Bitcoin: Next Cycle Could Be Bigger
Last cycle's headwinds are giving way to next cycle's tailwinds
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There have been two iron rules of Bitcoin’s 4-year price cycles:
1. The bear market low never goes below the prior peak.
2. Each bull market delivers less upside than the cycle before it.
In November 2022, we broke rule #1 (the $15k price bottom was below the $20k peak from 2017).
I’m starting to think we might break rule #2 after the upcoming halving.
My thinking consists of two pieces. First, last cycle’s bull market saw headwinds that are unlikely to exist during the next bull market. Second, there are new tailwinds brewing that could fuel the next bull market in a big way.
What happened last cycle
Despite rallying ~8x from the 2020 halving to the 2021 peak, Bitcoin’s price performance paled in comparison to prior cycles. Here’s how the last cycle compared to the 4-year halving cycles that preceded it:
This decaying amplitude of bull markets is to be expected in one sense. This is because each subsequent halving represents a smaller reduction of new supply issuance relative to the circulating supply.
However, I’ll argue that we were on track for the 2021 bull market to deliver ~15x performance instead of the ~8x we got. What happened?
The confluence of several factors resulted in a different bull market peak than in all prior Bitcoin bull markets. Instead of a parabolic advance culminating in a blow-off top, we got a bi-modal rounded top spread out over six months.
In my opinion, there were four factors that prevented the bull market from extending into a blow-off top:
In mid-2021, China announced it was banning Bitcoin mining. This caused an influx of sell pressure because of the sudden fear of what would happen to Bitcoin plus the logistical needs of Chinese Bitcoin miners to sell coins to fund the relocation of warehouses full of Bitcoin mining hardware.
Next cycle: Very unlikely to happen again.
The preponderance of leverage
Before the 2018 ascent of BitMex, the pioneer of leveraged futures trading in Bitcoin, the Bitcoin market did not have a significant amount of leverage. That meant that the 2017 bull market (and all earlier ones) took their course without leveraged speculators influencing proceedings.
The 2021 post-halving bull market was the first one characterized by widespread use of leverage.
During the bull run, this leverage skewed heavily towards long positions. Because of the mechanics of these leverage markets, this results in the leveraged long traders paying daily interest to their counterparties on the other side of the trade. These interest payments created a natural braking effect on the price of Bitcoin.
Prior bull markets were characterized by a manic blow-off top where suddenly there were no sellers left and desperate bidders pushed the price up dramatically in the final days and weeks in order to find willing sellers. By contrast, the 2021 bull market had more willing sellers because they were being paid high interest rates to take a short position.
Next cycle: Likely to play a role (these sophisticated financial products are part of this asset maturing). Will partially smooth out excessive enthusiasm (tops) and excessive pessimism (bottoms).
Paper Bitcoin issuance
When FTX collapsed, it turned out that they owed customers $1.4B in Bitcoin (80k coins) that they didn’t have. That is “paper Bitcoin.” These customers owned it on paper, but at the end of the day, it wasn’t really there.
80k Bitcoin amounted to ~25% of all the Bitcoin mined over that year. In other words, FTX’s “issuance” of incremental Bitcoin supply “added” 25% to the amount of new supply created that year.
This meant that demand for Bitcoin during the bull market was being spread between purchases of actual Bitcoin and purchases of imaginary Bitcoin. In other words, FTX diminished the acute supply shortage (and resulting price run) substantially.
Next cycle: Likely to occur in some form. (Last week, I highlighted how BlackRock’s ETF could become a major source of paper Bitcoin issuance, either at the expense of BlackRock or their clients, see link.)
The Fed’s pivot to QT
The Fed’s response to the Covid crisis was a massive stimulus package that fueled a bull market across stocks, real estate, commodities, and crypto. That Quantitative Easing undoubtedly helped fuel the 2021 Bitcoin bull market.
The mid-2021 China ban temporarily derailed the Bitcoin bull market. But Bitcoin’s price and momentum recovered. By late-2021, Bitcoin was breaking out to new highs and appeared poised to make a run for $100k+.
However, the Fed’s sudden shift in late 2021 to Quantitative Tightening marked the exact top for Bitcoin.
At that point, markets shifted from heady enthusiasm to fear about what interest rate hikes would mean for markets after a decade of Zero Interest Rate Policies (ZIRP). The shortage of sellers that a blow-off top requires was no more.
As with all of the above factors, its hard to say how significant of a force this pivot from QE to QT was for Bitcoin. But in my opinion, it’s no coincidence that it marked the top.
Next cycle: The shift from QE to QT that muted the 2021 bull market appears most likely to be replaced next bull market by a 2024 shift from QT back to QE. More on this in a bit.
Without these four factors, I think we would have seen Bitcoin’s price extend into a blow-off top in the ~$125k range. This would have meant a ~15x bull market, as per the table at the top of this article.
Obviously, we didn’t get that. And there’s no point in reflecting on the “what ifs,” except to help us take stock of conditions going into the next Bitcoin halving, now just 10 months away.
The conditions of next cycle
The halving is coming. That’s always bullish, specifically because of the supply/demand price mechanics that are set in motion.
But what is different this cycle is the supply shortage that is building up already...
Exchanges have been seeing a supply exodus for several years
70% of supply is being held by long-term holders now
Small holders are accumulating coins faster than Bitcoin is being mined
My thanks to @_Checkmatey_ from the Glassnode team for sending me this fantastic chart, an updated version from this excellent report. (And thanks to @1GazaDon, @149MH, and @BTCBrisket for helping me find this data.)
This last chart says that something has changed.
Small holders are accumulating Bitcoin faster than ever. In fact, the recent spike shows that Bitcoin addresses holding <1 BTC (“Shrimp”) are currently accumulating Bitcoin 100% as fast as new coins are being mined. But accounts holding between 1-10 BTC are also accumulating 100% of the new Bitcoin being mined. And on top of that, accounts with 10-100 BTC are accumulating 75% of the new Bitcoin being mined right now.
Together, that’s 275% of all the new Bitcoin being mined. Right now, individuals are accumulating way more Bitcoin than is being created.
This has never happened before. We have reached some kind of inflection point.
For individuals and small businesses all over the world, Bitcoin suddenly makes a lot more sense. People are accumulating with confidence and urgency – including many of you reading this.
You know the halving is coming in 10 months, you understand the mechanics of what will be set in motion, and you’re determined to capitalize on this rare information asymmetry of understanding something before the world catches on.
But this trend isn’t only happening among small-scale Bitcoin accumulators – bigger fish are slowly coming to the same conclusions…
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