Willy Woo on cryptocurrency investing, metrics and the NVT ratio.
Cryptocurrency investing, tools and metrics with Willy Woo. Crypto researcher and investor Willy Woo is the guest on this episode of AntiREKT Podcast. The conversation was recorded on October the 13th, 2017, in a café on the island Bali.
Learn about the tools and tricks of Bitcoin and cryptocurrency investing, the protocol economy, self-sovereignty and much more. This interview is packed with great, exploitable information for Bitcoin and crypto beginners and experts alike.
Highlights
Cryptocurrency Investing and Metrics with Willy Woo.
- 0:45: Discovering Cryptocurrency tools
- 2:20: Woo on his tools and metrics for cryptoasset analysis
- 3:55: Willy Bot and historical Bitcoin bubbles
- 6:20: Protocol Coins: 60% of are good
- 8:20: 2nd layer innovation, RSK, Lightning and Meshing of Protocols
- 9:50: We’ll never see 90% Bitcoin dominance again
- 13:50: Google Trends: track Bitcoin users and adoption
- 15:30: The NVT Ratio
- 18:25: This is not a Bitcoin bubble – it’s disruption
- 20:10: “Here you can start to own a slice of the world GDP of the future”
- 22:00: “Owning Bitcoin is an act of sovereignty”
- 23:40: If you have money in a bank, it’s not yours
- 24:45: Bitcoin basics
- 26:25: Evolution of Bitcoin: Speculation -> Store of Value -> Payments
- 27:50: On BCH and 2X: “Wherever the transactions are, that’s where the value is”
- 28:45: Bitcoin protocol architecture: Scalability, 2X and segwit drama
- 35:40: Ethereum Blowup?
- 36:25 “What the fuck is this. Bitconnect” and other scams
- 37:05: Bitcoin Privacy and Monero
- 40:20: Decentralized Exchanges
- 43:50: Developer Activity Indicators
- 49:50: Settlement Utility vs Store of Value: How to track
- 50:35: New chart patterns: 2017 investor mindset is different
- 56:15: Early Bitcoin adopters trading Bitcoin cash according to patterns
- 57:05: Leaving Bitcoin
- 58:35: Investing in internet rails and rebuilding the internet
- 1:00:00: Fall of the nation state (sovereign individual book)
Links From the Episode
Protocols, tools, metrics, books and concepts mentioned in the episode (coin mentions ≠ endorsements).
Find Willy Woo here: Twitter, Website: Woobull
- Bitcoin – Get it here: (Xapo) Trade here: (Bitmex – Be careful lol)
- Monero – Get it here: (Binance)
- Zcash – Get it here: (Binance)
- Litecoin – Get it here: (Binance)
- NEM – Get it here: (Binance)
- Ethereum – Get it here: (Binance)
- Bitcoin Cash – Get it here (Binance)
- Factom – Get it here: (Binance)
- Ark – Get it here: (Binance)
- Exodus
- Lightning Network
- RSK
- Book: Road to Ruin – James Rickards
- Book: The Sovereign Individual
- Willy Woo NVT ratio, metrics, future of crypto explained: Interview + Explainer
- NVT Ratio and NVT Signal – Detect Bitcoin Bubbles
- Chart: Google Trends “BTC USD“
- Chart: NVT Ratio at Woobull.com
- Chart: Transaction Value and Network Value
- Chart: Bitcoin Sharpe Ratio
- Chart: Trending towards Store-of-Value
- Three cats and a moon pattern
- Shift to Digital Cash
- Developer Activity at Coingecko
- Hardware Wallets: Get 100% control of your own money: Ledger, Trezor
- Cyprus banking crisis and the new bail-in policies
- Mimble Wimble
- Schnorr Signatures
- Sidechains
- Cypherpunk Manifesto
Transcript
(50% and loading)
Woo: I’m specifically a cryptocurrency researcher, so im trying to find the underlying stuff people haven’t figured out yet. If you go to wall street there’s all manner of indicator and calculation you can do that are centuries old. Cryptocurrencies are new. So I’m coming up with new stuff so we can start to understand this. People talk about Bitcoin being in a bubble and there is no intrinsic value and what im pulling out is, actually there is intrinsic value. Here are the indicators, this is a new field of cryptocurrencies and this is what’s relevant here. We didn’t know how to value internet stocks in the ´90’s. P/E Ratios was through the roof and people didn’t understand zero marginal costs of companies, what if you reach the world at zero cost, what does that mean and how do you value this stuff. It’s the same thing with Bitcoin. These aren’t companies so there is no earning s so how do you value it. We’re showing here that you can measure the value of throughput on the blockchain and use that as a proxy for utility and show where the value should be. I publish that stuff and i also invest myself. And I run a few projects myself.
