#1185 Will Clemente On Bitcoin: Start Of The Next Bull Run?

Will Clemente is the co-founder of Reflexivity Research. In this conversation, Anthony Pompliano and Will Clemente discuss a new report that explains bitcoin's performance in Q1 and how this sets up the asset for the rest of the year. Report includes core network activity, wallet addresses, ordinals, miners, and the lightning network. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Anthony Pompliano?

  All right, guys. Bang, bang. I've got Will here with me. Will, Reflexivity Research just published a brand-new Q1 report on the Bitcoin network. Bitcoin, obviously, isn't a company. It doesn't produce a normal quarterly report like a public company would. And so there's been a couple of people in the past who have done this, but you guys just put together this report and released it to summarize what's been going on. And Bitcoin had a monster Q1. Let's start with the core network activity itself in terms of transactions and transaction volumes. What are you guys seeing there?

• 0:29Speaker 01

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• 0:57Speaker 02

  Yeah, Bitcoin passed a major milestone this quarter. If you look at the cumulative value of all the transactions, the number of transactions that have taken place on the network, Bitcoin's now settled over 800 million transactions worth a cumulative value of over $107 trillion, which is an incredible feat for a fully decentralized protocol that's only been in existence for just over 13 years.

• 1:18Anthony Pompliano?

  When you think about active addresses, right, so you talk about transactions, you talk about the value of those transactions, but is this just like one person doing 800 million transactions, or is the number of active addresses continuing to grow?

• 1:29Speaker 02

  No, yeah, absolutely. When we look at the active addresses, which is looking at sending and receiving transactions on both sides, we can look at essentially on like a high timeframe view through a 30-day moving average and look at what's the kind of multi-year usage of the network. And what we see is that over the last 10 years, the number of active addresses continued to make higher lows. And so, of course, in a bull market, you have, you know, a ton of new kind of tourists and new network users that come into the network because Bitcoin's price is going up. But I think what the real signal is, when you look at this metric, making higher lows, is the fact that despite, you know, a lot of those tourists leave heading back into the bear market, a higher low, meaning a, you know, a greater amount of people stick around during every bear market. And that's really

• 2:12Speaker 02

  a real sign of adoption when people stick around despite, you know, price going down 60, 70% in the bear market. And this bear market's been no different. We've seen those active addresses continually making higher lows.

• 2:23Anthony Pompliano?

  So when we think about Bitcoin, I think a lot of folks are like, okay, cool. It's electronic peer-to-peer cash system, and that would lean itself towards those transactions. And we continue to see those cumulative numbers grow, and it seems like people are using Bitcoin to send transactions and increase the value. But also, there's a growing number of people who simply look at Bitcoin as a store of value. They want to hold Bitcoin. So one way that you all measure this is through how much Bitcoin sits in people's wallet addresses. And we see there that continues to kind of grind up over time, especially over the last year or so.

• 2:53Speaker 02

  Yeah, absolutely. So if we look at Bitcoin's supply distribution, you know, this is something that a lot of people like to kind of use as a criticism of Bitcoin. You'll see a lot of Bitcoin critics citing the fact that a very large amount of Bitcoin supply is held by a very small amount of individuals on the network. This frankly, isn't the case when we look at the actual on-chain data. First of all, a lot of these claims are looking at, you know, the top 10, 15 addresses on Bitcoin outright, which a lot of those are exchanges or custodial solutions. So those are, you know, entities that are holding Bitcoin on the behalf of hundreds of thousands, if not in the case of like a Coinbase, for example, 100 million plus individuals. And so when you actually look at the real data in terms of batching these transactions

• 3:35Speaker 02

  together, labeling out, you know, the exchanges and custodian solutions, when we look at the percentage of Bitcoin's overall supply held by entities that hold less than 10 Bitcoin, which at a 28K Bitcoin price is roughly $280,000, we can see that that total value of the amount of supply held by those individuals with less than 10 BTC has continued to climb throughout all Bitcoin's history. We've seen a real acceleration in that over the last six to eight months, and that value is now over 17%. And so what does that mean from kind of a first principles basis? It's showing you that Bitcoin's supply distribution is continually becoming more favorable over time.

