A bitcoin price crash this week provided investors with an attractive moment to enter positions in the bitcoin market.
While most people reading this article are likely aware of the tweets that were sent out by Elon Musk on Bitcoin mining, his comments are simply noise, and the resulting price crash and derivative market liquidations provide investors who may have been waiting for an attractive moment to enter positions with a great opportunity.
The long-term trends observable in and around the Bitcoin space remain extremely bullish, and the recent three-month consolidation can be thought of as UTXOs simply transferring from weak hands to strong ones, as short-term leveraged traders in derivatives markets have chopped the price of bitcoin in the range of $44,000 to $64,000.
Short-Term HODLer SOPR: Flashing Buy Signal
With short-term traders setting the price at the margin over this period of consolidation, it is telling to look at short-term HODLer SOPR, which measures the ratio of profit/loss of UTXOs being spent that are less than 155 days old.
Over the course of the last six months, any SOPR break below one has, in hindsight, presented investors with an attractive buying opportunity, and this week’s move should be treated no differently.
An SOPR value less than one implies that the coins moved that day are, on average, selling at a loss (the price sold is less than the price paid), thus when SOPR breaks under one, it is a signal that short-term market actors are capitulating.
Derivatives Markets: Short-Term Tail Wagging The Dog
While the long-term price action is driven by the monetary preferences of the world changing from fiat money to BTC, short-term price action is driven by leverage and derivatives markets. There have been very few times during this bull market when funding across perpetual futures markets went negative on average for more than 12 hours. This occurred earlier this week, and presented investors a screaming buy signal.
Big Withdrawal Following The Sell Off
Directly following the cascade of liquidations and the sharp correction in the price of bitcoin all the way down to $45,000, a massive outflow of bitcoin could be observed leaving exchanges, an indication that some big time players secured positions at attractive prices as a result of the sell off. While this is purely speculation, it would not surprise me at all if the FUD (read: fear, uncertainty and doubt) thrown out all toward the end of this week was simply chance.
Short-Term HODLer Market Value To Realized Value Ratio
The short-term HODLer market value to realized value ratio has dropped significantly from where it was in early January. While market capitalization takes the market price of bitcoin and multiplies it by the total outstanding supply, realized cap takes the price of when the coin last moved into account in the calculation. When you take the ratio of market cap by realized cap, it gives you MVRV, and in this case, it measures UTXOs (bitcoin) that moved less than 155 days ago. This metric can give you a sense as to whether the market is above “fair value” in terms of the short-term price action, which is being driven predominantly by speculators in the derivative markets over the last few months.
Short-term MVRV trending lower is very bullish and should give investors confidence the lower it creeps down, that the next bitcoin run up is closer than ever.
A tweet from Tesla CEO Elon Musk, making inaccurate claims about Bitcoin’s energy use, likely caused a dip in the bitcoin price.
At approximately 6:00 p.m. EST last night, May 12, CEO of Tesla Elon Musk posted a tweet in regards to Bitcoin and Tesla that appeared to have significant market impact.
The tweet included a statement that was misguided in its assessment of Bitcoin’s energy use. While Musk claimed that Tesla is “concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions,” the mining industry appears to be growing in its use of renewable energy sources instead. He also seemed to suggest that bitcoin transactions consume energy, but that is not true.
Bitcoin Energy Use Is Not Alarming
It is important to remember what is actually unfolding here with the adoption of the Bitcoin network. With bitcoin, all energy production and consumption now has a distinct economic cost. The problem that bitcoin is solving is the separation of money and state. The reintroduction of free market money will eliminate vast amounts of energy waste, malinvestment and destruction inherent in the incumbent petrodollar system.
Proof of work is crucial to bitcoin, or more broadly, a decentralized monetary network (which only Bitcoin can claim to be). Only the proof-of-work function in the form of the SHA-256 hashing algorithm can ensure that the most recent block was mined fairly, and not by nefarious actors looking to compromise the validity of the chain/network. This is (one of many) killer features of Bitcoin. If you wish to “attack” the network, you need to expend vast amounts of energy and computational resources to do so, and the economic incentives therefore align with simply supporting the network.
When a climate alarmist demands for you to explain Bitcoin’s “alarmingly high energy usage,” ask them what the future looks like without Bitcoin? What does our world and climate look like without a distinct economic cost for energy inefficiency and waste, and how does one propose to solve for this otherwise?
