, for example, people often say, oh, well, the bitcoin blockchain is not private. But it turns out that you can build in very high performance privacy functions on a different layer. For example, the liquid side chain that Blockstream has launched recently is extremely private, and it allows you to even issue new assets that can be backed-- it could be equity-type assets, it could be backed by commodities. And the transfer of these assets is highly, highly private. And it's still all transacted in a bitcoin environment.
So that's one example of how you have to kind of look beyond the main blockchain of bitcoin, because the capacity that is always mentioned by pundits on television is like oh, three or four transactions per second. But that's like saying international shipping is never going to go anywhere because a cargo ship can only carry 200 containers. Well, yes, that's true, but you can break it down a lot further. And just like in the gold market, the wholesale settlement has a different pace to it than once retail starts interacting with it, or once you're talking about the fund level, then people interact much more with derivative products.
And that's going to happen with bitcoin. That's the financialization of bitcoin that's happening now with futures options. I think by 2020 we'll probably see a bitcoin ETF, all those kind of things that are deepening the liquidity of bitcoin and actually strengthening that decentralized anchor that it's built upon.
How are you thinking about investing in crypto now?
So I think the question of how to invest in this space is a really important one. And there are some lessons, I think, to be learned from the dot.com era, the dot.com bubble, and then afterwards, how internet companies were traded. A lot of the funds that started in 2017, their function was to give investors access to the market. Like in many cases, the tokens were stored by the asset manager himself. And so that was a valid proposition.
But now we're seeing that is kind of being streamlined, and you're seeing these kind of index products where you can buy a mix of crypto, so to speak. And I think obviously, that's better than not being exposed at all to the sector. But if you really zoom in to how these indices are put together, like a top 10 or a top 20 of crypto products, to me, I just see a concerning amount of projects that I don't think are going to go anywhere just because of this massive network effect of bitcoin.
And so to me, those indices often are a little bit similar to imagining having an index of the top 10 search engines, an equity portfolio of the top 10 search engines in 1998. Obviously that's going to perform well, but you would do a lot better if you just had some Google equity. And so I think that's why investors should really have a separate bucket for bitcoin. If you want to do these alt coins or experimental blockchain projects, I think that's a valid investment proposition. But consider that perhaps bitcoin is really already established as a standard.
And if you just look at the pedigree of the developers involved, if you look at how deep the market is, if you look at the quality of institutions that is building on top of bitcoin, I think-- at least, that's the direction that I'm going. And I would go even further and say that if you're going to judge performance of assets in this space, I would suggest to use bitcoin as a benchmark because that's the other question is, if you consider investing in a fund or something, what benchmarks should you look at. And I think that the most straightforward one is just to compare it to the bitcoin performance.
What's your current view on Ethereum?
So what my view is on Ethereum, Ethereum, I think, is stuck. I think Ethereum, from 2014 onwards when they got started, had a flawed view on how to architect a blockchain. Their idea was to kind of compromise when it comes to security and decentralization and choose to do more operations on the chain, which I think is a really bad idea. And so now they're kind of stuck with a bloated chain, and they're really having trouble trying to figure out how to scale this project because if you don't scale it properly, transactions are going to be very slow. And then all your startups are just going to abandon you.
So a rough comparison that I think kind of works is to compare Ethereum to Yahoo back in the day. Like Yahoo was considered to be the blue chip of the dot coms. They were printing money because all the other dot.com startups were advertising on Yahoo, and so investment analysts could show real data that showed the success of Yahoo.
But they were not a technology company. They were a media company. And so when Google came around with really cutting edge tech that was really scalable, they blew Yahoo water because Yahoo was never scalable to begin with. It was all human muscle and trying to index the internet by using human eyeballs, which is impossible.
And so that's where I see Ether right now. The CFTC is looking at Ethereum to see if it's possible to allow for futures contracts to be built on top of it-- or I mean, to be issued in the Ether market. I think that's showing some of their doubts about whether this is actually a commodity or whether it's actually decentralized. What's up with all these hard forks?
And then when it comes to the smart contracts, that was always the main use case that was touted for Ethereum, is you can build all these smart contracts. Well, you can do that in bitcoin, too. Especially now with liquids, the liquid side chain, anyone can issue assets very easily. That was the main use case for smart contracts anyway.
And so I think that's kind of undermining the value proposition of Ether right now. It's much more expensive to use an AWS Amazon-- a centralized server, I mean. It's very convoluted. It's difficult to run your own nodes. And the code is just not solid. There is a lot of smart contracts that have had a lot of problems. And that will probably continue to happen like that. And so I don't think Ethereum is going to die tomorrow. But I think it's slowly going to be on the decline versus bitcoin's market cap.
What are your thoughts about Ripple?
Yeah, my thoughts on XRP, on Ripple. I liked Ripple very early on when it was actually a decentralized protocol. And then later, a company came in, and they assumed the branding of it and really changed quite radically how everything was set up. And the way it operates now, as far as I understand it, is really it's a centralized operation. And so to me, that's a lot less interesting because then, if it's centralized, it can be shut down at any time. We can have clawbacks from one address to another. The supply of the currency can be changed all of a sudden.
So anything can be rewritten, and to me, we already have that, right? That's the Fiat money system. And so that's why even if Ripple-- who knows, maybe they will do well. I'm a little bit worried about their legal status because it does seem like the Ripple token could be seen as equity-like, and then Ripple could have been violating all these laws. So that's to be seen. But I don't see it as a threat against bitcoin at all. It's not a digital gold. It's just an experiment with centralized money that also have some kind of a blockchain. But to me, I would not call it a cryptocurrency.
What's your view of the space over a five-year time horizon?
Where do I see things going in the next three to five years? Right now we are in the infrastructure phase. That's how I see it. Up to 2013, we had the initial discovery phase, and then 2013 came around with hardware wallets, specialized mining chips, and a lot more development efforts on really the core side of when it came to bitcoin. And I think this infrastructure phase is going to keep continuing until 2020, 2021. And then I think we'll see more mass market adoption.
And right now in the infrastructure phase, the ASIC mining market is maturing. And I think that's a very positive thing. Rather than one company that happens to have struck gold by having this one chip that performs really well, which I think was Bitmain, and then is able to kind of monopolize the market, I think chips are going to be commoditized. And so we'll see a plethora of mining activity around the world, especially concentrated where electricity is cheap.
And so I think that energy producers are going to get more involved with bitcoin mining over the next years. It's this incredible way in which it's this intermediating transaction clearing around the world. It's just a marvel to see. And it's also a very clean revolution. Right now, I think it's 75% of all mining is happening with clean energy like hydro and so on.
And then the other trend that I see is just the continued financialization of bitcoin. I don't think that the mass adoption of bitcoin is going to happen by Baby Boomers sending each other bitcoins over their phones. I think it's going to happen through bitcoin becoming a part of a fund's portfolio. So it'll be part of endowments, pension funds, large mutual funds.
And so many people will be exposed financially to bitcoin without even realizing. I think that's going to be the main adoption, which is kind of a behind the scenes type