Norupp: What is your main tools and metrics for crypto asset analysis?
Woo: I dont know if I have a main one, but the NVT I use a lot lately cause im always worried that Bitcoin is going to be in a bubble. I think that’s more reliable than a lot of the other tools. But im looking at…. I keep making shit up and I use a lot of them In cross, cause not all of them are going to be perfect, right. For example you can see that the NVT is right up there almost calling a bubble, and you know bubbles is sort of the 90 to 95 zone and here you would have said “ah yeah it’s in a bubble, because I can see it [on the chart]”, but the reality is that the latest data shows that it’s coming back down. Cause the price pumped. The price pump created all the transactional activity on the blockchain and that pushed it back down. So you know, you could easily read it wrong.
Norupp: So when is it in a bubble, is that 95 or what?
Woo: It’s around 90. 90 to 100, it’s sort of a grey sliding scaling. 100 would be very safe [to call bubble territory]. We only had to true bubbles, if you can that one a consolidation.
Norupp: Yea in 2013, the first one [$200 pump in spring 2013].
Woo: Yeah. Actually when I did the data on this, man! That’s our first true bubble. That one, true bubble. That one was Willy Bot right? I think there was some bullshit going on there, based on the underlying data. What kind of shit pushed it that high?
Norupp: What data did you look at?
Woo: This kind of shit! Like, you look at all these things that are out of skew. I try to remember. There was other stuff I was looking at that showed that the data was way off balance. Like, I don’t know, was it volatility one of them? But I’m constantly looking at all of these different tricks and looking at price charts. Not all of these bumps are the same you know. This one and this one, are different from this one. This one had more fundamentals (Sping 2013 pump), as had this, as had this (spring 2017 pump). I was saying at the start of 2017 to a group of researchers, that this is going to be the bubble that changes the world.
If we’re looking at Bitcoin. Bitcoin is not in a Bubble. ICO’s are in a bubble.
Norupp: Yeah!
Woo: Altcoins is like, it’s grey you know. Some use cases starting and a lot of alt coins are just shit , right. I look at the top 10 right [coin marketcaps] now and go: shit, scam, shit, scam, scam, shit, good, good. Now, it used to be all of them were bad. Now a majority, like 60 percent are good and the 40 percent are dubious. It used to be 80 percent were dubious. If you look at things like Monaco, TenX. These coins that overnight they launch a debit card and they are valued at $100 to $250 million.
Norupp: Earlier (2014ish) small shitcoins would launch a card, with maybe $5 million market cap.
Woo: Yeah they were terrible and there is nothing justifying it. But then you look at the underlying protocol coins. Like Bitcoin, Ethereum, NEM, even Litecoin, Monero this are coins with fundamental rails you can build shit on, right. And they’re undervalued. Massively undervalued. I mean look. I look at Monero; privacy is wroth more than $1.5 billion.
Norupp: I heard you in an interview talking about how you should never invest in a feature, but always the platform. I know that a lot of these alt coins are also platforms, but I was wondering; If bitcoin, which is the most secure one, can scale in the layers above, will the alt coins be able to compete?
Woo: Yeah I think so. I mean Bitcoin is very good at a few things. It used to be one thing which was secure store of value and immutability. It’s very good at not changing much. Thats changing a bit with all the forks. But it’s starting to do more with segwit. Segwit is allowing a lot of innovation on top and can probably do a lot of things Ethereum is doing. Becasue you can plugin you know, RSK as a sidechain and run an Ethereum virtual machine on a secure blockchain. So again, I don’t think it’s going to be [Bitcoin or nothing]. I think what were being now, and I’ve been meaning to write about this, is the mesh net. If you can see from last year to this year, a lot of the other coins are catching up, and… A lot of the protocols and even coin projects are about meshing the coins together. So an example is the Lightning Network makes any coins interoperable. So you’ve actually got a protocol for decentralized exchange at millisecond speed. So I go from Litecoin to Bitcoin and vice versa. So we’ve got things like Ark have you seen that? It’s a protocol coin. It’s sitting on top of other chains. It’s a bridge chain. I has its own chain, so if you gonna write an application for multiple chains, you can write it on ark. So Ark is a messenging platform between all of the different chains in a decentralized way. So, you can send an ark transaction to the Ethereum blockchain and initiate a smart contract. So, you can code in Ark and use different chain and different applications.