Elon Musk’s Tweet And The Bitcoin Price
Anyway, back to the market’s reaction…
The bitcoin market was sent spiraling downwards as leveraged speculators and traders quickly exited their position, with the price of bitcoin falling to as low as $45,000 before catching a bid and rebounding quickly. Data from Coinalyze shows that nearly $1 billion worth of leveraged longs were liquidated directly after Musk’s tweet.
Does this event have any meaningful impact on the ultimate longevity or success of the Bitcoin network? Unequivocally, it does not. Bitcoin is the energy bidder of last resort across the entire planet, and the economic incentives provided by the network to reach peak energy efficiency cannot be understated, and are extremely misunderstood.
Regardless, the Bitcoin network keeps chugging along, and the weak hands and speculators who do not have an understanding of Bitcoin sold their BTC to convicted HODLers, who understand the sound money attributes of Bitcoin, and are not shaken out by a tweet throwing FUD (read: fear, uncertainty and doubt) from the CEO of a company that has only recently became profitable thanks to massive amounts of environmental credits and government subsidies…
The most recent Bitcoin mining subsidy halving took place one year ago today, and its price has risen dramatically since.
The most recent Bitcoin mining subsidy halving occurred officially one year ago today, on May 11, 2020. In recognition of the event, let’s take a look back at what has transpired in the Bitcoin market over the last year and a look forward to what it could have in store.
The Importance Of The Halving’s Quantitative Tightening
Following the record plunge across all asset classes during the global liquidity crises at the beginning of March 2020, record monetary and fiscal stimulus had bitcoin trading around the $8,000 level at the halving on May 11, 2020. Investors around the globe began to understand that they needed a place to seek refuge and insulate themselves from the unprecedented monetary expansion, and bitcoin undergoing a quantitative tightening event — whereby the supply issuance of new bitcoin is cut by 50% irrespective of the choice of any policy makers — was quite the contrast.
What Has Transpired Since The 2020 Halving
What has transpired since that Halving event was that investor sentiment around the record monetary expansion on the horizon has been proven to be correct. The Federal Reserve (and other major global central banks) continued to inject liquidity into the financial system to keep borrowing conditions loose, and this played a major role in the adoption of bitcoin as an alternative monetary asset that exists outside the system.
At the time of writing, bitcoin has gained 533% since the halving event, as the supply and demand dynamics of a surge in demand coupled with an inelastic (and 50% reduced) supply issuance caused the price of the asset to skyrocket above a $1 trillion market cap.
Before the Halving event, legendary Wall Street manager Paul Tudor Jones published a report titled “The Great Monetary Inflation,” in which he outlined his beliefs about the incumbent monetary system and the path that it was headed on going forward, and why he believed Bitcoin was the “fastest horse.”
Shortly thereafter, in what will be remembered as a watershed moment in the ascent of Bitcoin, MicroStrategy, led by now prominent Bitcoin proponent Michael Saylor, announced that it was adopting bitcoin as a treasury reserve asset.
In what has since become an increasingly accepted view, Saylor and MicroStrategy decided that CPI was not an accurate measure of inflation and rather decided to use M2 monetary base as a measure for the inflation rate.
“Once the real yield on our treasury got to more than negative 10%, we realized that everything we are doing on P&L is irrelevant,” Saylor said. “We really felt we were on a $500 million melting ice cube.”
Are Future Halvings Priced In?
Leading up to the Halving last year, many in the Bitcoin community and more broadly in the financial system were debating whether the Halving was “priced in,” as the event is known well into the future. While I won’t delve into my personal opinion on the debate, due to the nuance and all of the exogenous variables and factors that play into the price of bitcoin, it is extremely fascinating that price seems to be tracking the stock-to-flow model that was first introduced by the pseudonymous Twitter account Plan B back in March 2019.
Are future Halvings priced in? Who knows? But what is known is that with the 2024 Halving just 156,872 blocks away, it might be a good idea to front-run the event…
Remember, if you’re not long bitcoin, you’re short. Happy one year post Halving!
A deeper dive into bitcoin’s fundamentals and recent market trends shows that the price bull run is nowhere near its top.
Bitcoin has been consolidating around the $1 trillion market capitalization threshold for almost three months, which is a very healthy development during a bitcoin bull market. So, what’s happening behind the scenes, and how should investors be thinking about the recent price action of bitcoin?
