In a recent publication by Pantera Capital, the firm delved into the concept of a “positive black swan” event in the blockchain industry. The term “black swan” traditionally refers to unpredictable events with potentially severe consequences. However, in this context, Pantera Capital highlights the positive implications of such events for the blockchain sector.
Key takeaways include:
Historical Bitcoin Price Predictions
Pantera Capital references historical trends to make a significant prediction about Bitcoin’s price trajectory. The firm states, “If history were to repeat itself, the next halving would see bitcoin rising to $35k before the halving and $148k after.”
Blockchain’s Rapid Growth
The blockchain sector has witnessed exponential growth over the past few years. Pantera Capital cites that the number of blockchain users has doubled every twelve months. This rapid adoption rate underscores the increasing acceptance and integration of blockchain technologies in various industries.
Bitcoin’s Resilience
In the face of regulatory hurdles and market shifts, Bitcoin has showcased significant stability. Pantera Capital points out that, over the last 90 days, Bitcoin’s price fluctuations have been steadier than 87% of stocks in the S&P 500.
DeFi’s Potential
Decentralized finance (DeFi) platforms have garnered significant attention and investment. Pantera Capital emphasizes the potential of DeFi to revolutionize traditional financial systems by offering decentralized alternatives.
Blockchain’s Positive Impact
The article suggests that blockchain technology can play a pivotal role in addressing global challenges. From improving supply chain transparency to fostering financial inclusion, blockchain solutions have the potential to drive positive change on a global scale.
Future Outlook
Pantera Capital remains optimistic about the future of blockchain and its transformative potential. The firm believes that as the technology matures, its impact will be even more profound, touching various facets of our daily lives.
In conclusion, while black swan events are typically associated with negative outcomes, Pantera Capital presents a compelling case for the positive impact of such events in the blockchain domain. The firm’s insights underscore the transformative potential of blockchain technology and its role in shaping the future of various industries.
About Pantera Capital
Established by Dan Morehead, the former Head of Macro Trading and CFO at Tiger Management, Pantera Capital stands as a prominent figure in the investment arena. The firm’s adeptness in global macro strategies has seen it oversee more than $1 billion in institutional allocations. In a pioneering move in 2013, Pantera introduced the United States to its first blockchain hedge and venture funds. The firm observed a swift rise in the adoption of digital assets globally, a trend accentuated during the COVID-19 pandemic, serving as a countermeasure against unparalleled fiscal and monetary expansion. Additionally, a noteworthy transition in the fiscal domain is evident as major public corporations have begun incorporating Bitcoin into their financial reserves.
Pantera Capital’s investments span a myriad of blockchain initiatives, encompassing but not restricted to Zcash, Xapo, Wintermute, Ripple, Polkadot, Near, Filecoin, Coinbase, Circle, BitGo, and Bitstamp.
With Bitcoin’s current return of approximately 456% since the third halving event in May 2020, this is a significant underachievement compared to the two previous cycles of 2012 and 2016, which had recorded 1,355% and 4,974% respectively at this point in time.
“BTC returns from this cycle underperform the two previous cycles which returned 4,974% and 1,355% respectively at this point in time. This fuels the fear that the 4yr cycle that many market participants believe in is no longer an appropriate narrative.”
Nevertheless, Bitcoin’s present return is higher than traditional asset classes like S&P 500 with 59.3%.
Bitcoin halving refers to the reduction of Bitcoin block rewards, which occurs once every 210,000 blocks are created, and it usually happens around every four years. Block reward refers to the amount of Bitcoin received by miners after they successfully validate a new block. The rationale behind this is Bitcoin’s design, whose total supply is capped at 21 million coins.
Bitcoin’s third halving took place on May 11, effectively reducing the block rewards from 12.5 to 6.25 BTC per new block. This was the third time in its history that this event was happening as the previous ones occurred in 2012 and 2016. Precisely, Bitcoin’s block rewards went down to 25 from 50 Bitcoin per block in November 2012. It further decreased to 12.5 units in July 2016.
The logic behind halving events is that more BTC gets mined as more people utilize the Bitcoin network. Therefore, by slashing the mining rewards by half, retrieving this digital asset becomes difficult, increasing its value based on limited supply.
Meanwhile, the number of Bitcoin whales continues to grow.
“The number of whale addresses holding 100 to 1,000 BTC has 193 more addresses in this prestigious club, compared to just 10 weeks ago. The number of whales in this tier has shown some strikingly impressive parallels to BTC price, historically,” according to crypto analytic firm Santiment.