• 4:11Anthony Pompliano?

  So it's interesting because we saw in recent weeks that Michael Saylor and MicroStrategy now own 140,000 Bitcoin. I think he personally owns about 17,000 as well. So you put those two together, Michael Saylor controls somewhere around 0.75%, right? Kind of just under 1% of all Bitcoin that will ever be in circulation. And there's a lot of folks who are yelling and screaming and critiquing it and saying, hey, that's too Much concentration. Obviously, one point is that control of Bitcoin, the asset does not necessarily give you control over the protocol or give you control over nodes or hash power. But what you're also saying is while maybe Michael Saylor continues to acquire and concentrate Bitcoin, we actually are seeing the exact opposite in kind of the smaller wallets is becoming more decentralized?

• 4:52Speaker 02

  Yeah, absolutely. You know, when we look at something, for example, like two different moving averages of of addresses, for example, so the rate of essentially change or momentum in address growth. We're also seeing a really aggressive move up in terms of looking, for example, at the 30-day moving average of non-zero addresses relative to the 365-day moving average. And then also, if we look at the rate of growth, so kind of 90-day change or quarter-over-quarter change in those non-zero addresses, we're also seeing the highest rate of growth since early 2021 during Bitcoin's massive move up from 30 to 60K, as you remember very well. And so, yeah, I would say, you know, while Saylor is accumulating, you're also seeing in the smaller wallets

• 5:36Speaker 02

  really extreme accumulation from some of these smaller entities, which of course is favorable for Bitcoin supply distribution.

• 5:43Anthony Pompliano?

  One of the big stories in Q1 for Bitcoin was ordinals. And obviously, there's a lot of controversy. There was kind of the most hardcore Bitcoin maximalist hated it. They thought it was dumb. They thought it was a complete waste of time. Then there's a lot of folks who I would put more in kind of Bitcoin rationalist camp that they're saying, no, look, actually, this is usage of the protocol, part of the value of the protocol. People can do whatever they want with it. And obviously, people want to do this. What are you all seeing in the data when it comes to ordinals? And how important was that for the success of Bitcoin in Q1?

• 6:11Speaker 02

  Yeah, it's a great question. And to kind of summarize the kind of two camps that I would say individuals fall into. The first one is that the kind of increase in data usage on Bitcoin has made the download times for individuals that are looking to operate Bitcoin nodes. The download times are heightened, so therefore, there's slightly more friction in terms of people being able to download nodes. And then also, individuals that fall into this camp have stated that, you know, they don't like the fact that essentially on-chain images are competing with actual real economic transactions that are That are looking to get it put into blocks on on chain. And then I would say the other kind of camp that I would say you and I more so fall into is that,

• 6:51Speaker 02

  you know, the increase in in usage of ordinals has increased the the use of of the Bitcoin blockchain. And that's translated into several measures of data. So the first one being if we look at taproot adoption, right? So so ordinals were made possible through kind of a loophole and taproot. So if we look at taproot adoption, that's really accelerated throughout the quarter. If we look at the mempool, which is essentially the backlog of transactions, that's also been the most full that it's been in well over a year. We saw a brief spike during kind of the FTX collapses. There was a ton of transactional activity and kind of reorging of wallets going on. But overall, we've seen seen the most kind of sustainable filling up of the mempool that we've seen in in some time.