Let’s dig in.
Long-Term Trend Still Clear: Bull Market Far From Over
While it is true that at the time of writing BTC is trading at a price it first saw 75 days ago, there is absolutely nothing to be concerned about in terms of the fundamentals and long-term outlook of the monetary asset. Many market spectators have been quick to call it a “top” because of the speculation occurring in the illiquid altcoin markets, but this is a shortsighted take that does not take into account the empirical data. New entrants and capital are entering the market every single day, and the fixed monetary policy of Bitcoin remains consistent.
Long-Term HODLers Are Accumulating
The long-term HODLer net position change, which measures the 30-day change in supply held by long-term bitcoin holders, recently flipped positive, and the data from Glassnode shows that over the last 30 days, HODLers have accumulated 93,638 BTC more than they have sold. This shows that the conviction of bitcoiners is not the least bit shaken in regards to the choppy price action, and they are viewing the period of consolidation as a buying opportunity.
Miners Are Accumulating
Not only have long-term HODLers been net accumulating over the last month, but miners are as well. Over the last 30-day period, miners have accumulated a net position of 5,459 BTC, a bullish development as miners are the only natural sellers in the market, since capital expenditure and operational expenses force operations to occasionally liquidate a proportion of their treasuries.
With hash rate lagging far behind price action over the past year, and a global semiconductor shortage occurring simultaneously, expect miners to continue to be net accumulators of BTC, as profit margins remain wide across the industry.
Another fascinating metric to look at is the Puell Multiple, which measures the dollar value of bitcoin issued to miners in relation to its 365-day moving average. The Puell Multiple measures when the market has run too far, too fast.
Obviously, the market value of new bitcoin issued greatly increases in a bull market, and this can be seen not only during the recent run up but also past bull market cycles following the halving. Currently, the Puell Multiple is at 2.5, following the healthy 75-day consolidation. When compared to previous bull markets, a similar pattern occurred around the $100 mark in 2012 and the $3,000 to $4,000 level during 2017.
Another promising metric which puts into context the exponential growth occurring around bitcoin and the Bitcoin network is realized market capitalization. Realized market capitalization shows the total market cap of bitcoin, but accounts for the time each UTXO was last moved in the calculation.
This measure can be thought of as a more reliable way to measure the true economic value of the Bitcoin network. Realized cap at the time of writing is sitting at $370 billion, increasing approximately $250 billion since November. To put this move into context, the realized capitalization of bitcoin at the height of the previous bull market was $90 billion. The recent parabolic rise in realized capitalization can be seen as an immense amount of capital flowing onto the network.
A very telling metric when determining how “overheated” the bitcoin price is, MVRV is the ratio between the market capitalization to the realized capitalization. Short-term price fluctuations occur on bitcoin as price is set on the margin, and especially with the growing prevalence of derivatives and leverage in the ecosystem, total market capitalization can see explosive growth when actual capital inflows and economic activity remain somewhat muted. This is not what we are seeing, at all and is a key reason to be bullish at this moment in time.
The recent pullback in MVRV, or rather the rise in realized cap as market cap consolidates, is a very bullish sign, and should give investors confidence that this bull market has a long way to run.
The Macroeconomic Backdrop Remains Extremely Favorable For Bitcoin
One of the primary reasons for the surge in interest in Bitcoin over the past 12 months, the macroeconomic backdrop remains extremely favorable, and you shouldn’t expect that to change anytime soon.
Debt loads across the global economic system are at all-time highs, and central banks have painted themselves into a corner in terms of policy optionality. The only thing that markets know is ever-increasing liquidity injections, in what has become almost a competition between nation states and their respective central banks as to which can devalue against all of the others at a faster pace.
While it is true that rates being raised is not out of the question, it would be crippling for a global economy that has become accustomed to negative real rates over the past decade. In a very basic sense, investors should have two distinct intentions in regards to growing and preserving their capital in this macroeconomic environment:
How do I protect against debasement/dilution risk?
How do I protect against counterparty/contagion risk?
The market outcomes that can occur at this point is somewhat binary. Either central banks continue to inject liquidity into financial markets and the risk on everything rally continues, as debt continues to become cheaper in real terms, and the discounted valuations of every asset class skyrocket, or they collectively take away the punchbowl, credit contracts and markets witness a deflationary event similar to what was witnessed in March 2020. While this second possibility may not happen immediately, it is just reality that collectively, the domestic economy (in the U.S.) and the global economy are far too indebted.