Total circulating Bitcoin (BTC) hit a significant milestone on Monday morning, one and a half years after the last Bitcoin halving, as 90% of the maximum total supply has been mined.
Current data from Blockchain.com shows Bitcoin in circulation hit 18.899 million as of Dec. 13, meaning only 10% of the total supply is left to mine. While the first 90% of BTC took about 12 years to mine, the rest will take a little longer.
Bitcoin has a hard cap of 21 million coins set by its anonymous creator Satoshi Nakamoto. This limitation is written in Bitcoin’s source code and enforced by network nodes. The hard cap on Bitcoin is critical to its value proposition as a currency and an investment tool.
As detailed by Cointelegraph, it would take 119 years from now to complete the Bitcoin mining process due to the rate of producing new Bitcoin being cut by half every four years in a pre-determined protocol execution, also known as the Bitcoin halving.
Related:The history of Bitcoin: When did Bitcoin start?
Since the Bitcoin blockchain only creates new BTC as a reward for miners verifying new blocks, the halving ensures less Bitcoin is produced as the total circulating supply increases. Since May 2020, miners have earned 6.25 Bitcoin for every new block verified. This rate would decrease to 3.125 BTC per block in the next halving in 2024.
By 2040, the block reward will have reduced to less than 0.2 BTC and only 80,000 Bitcoin out of 21 million will be left up for grabs. The last Bitcoin would take close to 40 years to mine.
The Bitcoin price started the week with a fresh rejection of $50,000 as the end-of-year close is fast approaching. It is almost 30% down from its all-time high of $68,789 reached on Nov. 10 at the time of publishing.
Quantitative analyst PlanB is predicting when the market cap value of Bitcoin (BTC) could overtake that of more traditional assets such as gold and real estate.
In an interview with Blockware Intelligence, the analyst says that BTC could reach a market cap valuation somewhere between gold and real estate by the next halving. A halving occurs when the reward for mining BTC is cut in half. It is believed that the next two halvings will take place in 2024 and 2028.
PlanB then sees Bitcoin’s market cap reaching somewhere between $10 and $100 trillion.
“After the next halving, or really this halving, we should get really close to the gold market cap.
And after the next halving, it would really surprise me if an asset that is recognized by the market as a store of value, that has more than a trillion dollars in value, if that store of value, with a bigger scarcity than gold, would not at least be valued higher than gold.
So somewhere between gold and real estate – $10 trillion and $100 trillion, roughly.”
Bitcoin’s market cap is approximately $1.2 trillion at time of writing.
PlanB predicts the next halving could be a catalyst that prompts investors to perceive Bitcoin as a scarce store of value.
“…I think that the halving still will be an impulse for investors because they will recognize and see Bitcoin for what it is – a really scarce asset, and valuable.”
The crypto analyst’s forecasts are based on the stock-to-flow (S2F) trading model, which attempts to predict the price of an asset by measuring the amount of new supply entering the market compared to the amount of already existing supply.
Looking at the S2F applied to Bitcon, PlanB sees an even bigger future for the largest crypto asset by market cap.
“I do think if the stock-to-flow of Bitcoin will be bigger than even real estate – so above 100, and that basically is the case after the next halving – and certainly after the halving in 2028. But let’s say 2024, when we go over real estate, then it will be the most portable, most divisible, more fungible, and also the most scarce asset on the planet.
I think investors will see that, and that combination will probably mean that people are going to see Bitcoin not as a store of value but as in money. And that will trigger the hyper-Bitcoinization.”
Bitcoin is currently trading at $66,196, up 6.04% over the last 24 hours.
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Ethereum’s native token Ether (ETH) has rallied by more than 415% this year to over $3,800, and two major bullish patterns developing on its charts highlight the scope for another upside move, ultimately toward the $6,200–$6,500 price range.
ETH price eyes $4K resistance breakout
The first decisive break above the psychological $4,000-mark, which serves as a resistance trendline to a five-month-old ascending triangle and a cup and handle pattern, could trigger a textbook price rally in the coming sessions.
In detail, the $6,250-level appears as the profit target for the Ascending Triangle pattern, calculated by measuring the widest distance between its horizontal and rising trendlines and adding the output to the potential breakout level around $4,000.
ETH/USD daily price chart featuring Ascending Triangle (black) and Cup & Handle (blue) pattern. Source: TradingView
Thus, the price boom reflects moves equivalent by roughly 64%.
At the same time, the Cup and Handle pattern, which has a slightly lower success rate than Ascending Triangle, shows a potential run-up toward $6,550 in the coming sessions, up by 56% from current levels.