• 7:32Speaker 02

  Part of that is is Bitcoin's been the, you know, best performing asset class of the year up up nearly 70%. So there's definitely some degree of just, you know, heightened activity on Bitcoin because of price outright. But a large, a large degree of that is is can be credited to to ordinals. And then, you know, outside of the mempool, when we also look at fees as a byproduct of that, because of course, if there's more demand to get your transaction into a block, you're going to have to raise the fees that you're that you're willing to give miners to incentivize them to let you get into a block. And so when we look at Bitcoin transaction fees, we've seen that they've also climbed throughout the quarter. And so when you pair that in terms of the heightened transaction fees with the increase in the value of daily issuance for Bitcoin, you know, of course, you only have 900 Bitcoin that have that have come into circulation

• 8:16Speaker 02

  every single day since the last having change in 2020, and that'll change next year. As we maybe talk about that in the back half of the conversation that I think we're both looking forward to. But as Bitcoin's price has appreciated throughout the quarter, that's increased the USD value of the issuance every single day. And so when you pair the increased value of transactions with the increased value of issuance, that's translated to when you put those two things together, overall, higher USD-denominated value of of revenue for miners. And so ultimately, that's that's a very positive thing for the security of the network. Because when you pair that with also global energy prices declining, it's more favorable for miners. And we've seen that translated into hash rate ultimately.

• 8:55Anthony Pompliano?

  What's fascinating is if you look at total transaction fees for these miners over the last five, six years, the two big peaks were actually in the kind of final capitulation of the 2018 bear market, right? Kind of Q4 of 2018. And then in the summer of 2021 was another huge peak. And that was kind of the valley, if you will, when we drew down from 60,000 to back down to 30 before we went to an all time high. And so what's interesting about the use of ordinals here and kind of the men pool filling up and transaction fees increasing is this is not because of market volatility, right? This is not necessarily being driven by a negative event. It's actually being driven by what many people think is a positive event. Do you think that that is important for Bitcoin?

• 9:40Anthony Pompliano?

  Or do you think that, no, it's just whenever people want to use it, whether it's because markets going down or there's positive impact, we should just look at it as kind of a data point?

• 9:47Speaker 02

  No, I think it is an important development for Bitcoin because it kind of takes the volatility out of or cyclicality out of transaction fees for miners, which is a positive thing for them to have sustainable revenue long term. And then also, you know, as we look out into the future, whenever, you know, the block subsidy goes away for miners and they're solely relying on fees, I think you and I kind of fall into the camp of over time, you know, as Bitcoin supply issuance kind of plateaus out, you'll see more economic activity on chain because the value of Bitcoin likely appreciates by then. And then you'll have more people actually spending Bitcoin into the overall economy. But also I would say that ordinals add an even another, you know, kind of layer on top of that

• 10:30Speaker 02

  in terms of potential activity that could drive fees for miners over the long term, which, which allows, you know, the Bitcoin network to continue to be sustainable from an economic perspective.

• 10:38Anthony Pompliano?

  So this brings us to the Poel multiple. This thing has been deadly, right? Explain what it is. And then we saw kind of second half of 2022, we hit kind of this like green zone that everyone looks for. Does that signal that we actually have seen the bottom of that bear market? And we now are in the early days of the next bull market?

• 10:58Speaker 02

  Yeah, sure. I would pair this with a couple other kind of on-chain indicators that you can look at from like a kind of multi-year, like high timeframe view of Bitcoin's market cycles and has kind of behaved thus far in these like four-year market cycles and appears to be doing so thus far. First of all, I would say that Bitcoin thus far, again, is following those historical kind of halving cycles for better or for worse. It's also eerie how closely they've also tied in with the broader kind of liquidity cycles from monetary policy from the Fed. But yeah, looking at the PoM specifically, as we mentioned earlier, the USD value of issuance has gone up and that's a positive thing for miners. This is exactly what this metric tries to encapsulate. So if we look at what is from a first principles basis,

• 11:43Speaker 02

  this metric trying to illustrate, it's what's the USD value of miner issuance every day that they're bringing in relative to the trailing 365-day moving average. So essentially, you know, how much revenue are they bringing in from issuance every day relative to what they've been making over the last year? And so whenever we see this kind of capitulatory behavior where we see the sharps kind of spike down into that green zone that you talked about, which is somewhat arbitrary based on like prior cycles, what that's indicating is partially a byproduct of price, but just that miners under extreme stress. So whenever we get to the bottom of every single Bitcoin cycle, you see miners kind of, you know, sustainability or viability tested in terms of, you know, how they're running their operations.