In this deflationary scenario, anything with counterparty risk (any asset in the extremely leveraged banking system) is something you should hold with extreme caution. The interconnectedness of financial markets ensures that contagion spreads fast, and the default/credit risk of one market participant is something that should worry everyone.
Without going too much deeper on this matter, bitcoin is the solution to both of these market outcomes. With bitcoin, you are insulated from the record monetary debasement that is occurring in legacy financial markets, but you are also protected from a deflationary scenario in which systematic risk in the banking system does not affect you because of the network’s native self-custody attributes.
Conclusion: Stay Bullish
The fundamentals of bitcoin and the Bitcoin network remain as strong as ever, and in hindsight the shortsightedness of many prominent bitcoin skeptics will prove to again be pure folly. The reasons to be bullish are greater than ever, and one should expect that once bitcoin breaks out of the recent range, the monetary asset will once again be off to the races as global FOMO picks up in ways that have never been witnessed before.
CFO of Bridgewater Associates, the world’s largest hedge fund, John Dalby has joined NYDIG to work on Bitcoin services.
Earlier today, NYDIG announced that John Dalby, CFO of Bridgewater Associates, the world’s largest hedge fund, is joining its team and bringing more than two decades of experience in capital markets, asset management and financial services to its bitcoin services.
Before joining Bridgewater, Dalby was CFO and COO at D.E. Shaw Renewables Investments, and the CFO of UBS Americas before that.
“The NYDIG team and I are extremely excited to welcome John,” CEO of NYDIG, Robert Gutmann, said in the announcement. “Working on Bitcoin is increasingly what many of the best and brightest employees seek — including industry leaders like John — and NYDIG is uniquely positioned to offer them the platform, resources, and culture to shine, in pursuit of our collective mission to bring Bitcoin safely to everyone.”
The announcement emphasized the growing interest that institutional leaders have in working on Bitcoin throughout.
“John’s move to NYDIG showcases an increasing trend of top talent voting with their feet to propel Bitcoin’s inclusionary role as the De(Central) Bank, and its dual mandate as ultimate risk-on asset and the ultimate risk-off asset,” Ross Stevens, founder and executive chairman of NYDIG, said.
The news comes just two days after NYDIG announced that it was partnering with FIS to enable hundreds of banks to offer their customers the ability to buy, sell and hold bitcoin via their accounts in the coming months.
It seems that with every coming day, another major development is announced out of Wall Street, as more big players from the legacy system come to understand the immense opportunity presenting itself with the ascent of the Bitcoin network. NYDIG continues to lead by example in this sense, and it will be exciting to see what moves it makes next.
Bitcoin miners generated more than $56 million on average per day in April 2021, making it the industry’s second strongest month ever.
The Bitcoin mining industry saw its second strongest month ever in April 2021, generating total revenue of $1,702,531,320, or $56,751,044 per day on average, as a spike in transaction fees helped make up for slight downward pressure on price.
The strong total revenue figures can be partially attributed to the fall in hash rate that occurred earlier in the month, slowing the pace at which blocks were mined, leading to increasingly competitive (and expensive) transaction fees.
The month of April was an excellent example of the set of economic incentives built into the protocol. A significant portion of the hash rate came offline earlier in the month, slowing blocks and increasing fees for settlement on the blockchain. The rise in fees created an increasing economic incentive to sell hash rate to the Bitcoin network while block times were coming in slow.
The Bitcoin network is more robust than ever, and total miner revenue is just one metric to quantify this empirical reality.
Grayscale’s parent company authorized up to $750 million in GBTC purchases as the trust’s shares continue to trade at a discount to NAV.
Earlier today, Digital Currency Group, the parent company of Grayscale Investments, announced that it had authorized up to an additional $750 million worth of the Grayscale Bitcoin Trust (GBTC) to be purchased by the company. This is an increase of $500 million compared to an authorization by DCG announced last month.
With many funds executing the cash and carry trade over the past year, and easy access to bitcoin products still very much lacking in the legacy financial system, GBTC exponentially grew in size as the “risk free” yield opportunity presented quite an allure to investors looking to capture yield, who could redeem shares at NAV directly from Grayscale.