Its profit target emerges by measuring the distance between the Cup’s right peak and its bottom and adding the outcome to the potential breakout level around $4,000 — the same as Ascending Triangle.
One of the primary catalysts that support the two bullish indicators is trading volume, which has been falling across the formation of the said patterns. That suggests a weak consolidation sentiment among traders. Meanwhile, the relative strength index (RSI) below the overbought threshold of 70 also shows adequate room for a bull run.
The Bitcoin correlation effect
The optimistic outlook for ETH appears in the wake of a market-wide upside boom led by Bitcoin’s (BTC) 29% month-to-date price rally.
According to CryptoWatch, the 30-day correlation coefficient between Bitcoin and Ethereum sits near 0.89, meaning that the success rate of the two assets moving in sync is 89%.
Ecoinometrics, a crypto-focused newsletter service, noted the positive correlation as it highlighted the Ether price’s reaction to Bitcoin “halvings,” a pre-programmed event that slashes the BTC’s issuance rate by half every four years, against its 21 million supply cap.
The portal studied Bitcoin and Ether’s price reactions to the previous two halvings and applied the dataset to predict their tops after the third halving, which took place on May 11, 2020. As a result, it anticipated BTC to rise 29.5x times to hit $253,800 by late November 2021.
Bitcoin vs. Ethereum — Post BTC halving growth trajectory. Source: Ecoinometrics
Similarly, Ecoinometrics highlighted $22,300 as Ether’s price target in the same period, based on its 120x price rally following the second Bitcoin halving.
ETH supply crunch continues
More bullish cues for Ethereum appeared in the form of its ongoing supply squeeze.
Related: Ethereum price hits $3,800, boosting bulls’ control in Friday’s ETH options expiry
Notably, the total number of Ether deposited into the Ethereum 2.0 smart contract reached an all-time high of around 7.98 million ETH on Oct. 1. These tokens remain locked/untransferable for one year or more.
Ethereum total value in ETH 2.0 deposit contract. Source: Glassnode
Meanwhile, the total amount of Ether held across all exchanges continued to stay around its record low levels, with CryptoQuant reporting 18.187 million ETH in reserves on Monday compared to 23.323 million ETH a year ago.
Ethereum reserves across all exchanges. Source: CryptoQuant
Moreover, crypto data tracker Santiment reported a rise in new Ether addresses last week while the number of non-zero Ether wallets reached a record high of 64.5 million.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
Bitcoin’s (BTC) market tendency to crash by over 80% after logging strong bull runs might come to an end.
That is according to a new report published by California-based hedge fund Pantera Capital. In detail, the report notes that the recent periods of BTC price drops have been less severe than in the past.
For instance, in 2013–2015 and 2017–2018, Bitcoin crashed by as much as 83% after topping out near $1,111 and $20,089, respectively. Similarly, the cryptocurrency’s bull run in 2019–2020 and 2020–2021 led to massive price corrections. Nevertheless, the scales of their retracements afterward were -61% and -54%, respectively.
Bitcoin bull and bear markets across its history. Source: Pantera Capital
Dan Morehead, CEO of Pantera Capital, highlighted the consistent drop in selling sentiment after the 2013–2015 and 2017–2018 bearish cycles, noting that future bear markets would be “shallower.” He explained:
“I long advocated that as the market becomes broader, more valuable, and more institutional the amplitude of prices swings will moderate.”
The statements appeared as Bitcoin renewed its bullish strength to retest its current record high near $65,000.
BTC/USD rallied above $60,000 for the first time since early May as the United States Securities and Exchange Commission approved the first Bitcoin exchange-traded fund (ETF) after years of rejecting similar investment products.
The approval of ProShare’s Bitcoin Strategy ETF raised expectations that it would make it easier for institutional investors to gain exposure in the BTC market. That also helped Bitcoin wipe almost all the losses incurred during the April–July bear cycle as BTC’s price doubled to reclaim levels above $60,000.
Bitcoin price cycles throughout the history. Source: Pantera Capital
BTC undervalued?
It’s becoming increasingly common to hear $100,000 valuations as Bitcoin grows to become a mainstream financial asset, with its first ETF approval seeming to be right around the corner.
Morehead cited the popular stock-to-flow model, which studies the impact of Bitcoin’s “halving” events on prices, to rule out a similar bullish outlook for the cryptocurrency. He noted that the first halving reduced the new Bitcoin issuance rate by 15% of the total outstanding supply (around 10.5 million BTC), leading to a 9,212% BTC price rally.