• 12:27Speaker 02

  We saw a major miner capitulation at the back half of 2018. And as we saw this spike down on the PoM multiple in the back half of this year, I'm sorry, in the back half of 2022 into the beginning of this year, we saw kind of similar capitulatory behavior in terms of hash rate coming offline and looking at some like moving averages of hash rate that have kind of indicated capitulation for miners as well as selling for miners in terms of looking at the on-chain wallets. So yeah, this kind of from a like cyclical Perspective marked this like very similar behaviors to what we saw in 2018 and also in 2015 as well. And then, you know, from, from kind of a forward looking perspective, what does this indicate? Well, it indicates that potentially the worst is behind us for miners. And then again, kind of what I mentioned towards, towards the beginning of the conversation

• 13:09Speaker 02

  when we talked about ordinals, it's taken some of the pressure off of, off of minor margins, which as kind of a second order effect of that likely decreases the amount of sell pressure that's going to come online because miners no longer have to sell their Bitcoin to kind of keep the lights on.

• 13:23Anthony Pompliano?

  Yeah. When you think about something like the Lightning Network, I know that you guys didn't spend a ton of time doing the analysis for the Lightning Network for this specific report, but it seems like the Lightning Network continues to gain adoption and continues to kind of grow at an impressive pace. Is that a fair way to characterize it?

• 13:37Speaker 02

  Yeah, I would say the Lightning Network has held up quite well over the last few quarters, you know, despite the kind of like broader market decline in Bitcoin. I think that kind of shows you that there's actual real underlying utility for the Lightning Network being used for things like remittances and, you know, there's the Bitcoin beach now Salvador, that's kind of the most famous example of that. When we look at the USD value of Lightning Network capacity, granted, this is just public data, it's increased by 50 million quarter over quarter. And overall, it's held up quite well, I would say, but we haven't really seen that kind of breakthrough point of adoption for, for the Lightning Network yet. But with people like Jack Moller, Strike, and some of these other kind of Lightning Network companies, I think we're probably well on the way to, it's kind of just a waiting game for, for seeing that kind of breakthrough in an application to, to push the Lightning

• 14:22Speaker 02

  Network forward.

• 14:23Anthony Pompliano?

  Yeah, we, we mentioned earlier, the idea that the halving is coming, right? It's kind of next year. In the past, regardless of what people think, it has had an impact on price. It's very obvious there's the halving, and then there's this price kind of movement upwards. What is your expectation going into it? What are you looking for? Are there certain things that would be red flags to you as we head towards that halving?

• 14:44Speaker 02

  What does the halving mean for anyone who doesn't know? It means that the amount of Bitcoin that come into circulation is going to be cut in half. So it's going to go from 900 Bitcoin every day to 450 that have come out into circulation every single day. And so in theory, if you have the same amount of demand and then a decreased amount of supply that's coming into circulation, that should cause an upward drift in price. In terms of, I'm like a multi-year view, I think that's a very positive thing for Bitcoin's price action. But in terms of what I'd be watching leading up to the halving, I would say keep a very close eye on the derivatives data because that'll kind of give you some signals as to how the market's positioned. So in markets, it's not always about whether something's a positive or negative thing.