Now, with the premium to NAV deep in negative territory, and with newly issued shares of the trust locked from six months before being able to be traded on the secondary market, these arbitrageurs are underwater.
At the time of writing, GBTC is trading at a -12.07% discount to NAV, as seen on https://bitbo.io/.
On April 28, Genesis Global Trading, Inc., a subsidiary of Digital Currency Group, released its digital assets report for the first quarter of 2021. Genesis provides institutional clients with spot and derivatives trading, lending, custody and treasury and prime brokerage service products, so the report was full of interesting insights that showed the explosive growth in the bitcoin lending market that has taken place so far this year.
Growth In Bitcoin Lending
According to the report, Genesis saw:
$60 billion in trades, loans and transactions for digital assets over the first quarter
Over $20 billion in new loan originations, a $12.4 billion increase from Q4 2020.
Active loans outstanding increased to $9 billion, up 136.4% from $3.8 billion in Q4 2020.
At the conclusion of the quarter, BTC made up 42.8% of Genesis’ loan portfolio, a decrease from 53.9% quarter over quarter. It cited one of the reasons for the decline in loans extended in bitcoin was the GBTC discount to net asset value (NAV) that first developed in January.
With the GBTC premium negative, demand to borrow BTC to execute arbitrage trades to generate “risk free” yield greatly decline.
Through the first quarter, the spread between bitcoin futures and spot price continued to widen as more demand to be leveraged increased throughout the bitcoin market. The widening basis and increasingly liquid bitcoin futures and derivatives market continues to drive more institutional capital to the market.
“This persistence in basis premium has led many more institutions to eye crypto yield opportunities, driving our cash portfolio’s continued growth. As the June basis continued to widen into the end of the quarter, our derivatives desk saw increasing demand from macro discretionary firms and arb shops to put on the basis / cash-and-carry trade through our desk.
Some key advantages for trading the basis in a bilateral OTC format include physical settlement of the forward and collateralizing the forward with the underlying crypto asset. In many ways, the persistence of basis is a cash-deficit issue within crypto market structure.” –Genesis’ “Q1 Market Observations”
Genesis also reported on its digital assets spot trading volume, which witnessed explosive growth in Q1, trading $31.5 billion in spot,, an increase of 287% from Q4 2020, aided by the launch of Genesis Treasury. Corporates increased to 27.06% of total OTC volume, up from 0.49% of total volume last quarter.
According to the report, Genesis saw:
133% growth from Q4 across OTC and negotiated derivative blocks to reach $10.5 billion in trading volume.
Counterparty base growth of 21% over the course of the quarter.
According to the report, the majority of this flow came from:
“HNW individuals and systematic yield funds taking advantage of higher implied vols and the spot rally to lighten up on length via call overwriting.
Recycling risk in medium- to long-dated calls between overwriters and counterparties looking to add length in a levered but limited loss format. (The relative implied funding cost of perpetual swaps vs. longer-dated futures sometimes made buying longer-dated calls a more attractive option.)
Corporate accounts and venture books using puts to hedge their business risk or illiquid portfolio risk.
Selective hedging of impermanent loss via short-dated gamma portfolios”
The numbers and growth reported by Genesis are extremely bullish, and show the continued maturation in the bitcoin lending, futures and derivatives markets, as sophisticated institutional capital allocators are incentivized to enter the market due to the contrasting yields offered across the legacy versus the bitcoin futures/derivatives markets.
At the time of the report, the aggregate open interest across the bitcoin futures markets is sitting at $18.9 billion, up from $2.9 billion from a year ago. The demand to be leveraged long on BTC is a major reason that yields in the bitcoin ecosystem are so large, and this in turn drives additional capital inflows and interest in the bitcoin markets.
Expect Genesis’ growth to continue to increase exponentially over the coming quarters and for large players from the legacy system to scramble to get exposure and get involved.
As previous halving cycles along with the fundamental nature of bitcoin show, the BTC price is set to break $60,000 and go parabolic in 2021.
The price of Bitcoin has been consolidating for the last two months, and on-chain analytics and historical precedent suggest that Bitcoin is a caged bull below $60,000, ready for the next leg of parabolic price appreciation.
Halving Cycle Dynamic: Three Stages Of A Cycle
Many are familiar with the correlation between bitcoin’s supply issuance halving and the price action, but digging deeper can provide context to where bitcoin is in the current cycle, and what the future price action may hold.