Reduction in Bitcoin supply after each halving. Source: Pantera Capital
Similarly, the second halving decreased the supply of new Bitcoin by one-third of the total outstanding Bitcoin (~15.75 million BTC). It led to a 2,910% bull run, almost a third of the previous one, thus showing a lesser impact on Bitcoin’s price.
Post-Bitcoin halving rallies. Source: Pantera Capital
The last halving was on May 11, 2020, which further reduced the amount of new BTC against the circulating supply, with Bitcoin rallying by over 720% since.
“The flipside is we probably won’t see any more of the 100x-in-a-year rallies either,” said Morehead, adding:
“The cycles shown logarithmically make today’s level look cheap to me.”
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
It’s now three months since the last Bitcoin (BTC) all-time high, but one measure suggests that holders may be waiting even longer for the next.
In a series of tweets on July 17, analytics service Ecoinometrics revealed that this year’s descent from all-time highs is the second-longest in Bitcoin bull market history.
$30,000 may stay “for a while”
It’s been 95 days since BTC/USD hit $64,500 and a major correction phase began. Investors are impatient, but despite strong fundamentals, Bitcoin spot price action seems in no hurry to leave $30,000 behind.
At 55% below the highs, Bitcoin is also threatening to cause problems for price forecasting models, including the historically unparalleled stock-to-flow.
If history is a guide, however, Bitcoin can still go sideways for months before rising to beat its record. As Ecoinometrics notes, 2013 saw a period of 197 days between two all-time highs.
“This is one of the longest drawdown Bitcoin has had to deal with during a post-halving bull market,” it acknowledged in Twitter comments.
“But 95 days is still only half the duration of the big drawdown of 2013.”
Back then, BTC/USD reached a price floor 69% below its previous all-time high, meaning that the current market setup could also permit levels below $30,000 and still remain within historical norms.
More broadly, however, 2013 is now looking like the year most similar to Bitcoin price events this year.
“In terms of price trajectory this correction also looks very similar to 2013,” Ecoinometrics concluded.
“If we continue like that, BTC will remain stuck around $30k for a while…”
Retail investors are anything but gone
As Cointelegraph reported, recent on-chain behavior has painted $30,000 as more than just a psychological trading zone for Bitcoin.
Related: Bitcoin price can only go up if $30K accumulation ‘reset’ continues — Research
In addition to multiple metrics supporting its importance, investors are beginning to accumulate coins once again, including those who previously sold at current levels.
Over the weekend, statistician Willy Woo updated the picture, highlighting retail investors buying and different classes of whales balancing each other out between buys and sells.
“It’s retail that drive Bitcoin bull markets. When they stop buying, that’s a bear market warning. They haven’t stopped buying,” he tweeted alongside multiple charts on Saturday.
Last Week In Bitcoin is a series discussing the events of the previous week that occurred in the Bitcoin industry, covering all the important news and analysis.
Summary
After breaching $40,000 on Monday, it seemed a bull run was all but certain this week; however the fun didn’t last too long before bitcoin’s sudden surge from Sunday started to fizzle away. The week has been quiet news-wise, and besides the regular MicroStrategy and El Salvador coverage, there was very little else to persuade the market that it was time to get bullish. However, as we’ve seen over the last decade, there’s always room for being bullish.
Highlights
Chart Of The Week
The chart above is based off of my previous piece analyzing bitcoin’s performance during each of the past 3 halving epochs. The blue dotted line represents bitcoin’s performance should it follow the exact trend of the last bitcoin halving epoch, whereas the orange line represents the actual performance of bitcoin since the last halving in May 2020.
Clear as daylight, it is evident that bitcoin is prime for a breakout in the coming months, should it follow the same trajectory. If bitcoin does in fact follow this path, it’s likely to peak somewhere around the middle of October — or perhaps November when Taproot activates — with a price of somewhere between $200,000 and $400,000 per bitcoin.
What’s interesting to note is bitcoin has thus far outperformed the previous halving, only recently seeing lower gains than before, but still primed for a decent bull run. Of course, this time around there’s a lot more FUD being spread than in 2017, as a lot more institutional investors and people like Elon Musk have gained control of the market narrative.
In my opinion, we are looking at a delayed performance compared to the last bull cycle and although I firmly believe bitcoin is about to breakout, we could see this entire scenario play out over the next six to eight months, instead of a lot sooner as many would hope.
As analysed before, bitcoin enters a bull cycle after each halving and sees tremendous growth in the 18 months that follow. Compared to the previous cycle, bitcoin has performed much better (recent dips excluded) and it appears as though it will far outperform the previous bull cycle.