Norupp: It all starts working together.
Woo: Yeah! Maybe you pick Sia as your storage network and you might use Bitcoin as the notarization or Factom. You might use Ethereum as, I dont know. Maybe your ERC token because it has got wallet support. You can pick and chose what coin you are gonna use. Just like when you develop Facebook. It’s multiple languages, multiple technologies, right. So I don’t think we are going to see the days of 100% Bitcoin [domination] again. I think that in a healthy economy like… a very simplistic way to look at it, would be; If you see Bitcoin as the world reserve currency which isn’t nessecarely true, it’s kinda like the world now where we have a lot of currencies that are strong. The US dollar is not so strong as it used to be, then you’ve got the euro and you kinda have a basket of currencies that are relevant now. I think maybe we’ll have like that. And then you can look at the apps as the businesses. They’re reflecting the world GDP. So the world GDP is a ratio of world money supply, right. If you’ve got $70 trillion of fiat money and world GDP is apparently.. what is it.. $50 to $70 trillion. It’s actually pretty close. One to one. So if GDP grows, money supply grows. There’s this ratio. If GDP grows and they don’t expand the money supply, it starts to be detrimental to the economy. In a crypto sense you look at money supply of the reserve currencies and maybe that is Bitcoin, but I think more likely it’s going to be the major protocol coins. And then you have Apps.
Norupp: So you think that the reserve currency will be a basket of the major currency coins?
Woo: I was thinking that maybe it was Bitcoin. Earlier this year I was thinking Bitcoin is going to encapsulate all of the businesses. For example, Ethereum did its crowdfund in Bitcoin. What else would you raise in? So obviously you couldn’t have raised more money than the Bitcoin market cap. So all the activity that is done, have to fit inside Bitcoin. But now were in this paradigm where we have two currencies. We’ve got Ethereum and Bitcoin. And so, money is being raised in Ethereum and Bitcoin and that is the money supply in which activities are acting under. Eventually we will have more protocols that are relevant. Whatever people are raising and transacting in, that is gonna be on the left side of the equation, the money supple. And the goods and services, which are our apps on this side [the right side].
Norupp: They are a measure of the transactions [Goods and services].
Woo: Yeah, they’re pretty much a measure of the transactions. Of transaction value. Or it could potentially even be market caps. You could probably even do a ratio of all of the marketcaps [of app specific coins] to the market cap of the base protocols or general currency coins.
Norupp: The Google Trends [tool] you’re talking about, that’s more of a demand measure right? And then you have the NVT and if you can talk about what that is, what it measures fundamentally.
Woo: Okay. Trends. Trends is tracking users. You can actually look at the adoption level. The number of people pumping in “BTC USD” is gonna be some proportion of the Bitcoin user base. So you have a baseline of growth. And that baseline of growth is the adoption rate. Sometimes they are gonna punch it in more often than others, and those are times when the price are getting interesting. When the price pumps, they’re checking it every day or every so many hours. So you can measure that against the baseline and you can see “overvaluation/undervaluation”. Cause when there’s a lot of searches on that, it’s usually overvalued cause the price is pumping of the baseline. The baseline is increasing.
The NVT [Ratio] is a metric that is blockchain based, it’s economically based. Wheras Google Trends is kinda like having robots scanning the internet for user activity and drawing conclusions from the worlds internet usage on Google. Getting clues to that growth. Its kinda like sentiment analysis on Twitter. It’s a different way of looking into it. One is studying humans the other is studying the underlying economics.
The NVT is… I guess I could explain how I came up with it. I started looking into to; how do you track the equivalent of the valuation of a payment company. So if it was PayPal. PayPal would be how much money you are earning to its stock price.