The previous two bitcoin bull runs paint quite an interesting picture about the interplay of the protocol’s inelastic supply issuance schedule and the price action of the monetary asset.
To provide context: The Bitcoin network issues new supply every block on a predetermined schedule, with the amount of bitcoin issued by the protocol being reduced every 210,000 blocks, or approximately once every four years (as blocks come in at an average time of once every 10 minutes).
Stage One: The Parabolic Advance (First 70,000 Blocks After Halving)
Bitcoin miners can be thought of as the most bullish market participants, as large capital expenditure must be made before any bitcoin is even acquired, followed by the operational expenses that come with the energy needed to mine. As a result, miners hold onto as much bitcoin as they possibly can, oftentimes only selling the bare minimum to cover expenses.
Directly following a halving event, new supply issuance of bitcoin is cut by 50%, which puts downwards pressure on inefficient mining operations, which have to shut down as their revenue is cut by approximately 50% overnight.
This purge of inefficient mining operations causes network hash rate to temporarily drop off, leaving only efficient mining operations with cheap power sources and/or next generation ASICs to mine for blocks. With inefficient miners that operated with negligible profit margins out of the market, and hash rate pulling back significantly, difficulty adjusts downwards and the miners still in the market are left with significant profits, greatly reducing sell pressure in the market.
Inefficient mining operations will often be sold and/or relocated to a different jurisdiction with cheaper energy.
Not only does the halving event decrease the quantity of new bitcoin supply issued per day immediately, but in the process, remaining mining operations see their competitors ousted simultaneously. With inefficient mining operations having to turn off and oftentimes geographically relocate, efficient operations enjoy greater market share, as well as wide profit margins.
These dynamics, coupled with increasing development, improved exchange and wallet infrastructure and a fresh wave of new adopters, create a massive disequilibrium between available bitcoin supply versus market demand, which serves as rocket fuel for the price of bitcoin.
During the parabolic leg of a bull market following the halving, the price action and adoption of bitcoin is reflexive. A new all-time high is breached, and bitcoin is once again thrown in the center of the media circuit, catching the eyes of speculators and investors across the globe. It begins to sink in for many that Bitcoin has not “died” as they may have previously believed, and increased legitimacy, market liquidity, market infrastructure and the newfound support by respected investors increases demand, despite supply remaining completely inelastic.
A feeding frenzy is incited, as an exponential increase in demand for the monetary asset has to be priced against an absolutely fixed, verifiable supply. The 2012 and 2016 cycles saw this dynamic play out for approximately 70,000 blocks.
Stage 2: Large Drawdown (70,000 to 140,000 Blocks After Halving)
Following the parabolic advance, the price of bitcoin is an order of magnitude (or more) above where it was trading at the Halving. Even with a new wave of adopters in the market, the last two halving cycles have witnessed a protracted drawdown as new demand is exhausted and is unable to keep up with supply hitting the market. There are a few reasons this takes place.
A result of the rising bitcoin price is that the mining industry becomes extremely competitive. With the price of bitcoin increasing exponentially, mining profitability skyrockets. This creates an incentive for new market participants to enter, but because of the rapid increase in demand, supply of new mining equipment lags behind price. As the price goes exponential, hash rate follows, with new miners coming online throughout the cycle. A result of economic incentives, the new ASICs take time to be manufactured, shipped out and plugged in efficiently and effectively. This is why hash rate often will lag price, only to catch up later on after the cyclical top.
Because of the difficulty adjustment that is built into the protocol, the miners continue to fight for the same amount of bitcoin, despite increasing competition and difficulty. This dynamic means that with all else being equal, profit margins across the mining industry are diminished, thus increasing potential sell pressure as miners have capital expenditure and operating expenses denominated in dollars.
With increased sell pressure from miners later in the bull run, demand eventually cannot keep up. With the exponential increase in users and adopters (stackers/HODLers), an increasing amount of buy side pressure is exerted in the market in the early stages of the bull run. However, as bitcoin increases in value by an order of magnitude (or more) in a very short amount of time, newfound demand dries up, and the sell pressure from miners and long-term holders can no longer be met with increasing demand to sustain such a high price.