Bullish News
Discussing MicroStrategy and El Salvador seems like a broken record stuck on repeat, as such I am refraining from digging too much into it. What is interesting to note on the latter is that the World Bank has eagerly dismissed El Salvador’s request for assistance in implementing bitcoin as legal tender.
What makes this interesting however, is that the World Bank’s 1944 founding charter states that “The Bank shall accept from any member, in place of any part of the member’s currency,” and “notes or similar obligations issued by the Government of the member or the depository designated by such member.” This means that despite the World Bank not being open to El Salvador’s embrace of bitcoin, they will have to accept bitcoin payments as it is the country’s legal tender, opening up a whole new world of irony.
As covered earlier this week, Switzerland’s BBVA, one of the largest banks in the world, plans to open up bitcoin trading to its private customers, a move that may pave way for further adoption globally and bring some reassurance to those who are still hesitant to jump onboard the bitcoin bandwagon.
Finally, after billionaire Mark Cuban lost some money in a recent rugpull, he has been calling for regulation in the crypto markets. Although this may seem bearish at first, regulation can prove to be a good thing. With so many states and cities across the US already embracing bitcoin, regulation may bring better certainty to the market and open it up to a wider audience as those concerned about an unregulated market may start investing in crypto. It is unlikely to bring outright bans and more likely to see the US embracing bitcoin-friendly laws in order to push it to the forefront worldwide.
Bearish News
Although it may seem bullish, more and more institutional investors are investing in bitcoin and firms that offer bitcoin-related services such as mining, wallets etc. This may have positive consequences, but it also brings them more power in the industry in the long run, which the last few centuries have shown is hardly ever a good thing.
China’s bitcoin mining ban continues, and although Miami’s mayor is keen on getting Chinese bitcoin miners to move to Florida, it is still likely to negatively affect the market in the short term as it fuels the FUD fire. More and more firms are being forced to shut down operations and it will affect bitcoin mining in the short term as they either relocate, or more mining initiatives go online in other parts of the world.
Musk is still on his “bitcoin isn’t green” FUD train and no matter how wrong he is about the whole narrative he has been spreading, he still commands a global audience, which is not a good thing in this case. The sooner more respectable institutions and individuals can spread the true effect bitcoin mining has on the environment and how much mining is done through renewable energy sources, the better.
Then there’s Danish bank, Danske Bank, upholding its bitcoin ban in the country, essentially robbing its citizens of the opportunity to free themselves from oppressive financial systems and institutions. Although it may not last long, several countries are still fiercely anti-bitcoin and although one could hope more countries following in El Salvador’s footsteps will change their minds, it may not happen soon enough.
Verdict
Yes, the market may be running sideways and the market may be struggling to break past and stay above a $40,000 bitcoin, it’s unlikely to remain ‘doom and gloom’ for too long. If the last three halvings have taught us anything, it’s that a breakout is imminent, so however long it may be delayed, it is coming.
Bans on bitcoin and bitcoin mining won’t last forever. As more countries continue to signal their intent to follow in El Salvador’s footsteps, bitcoin-friendly regulatory framework is almost guaranteed. Several US states and many countries are racing to embrace miner-friendly incentives which can only have a positive effect for the bitcoin ecosystem.
Finally, calls that bitcoin is experiencing a death cross is, in my opinion, nothing more than FUD and as the chart above shows, bitcoin has much more positive growth left in it for the remainder of the year. So here are some words to live by: strap in, HODL on and get ready for liftoff.
This is a guest post by Dion Guillaume. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
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.
Inflation rate of bitcoin (log)
What Has Transpired Since The 2020 Halving
Federal Reserve balance sheet, May 11, 2020 to May 11, 2021
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.
Price of BTC/USD since the start of 2020
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?
Bitcoin stock-to-flow model
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!
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
Source
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.
Hash rate in 2012 immediately following a halving event.
Hash rate in 2016 immediately following a halving event.
Hash rate in 2020 immediately following a halving event
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.
70,000 blocks following the 2012 Halving, +11,476.2%, +$1,360.45
70,000 blocks following the 2016 Halving, +838.7%, +$5,461.22
70,000 blocks following the 2020 Halving, block 700,000 expected on September 9, 2021
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.
Hash rate (log) and price (log) over the course of the 2012 to 2016 market cycle
Hash rate (log) and price (log) over the course of the 2016 to 2020 market cycle
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.
Puell Multiple over Bitcoin’s history
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.
The thirty-day change of the supply held in miner addresses since the 2020 halving.
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.
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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…