Norupp: P/E
Woo: Yeah that’s the P/E, right. Theres other valuation metrics which is sales. Like within the same industry you’ve got credit card companies and they’re all just doing sales. You’ve got their sales metric. You know their operational costs are the same. So that’s a pretty good metric. So, I could look at the amount of throughput PayPal is doing and then just do a ratio to its earnings. More or less. In Bitcoin we do know its transaction throughput. We don’t know its earnings because its not a company, but we know its transaction throughput. So its the closest proxy we have to it. So thats all it is really. Its like if Bitcoin was a payments company lets measure how much throughput to its valuation.
Norupp: It’s like the fundamental use and utility of the protocol versus the valuation.
Woo: Yeah, you could look at it that way. You know, I could also say; show the throughput, give me a graph of PayPal, the throughput transaction value and its valuation, and I could probably show you that the valuation tracks the throughput very closely. Theres a chart that maps the transaction value to the network value of Bitcoin and it tracks almost exactly. All you’re looking for is the slight deviations where one is over and one is under. That is what the [NVT] ratio is. If we devide one by the other it should be a straight line, in a perfect situation. But it’s not. It deviates. And thats where you pick overvaluation/undervaluation. It turned out the same you’d see in PayPal early on with high growth, it deviates. It’s overvalued because theres a lot of future speculative value proper up in it.
Woo: People would call this a bubble but its not. What were seeing is disruption. We are doing the s-curve of adoption and what we will probably see is this [down – maturity/decay] with fiat money. Were going to digital currency and so theres a phase shift. What we’re seeing right now is 25 years of industrial age transitioning to post-industrial age. The internet almost finished. The final part of completing that cycle is digitizing money, which was a scientific breakthrough we had with Bitcoin. Now we can stream money we can send micro fractions across the world in miliseconds. That changes the world completely. I could Skype you in Africa, but I couldn’t send you 5 cents! I could Skype you for free but I couldn’t send you five cents! Now you can. That actually disrupts how companies are gonna be build. ISP, telecarriers, thats all beacause of the billing system. When you can start to stream money at a micro level, you can build wifi routers that can be our own internet. We can hop through a mesh net and you can [pay] everybody for that data transfer. So you can turn everything inside out again. So when this completes in the next dusin years, everything has changed. Big companies have broken down, new companies have arised. Money becomes digitized and fiat money is going down and it’ll change the way countries operate.
Woo: What I was saying about the apps and the underlying rails, the protocol coins. Here you can start to own a slice of the world GDP. Because the world GDP in future, actually it alraeady is, all the internet companies are becoming a huge part of the GDP. We cant get access to that part before late into the investment via stocks. The future companies are going to be build on the protocol stack and you can own a slice of the protocol. The protocol operates on the token (BTC, LTC, XMR, ETC). It becomes the currency you operate on. So if you invest now, you’re investing early for a slice of the world GDP theres gonna sit on top of it.
Norupp: You’re actually buying the future infrastructure of the internet.
Woo: Yeah. I’m buying the internet and everything that runs on top of the internet, I get a slice of it.
Woo: This is the Sharpe ratio. It is a measure of risk balanced with reward. Bitcoin is a very high risk investment. You can see that early. It had crazy wild swings but over time it’s getting more and more stable. The returns are reducing as well. You can see right here; we’re at the return levels of when you got involved. 2013 it is higher that is has ever been. These are the traditional Sharpe ratios. If you’re in stocks you’re up here. If you’re in gold you’re down here. These are the return ratios from the amount of risk you’re taking. For the amount if risk you’re taking, you’re getting massive returns (on Bitcoin).
Woo: If you get in to this for any more than a year, you’re starting to come to this point where owning bitcoin is an act of sovereignty. And you start to really understand what that means. Most people dont really get that, but [you will] once you’re in control of your own money, no one can print more of it, no one can take it of you, no one can block your transactions. Governments are locking down and on the other end we have this new technology what everyone it touches are concerned. We’ve got our own currency now. We have our own privacy measures. When you get into this you learn about protecting your keys and protecting your identity.
There’s this book, Road to Ruin by James Rickards. He was working at one of the top hedge funds. They managed sovereign wealth funds worth multiple trillions. They managed the wealh of countries. He talks about the systems that has been rolled out since the 2008 crisis. Essentially governments has locked down on all financial markets and the last thing they dont have locked down, is cash. So that’s happening now. They’re digitizing cash. And at that point when its all into digital money in *bank* systems, you don’t have control. It’s already in place that if you have money in a bank, it’s actually their money. It’s an asset on their ledger and they do have the right to take it when they want. That’s what happen in Cyprus. Bail-ins. They said; anyone with more than a hundred grand, were taking the top on anything above that. And that policy is rolled out to every single bank in the world. So your money is not yours in a bank.