This dynamic can be seen with the Puell Multiple Indicator, which is calculated by dividing the daily issuance value of bitcoins in dollars by the 365-day moving average of daily issuance value. Even with demand increasing exponentially, if price rises too far, too fast, the new high in price cannot be sustained for long.
Interestingly, the 2013 bull run saw what some call a “double bubble,” as the price rose to a high of $250, then crashing down to $50, before reaching a high of over $1,100 later in the year.
The price floor is eventually found multiples above the previous cycle high as the new wave of adopters establish a steady stream of demand as HODLers/stackers continue to accumulate the asset despite the severe drawdown. In 2015, the price found a solid floor around $200, while in 2018 the floor was found around $3,200. The bottom is in when the sell pressure from the purge of inefficient miners (who are squeezed by ever-increasing hash rate), speculators and long-term holders is met by equal demand from strong-handed bitcoin accumulators, who come to understand the superior monetary attributes of the asset.
Stage Three: Consolidation (Market Attempts To Find New Equilibrium)
Following the protracted decline in price, the last approximately 70,000 blocks of the halving cycle see the price of bitcoin attempt to find a new price equilibrium. The price ranges above the bottom set approximately 140,000 blocks after halving, and below the all-time high set approximately 70,000 blocks following the halving. All the while, hash rate continues to rise as new miners plug in as lagging demand to mine bitcoin by increasingly deep pocketed and sophisticated investors with cheap energy sources is finally felt in the market.
What To Expect For The Rest Of 2021
If anything can be taken away from past market cycles and a multitude of various metrics and on-chain analytics, the price of bitcoin is set to continue to go parabolic throughout the rest of 2021.
Since the halving, price has surged 516% while hash rate has only increased by 33%. This can be attributed to a variety of factors, including a global semiconductor shortage. This is significant because it means that miner profitability has surged with the increase of price, while hash rate and subsequently difficulty has lagged far behind. This is extremely bullish as new waves of demand continue to push the bitcoin price higher, while miner selling pressure remains near non-existent.
With this in mind, with a high amount of certainty it seems that the “top” is nowhere close to being set, with the parabolic advance still having much of 2021 to develop. However, following the parabolic rise that comes with the first 70,000 blocks following a halving, will bitcoin see a protracted approximate 80% drawdown and bear market similar to past cycles? One must not be so sure.
This Time Different™
The traditional boom and bust cycle is well known at this point, but this cycle has seen developments that could alter the traditional market cycle that bitcoiners and investors have become accustomed to. Often called the four most dangerous words in finance: Is this time different? Yes, and here is why.
A Developed Market For Bitcoin As Collateral
Throughout the course of previous bitcoin bull runs, early adopters and HODLers grew specutaturly wealthy in very short amounts of time, off of what often began with a small allocation. These individuals naturally would look to sell/spend a proportion of their holdings, whether to diversify into alternative investments or to spend for personal enjoyment, as bitcoin is, at the most fundamental level, money, after all.
However, this cycle comes with optionality that was not present in previous cycles. The dynamic of a developed bitcoin futures and derivatives market, along with the increasing ease of deploying bitcoin as collateral changes market dynamics significantly.
No longer do long time holders need to sell their bitcoin to enjoy their recently exponentially increased savings/wealth. The advent of a market for dollar loans collateralized by bitcoin holdings is a massive deal, and has broad implications for both bitcoin and the dollar.
The value of the global market for collateral is estimated to be approximately $20 trillion. Currently, government bonds and cash like securities are the most prevalent forms of collateral. An efficient and liquid market for collateral is imperative for a fully functional financial system.
Collateralized loans can be beneficial to both borrowers and lenders, as lenders hold security against default risk, and the borrower can obtain credit that they would not have obtained otherwise and/or receive the loan on more favorable terms. Various forms of collateral come with their own sets of tradeoffs.
What is not very well understood outside of the bitcoin space is that the asset is the best form of collateral the world has ever seen, and this statement becomes increasingly relevant the larger and more liquid the bitcoin market becomes.
Bitcoin trades 24/7/365, has liquidity in every jurisdiction and market in the world, is highly portable, fungible, and is not subject to rehypothecation like many other traditional forms of collateral like bonds and other financial assets, and as a completely transparent ledger it allows any entity to audit ownership and know who exactly owns what.
With the ability to use an absolutely scarce, digital bearer asset as a form of collateral, lenders can mark to market positions every second, and in the case of a steep BTC/USD drawdown, liquidate the borrowers collateral.