• 15:25Speaker 02

  It's about how positive or how negative is this event relative to the market's expectations? So I would say if you see in the derivatives data that seeing things like high funding rates along with high open interest, that's potentially indicating that traders are maybe getting a little overly bullish locally in terms of prior to the halving. And this is something that we saw in 2020. We saw, of course, the COVID crash played a big role in this, but we saw in the derivatives data, derivatives essentially got jacked leading up into the halving. We saw funding rates extremely high, open interest was climbing. So essentially, a bunch of individuals understood that on a multi-year view, the halving was a bullish thing, but maybe locally kind of levered up a little too much. And then we had COVID that came in and exacerbated a liquidation cascade and wiped all that

• 16:10Speaker 02

  leverage out. Hopefully, we don't have another type COVID-like event that will cause any type of leverage to get flushed out to that extent. But I guess the point I'm just saying is keep an eye on the positioning of the individuals heading into the halving to understand locally how maybe it'll play out and potentially be a sell the news event on a short-term basis.

• 16:27Anthony Pompliano?

  So we've seen narratives being incredibly important to Bitcoin over the years. There was obviously institutions are coming, corporates are buying everything from regulation, El Salvador, et cetera. We talked about ordinals, there's obviously the Lightning Network story. There's this idea of very high illiquidity in the market. Are there any other narratives you're paying attention to right now that you think are worth calling out?

• 16:48Speaker 02

  Yeah, absolutely. I would say one thing on the liquidity thing, this is something that we talked about actually a lot in 2020. And I would say where where I was wrong was, yes, I would say the the overall supply was was relatively illiquid in terms of being held by entities that had a low likelihood of moving those coins again. But you know, that that'll look that illiquidity can be exacerbated in both directions. And so I think the fact that there was such a low circulating float of Bitcoin exacerbated a lot of the downside. It the kind of back half of of 2022. But you know, on the on the converse of that, you know, if if we do see some type of, you know, upwards price action, that's likely to get accelerated by the fact that

• 17:26Speaker 02

  there's a large amount of Bitcoin that's held by on chain entities that are have a very low likelihood to sell over 70% of Bitcoins held by long term holders. All time high amount of supply that hasn't moved in at least a year, two years. And so I would say the the available float is is at the lowest that it's ever been. And so when individuals come come looking to buy Bitcoin, I think there's a lot of Bitcoin holders that have gotten their belief tested over the last two years, and at least based on the data that we're currently seeing, aren't looking to sell anytime soon. In terms of narratives that I would say to watch out for, I think a lot of individuals are kind of underestimating the geopolitical significance of Bitcoin. You know, as we continue to see some of these headlines of countries looking to price oil in in Wuhan, for example, and potentially looking to move off a US dollar standard.

• 18:10Speaker 02

  I don't think the dollar is going away next week like some individuals maybe have have mentioned. But I do think, you know, there's there's likely a relationship or correlation between as we see more headlines of of countries looking to move away from from a dollar standard slowly. The higher the likelihood is that they have some type of at least, you know, like a small hedge, a small position in in Bitcoin. And so something I would I would keep an eye out for is some of these countries like UAE, Singapore, etc. Potentially taking some type of small Bitcoin allocation, and I wouldn't be surprised to see that, you know, announced over the last few years.

• 18:41Anthony Pompliano?

  Yeah, I mean, that would be a pretty big development and pretty incredible. Where can people go find you online or find out more about Reflexivity Research if they want to get this in their inbox?

• 18:50Speaker 02

  Yeah, absolutely. You can check out Reflexivity at ReflexivityResearch.com. We're also on Twitter at ReflexivityRES. And then you can check me out on Twitter at W Clemente III.

• 18:59Anthony Pompliano?

  Awesome. Well, anyone who wants, I highly suggest go and subscribe Reflexivity Research. These guys are doing a fantastic job digging into the data. They are creating all sorts of different reports. And I've been learning a lot from them. It's pretty cool to be working with Will and the rest of the team. So if you want, go check it out ReflexivityResearch.com. I appreciate you doing this. We'll do it again in the future.

• 19:18Speaker 02

  Thanks, Pom. Talk to you next week.