This is the first bearer instrument since they outlawed it. A bearer instrument is like; whoever holds this piece of paper of whatever, owns it. I can give it to you and theres no intermediate. It’s like cash, but you can hold billions in these things. Whoever got it, they’ve got it. Banks can’t block it. So, that got outlawed. Other than cash, which is bullshit because you can print more of it. And now we’ve got Gold and cryptocurrencies. Cryptocurrencies are very powerful because the invincible. It’s a string of numbers. You can memorize it. You can cross the border memorizing it. Bitcoin basics: It’s just a notebook. Money these days is just a notebook. Jacob owes my a buck, so we put it down in a notebook. Minus 1, plus 1 for will. That’s what the bank does. It’s just a bunch of transactions saying this is what you own. Bitcoin is exactly like that. It’s just a notebook that sits in the cloud. Every single transaction sits in the cloud and everyone’s got a copy. No one is allowed to write to it without a whole lot of work being done. It’s all set up so no one can write a fraud into that notebook. That’s Bitcoin in a nutshell. So every transaction is visible and were just starting to figure out how to do this privately without it being visible.
Woo: So i’ve been in technology for a long time. And then when bitcoin happened I was like; oh fuck. I’ve seen the waves. I saw the internet, I saw mobile and I saw that cryptocurrencies was the new wave. So I just duck in deep to study it. That the only way you can do it. To immerse yourself.
Norupp: It takes a lot of time.
Woo. Yeah, it takes a lot of time and it engrosses you. Theres no way you can learn it out of a book, because the books haven’t been written yet! It’s too new. So if you can study it enough, you get to change the industry. You get to make a footprint. That happened with the internet, that happened with mobile and now we can do it again.
Subject change – SOV vs pay
Woo: Well it’s been Store of Value before it’s payment. This is the lifecycle. Vinny tweeted this. First it becomes a speculative instrument, secondly it becomes a Store of Value, lastly when store of value is stable, with very low volatility, it becomes a means of payments.
So actually we’re in a phase of transitioning into a store of value form speculation. The funny thing is; this NVT ratio works at store of value level and even speculative level. The more speculation you get the more transactions you see on the blockchain. The more people that enter bitcoin as new store of value holders. Each one has to activate a transaction. Yeah, transactions is a measure of new holders coming in and new people hitting it. So all three actually are getting tracked by this. The question is will it be relevant when we do true payments. True payments are off-chain. Lightning network and all this stuff. I dont know. Probably not.
Norupp: It’s harder to measure.
Woo: Yea you wont be able to measure lighting network transaction throughput.
Norupp: How about the forks. I was thinking; transactions, are they going of the bitcoin network, some of them now.
Woo: Theres something like less than one percent utilization of bitcoin cash.
Norupp: What about *if* we have a new fork in november. How do you see that play out?
Woo: I think the ratio will still contuinue. Wherever the transactions are, thats were the value is. So that ratio (NVT) should hold.
Norupp: That will be interesting to see if thats how it goes. You can see that on the ratio.
Woo: Yeah if one is getting more transactions, the value should be equivalent.’
Norupp: There seems to be these two visions of bitcoin in the community. The cash or transaction based and the store of value and more conservation approach. What do you see as the most important.
Woo: I’m pretty sure it’s store of value. If you’ve got store of value, it’s a fundamental [base]. If you’re talking about transaction your starting to talk about either payments or protocol level stuff. You wanna run a lot of transactions with op-codes like Omni Layer. You’re doing smart contrat on top of it and you want cheap, cheap, cheap transactions. Bitcoin has totally got the capability of doing both. If you have cheap transactions with large blocks, you start to compromise the store of value. Like you compromise store of value with large blocks because you compromise decentralization. You compromise store of value because you’re now trusting, let’s say, a few key miners. Or a few key nodes and they hold your keys. I’ve done a lot of study on this. Not that Segwit has activated, we’ve got two to three years of headwind. We jumped from 100 percent utilization of blocks, to now wavering between 80-100.