Market participants, specifically those with an extremely large amount of bitcoin, now have the option to never sell any of their holdings, while living off of their stack. With the assurances of steady devaluation across all fiat currencies, HODLers can borrow against a small proportion of their bitcoin stack and use the dollars to spend/invest. When it comes time to pay off the principal of the loan later on, more fiat can be borrowed and the fiat obligations can be rolled over.
This works because the centrally planned market rate for fiat currencies is coming up against the free market price of bitcoin; an absolutely scarce, digital monetary asset. Bitcoin will continue to appreciate at a greater pace than the interest rates set by central banks, which have attempted to warp the cost of capital to zero (or even negative in many jurisdictions).
Credmark, a leading company in the credit data space, shared data in a report released this February by Arcane Research, showing that the lending market has seen a sharp rise over the past year, estimating that approximately 400,000 BTC could already be in use as collateral in the lending market at the time of the report’s release.
This is occurring at the same time that the incumbent monetary system is at the tail end of the long-term debt cycle, and the explosive combination of a free market, absolutely scarce, global monetary asset — up against various centrally-planned national currencies that are issued by central banks which are forced to continue to pump liquidity into the system — will bring about an extinction event for the incumbent monetary regime/s.
Expect bitcoin to go parabolic throughout the rest of 2021, but be wary, this time may be different…
Comments from the Swiss National Bank chairman signal that he does not understand the bitcoin market or is strategically downplaying it.
Today, a report emerged indicating that Chairman of the Swiss National Bank (SNB) Thomas Jordan commented on the liquidity of the “cryptocurrency” market.
“Cryptocurrencies are not liquid enough for the bank to have as one of its investment assets,” Jordan said.
While the chairman did not mention bitcoin by name specifically, bitcoin is by far the most liquid asset in the cryptocurrency market, and is the only logical choice for the central bank to add to its balance sheet among all “cryptocurrencies,” so it stands to reason that he is dismissing bitcoin’s liquidity.
In its 2020 annual report, however, the bank reported an asset allocation of 91% foreign currency investments, 5% gold, 1% Swiss bonds and 3% miscellaneous assets, totaling 999,027,900,000 CHF (or $1,094,506,994,458).
Digging into the report, and SNB’s strategy in general, it becomes clear that Jordan does not understand bitcoin, its liquidity or its position in relation to the investment assets that he does consider to be “liquid enough.”
“The most important element for managing absolute risk is broad diversification of investments. Risk is managed and mitigated by means of a system of reference portfolios (benchmarks), guidelines and limits. All relevant financial risks associated with investments are identified, assessed and monitored continuously. Risk measurement is based on standard risk indicators and procedures. In addition to these procedures, sensitivity analyses and stress tests are carried out on a regular basis. The SNB’s generally long-term investment horizon is taken into account in all of these risk analyses…
The currency reserves are mainly composed of gold, bonds and shares. The diversification effects achieved by adding shares to a portfolio, as well as equities’ high liquidity, make them an attractive asset class for the SNB. Furthermore, given that expected return is higher on shares than on bonds, this asset class helps to preserve the real value of the currency reserves.” -SNB’s 2020 annual report.
With the Swiss franc strengthening over the past two decades, SNB has engaged in the practice of printing francs to buy dollars (and other foreign currencies), and to buy dollar-denominated assets, including a large number of U.S. equities.
It is clear that Jordan is attempting to downplay what is really occurring: Central banks are being displaced and disrupted by superior technology in real time, and the game theory suggests that they should further accelerate their own demise by accumulating the world’s first and only absolutely scarce monetary asset.
If the SNB was truly interested in mitigating risk through diversification, as well as investing with a “long-term time horizon,” it would start accumulating bitcoin, and most likely not disclose the action. The numbers don’t lie, bitcoin as an asset is actually the least “risky” in terms of risk-adjusted returns.
The game theoretic adoption of bitcoin at a nation state and central bank level has yet to begin. No one is better than their incentives, and the incentive of being an early adopter of bitcoin at a central bank and sovereign level is too strong. Expect central bank accumulation of bitcoin, even while they denounce it.
For bitcoin HODLers and stackers everywhere, let’s hope Jordan is truly oblivious, and does not yet realize that he doesn’t have a choice whether or not to buy bitcoin, but rather can only choose at what price to buy it.