How to think about the current bitcoin cycle and bull market
The following article is an attempt to help bitcoin investors traverse the current bitcoin bull market, stay focused and be successful on the other end of this crazy journey.
This is not financial advice. Investing in bitcoin and cryptocurrency is risky. Please do your own research. The ideas presented in this newsletter are my personal opinions and meant for informational and entertainment purposes only.
It’s important to understand what type of asset bitcoin is trying to become, what’s happened in previous cycles and where we are in the current cycle. This will help us think rationally, manage risk and be profitable.
The Bitcoin Asset Class
If you haven’t read the article How to Value Bitcoin, I highly recommend reading it for more details regarding bitcoin’s underlying value and to understand how investors are viewing the asset. Bitcoin has transitioned from a technology hobby project, to a payment system, to digital gold, to a financial asset and now to a reserve asset. When thinking about a reserve asset, you should think in terms of buying power. What is going to hold the most value over time? Historically, gold has been used as the best reserve asset for it’s specific characteristics — scarcity, authenticity, fungibility and salability. Then, the US dollar took gold’s place post WWII and after the Bretton Woods Agreement making the US dollar convertible to gold. But, now things are changing. The world is going through a tumultuous period in time when the dollar and fiat currencies (government backed paper) have left an opening for technology to step in and replace money. Specifically, sound money as the world is losing confidence in fiat currency’s ability to store value. Simply put, bitcoin is trying to become the money denominator or the unit of account. In our digital future, what do you think makes the most sense for prices?
Money is a technology. A social phenomenon that allows human beings to coordinate and execute trade at scale to maximize efficiencies. Bitcoin has the characteristics to be the best money ever created.
- Store of Value — deflationary monetary policy. There will be less new bitcoin issued in the future.
- Portability — it can be sent over the internet, satellite and radio.
- Medium of Exchange — more merchants accept bitcoin today than yesterday and PayPal’s recent announcement will only accelerate adoption.
- Fungibility — 1 bitcoin is divisible into 100,000,000 Satoshis.
- Absolute Scarcity — there will only be 21 million bitcoin ever in circulation. There is no other element in the known universe with a fixed supply.
- Fast Clearance & Settlement Times — less than 30 mins to settle transactions placed anywhere in the world. Trying moving $1B of gold. It takes an army, million dollar costs and days to complete.
- Decentralized — no one controls bitcoin and no one can stop bitcoin from working.
With that said, bitcoin’s market value sits at ~$300B. This is extremely small for an asset that’s trying to become a reserve asset and effectively become the money denominator. To put things into perspective, listed below are the approximate global market caps of gold, stocks, real estate and derivatives.
Bitcoin’s upside potential is real and massive. Day trading bitcoin is not recommended unless you’re a professional. The best way to “stack sats” and increase your bitcoin position is to dollar cost average (DCA) or buy the dip. And, of course HODL, which means sit on your hands, don’t sell and enjoy the ride — Hold on For Dear Life.
Bitcoin is viewed as a volatile asset, but only when you frame it from a price action perspective. If you understand it’s real value, have low time preferences and think long term; then bitcoin’s volatility becomes a feature not a bug. The short term volatility provides endless entry points to strengthen your bitcoin position or if you’re a trader, to buy low and sell high. Another framework to view bitcoin’s volatility is through the lens of a young technology stock that’s had a price tag since the day it launched as a startup. For reference, Amazon’s priced dropped 98.7% between the years of 2000–2002. Strong hands prevail.
Previous Bitcoin Cycles
Chart Source: Chart Source: PlanB @100trillionUSD, with annotations added by Lyn Alden
Bitcoin cycles happen every 4 years and are driven by bitcoin’s halving event. Bitcoin’s core properties are coded into it’s immutable software. Bitcoin has a fixed supply of 21 million coins. There are currently ~18.5 million coins in circulation. Every ten minutes a specific number of coins are issued into circulation through the bitcoin mining and transaction verification process. When the Bitcoin network first launched in 2008, every ten minutes 50 coins were issued. Then in 2012 the new issuance was cut in half for the first time to 25 coins. Then it was cut to 12.5 coins in 2016. Then on May 12th 2020 bitcoin halved for the third time and now 6.25 coins come online every ten minutes.
The reason why this is such a big deal is because the halving creates a massive supply shock. It’s a new technology with global demand and every four years there’s exponentially less bitcoin available for new buyers. Supply and demand would suggest bitcoin’s price should increase, which it has dramatically after each of the previous halving events. These bitcoin bull markets have historically lasted about 18 months post halving before the market gets too hot, over bought and sells off creating what seems to be a bubble. It’s clear that bitcoin is not a bubble and is certainly not dead as it’s testing $16k again. But, this time is different.
Above is a chart of the United States 10-year Treasury Yield. The chart of truth. US government bonds have been the safe haven asset to hedge inflation and protect wealth over time. However, that’s not necessarily the case any more as we reach the zero bound and real returns go negative. This means investors are guaranteed to lose money when yields no longer protect against inflation. The Fed and global central banks have guaranteed low interest rates and loose monetary policy to create accommodating conditions for markets and have called on government for increased fiscal stimulus to bolster global economies. These conditions push investors farther out on the yield curve and into risk assets in order to find the necessary returns to meet their liabilities. Enter bitcoin.
When surveying the market landscape and evaluating the best options to hedge inflation, most markets will do well as more financial units are flooded into the system. However, equity markets have dislocated from reality and the real economy providing investors with expensive P/E ratios and over valued opportunities. Hard assets and commodities have traditionally done well, such as gold, silver and copper. But, everyone in the investing community is starting to talk about bitcoin. Legendary investors such as Paul Tudor Jones, Stanely Druckenmiller and Bill Miller are super bullish on bitcoin because it’s not only going to hedge their portfolios against inflation, but provide one of the best return opportunities of all time. Why is this a big deal?
Current Bitcoin Cycle
In 2017, the bitcoin bull run was driven by retail investors with relatively small position sizes. The 2021 bitcoin bull run will be driven by institutional investors and publicly traded companies taking hundred million and billion dollar positions. Keep in mind, this is all happening post halving when bitcoin is the most scarce it’s ever been. There’s simply a wall of demand coming for a very small amount of supply.
It’s important to keep your head and manage risk appropriately. If you’re feeling over extended or you’re up on your investment, trim your position or take some profits. If you feel like you’re short, dollar cost averaging is an excellent strategy for ignoring the volatility / trying to time the market and accumulating more bitcoin. But, whatever you do, don’t sell your whole stack. Once bitcoin passes $50k and increases in liquidity, it opens up to new institutional investors who have to comply with specific liquidity regulations. Then, once bitcoin passes $100k and approaches a $2T market cap, we’re in a new world and heading to a new financial system, so selling is probably a bad idea.
We’ll leave you with this chart to help put things into perspective. We’re currently in the awareness phase and it’s just getting started. Buckle up.
**This is not financial advice. Investing in bitcoin and cryptocurrency is extremely risky. Please do your own research. The ideas and news presented in this newsletter are my personal opinions and meant for informational and entertainment purposes only.