Will 2021 be the first bitcoin super-cycle? What is a bitcoin super-cycle and why do I think that there is a relatively high probability of this happening?
Dan Held, one of the few bitcoin OGs, proposed a bitcoin super-cycle on his substack blog in late December 2020. If you recall, bitcoin has these mind boggling exponential growth cycles every 4-years following the halving event. In these cycles bitcoin typically jumps 100s to 1000s of percentage points up, followed by a large correction, ~80-90%.
In 2011/2012 bitcoin went from a few pennies up to ~$30, then crashed down ~$3, a 1000x increase followed by a 90% drop. Then from 2013 to 2015 bitcoin moved from $3 up to an astounding ~$1,200 only to drop down to the ~$100-$200 range. A 400x increase followed by a 85-90% drop. Then in 2015 to 2018 bitcoin grew from ~$100-$200 up to nearly $20,000, roughly 100x, followed by a drop to $3,000, an 85% drop.
Each of these parabolic jumps occurs ~1-year after a halving event.
Dan Held proposes that this cycle is different, that this cycle will have an even larger parabolic jump and/or a minimal subsequent price correction – what he calls a bitcoin super-cycle.
In a Bitcoin Super-cycle bitcoin price can reach as high as $1,000,000 per bitcoin!!
Why is this Bitcoin Cycle Different?
In previous cycles the users/investors in bitcoin were either highly speculative traders, fundamental believers, or criminals. There were very limited resources on bitcoin information, and even fewer legitimate institutional investors. There was also very limited access, you either mined, bought off Mt Gox exchange or sold something for bitcoin/received it from a friend.
Today, 12 years since bitcoin’s inception, it is a totally different environment:
- The world realizes that bitcoin is here to stay
- Regulated Exchanges and Custodians
- Greater access to Bitcoin for retail
- Institutional Investments in Bitcoin
- Bitcoin as Collateral
- Contango Effect
- Macro-Economic Environment
- Positive On-Chain analytics
- Anti-thesis to Bitcoin Super-Cycle
- Final Thoughts on Bitcoin Super-Cycle
The World Realizes That Bitcoin is Here to Stay
- Negligible criminal activity due to blockchain analytics/tracing (even confirmed by ex-CIA agent )
- Legitimate, regulated cryptocurrency exchanges (Coinbase, Binance, Kraken, Gemini, BitFinex, BitStamp, Huobi, OKEx, etc).
- Bitcoin based investment funds – Greyscale, at least two Canadian Bitcoin ETFs
- Bitcoin on corporate balance sheets of publicly traded companies (Microstrategy, Tesla, Square Inc, Galaxy Digital, Hut 8 Mining, for a total of 32 publicly traded corporations etc)
- Municipalities adopting bitcoin – Miami.
- Nation States using bitcoin: Venezuela, Iran.
This is the first market cycle where bitcoin has been viewed in the mainstream media with some support and credibility, thanks to investments by major funds and institutions.
Previously, bitcoin was considered an interesting speculative bubble that would surely do well and then pop and disappear. Although, having done that 2-3 times in the past (2011, 2013/2014, & 2017), only to have recovered and made a major comeback again, leaves investors thinking differently this time.
Today there is broader understanding and adoption of bitcoin. The digital gold narrative is reinforced after the May 2020 halving event in the context of ever increasing government money printing. Also there are many vocal influential proponents of bitcoin (i.e. Michael Saylor from Microstrategy), who were not in the industry before.
Regulated Exchanges and Custodians
Coinbase was probably one of the first major American regulated cryptocurrency exchanges. However, even they had little capacity in the 2017 bull market, and were unable to keep up with daily sign ups during the heat of the bull market in December 2017 and January 2018.
This cycle there are numerous regulated exchanges and custodians for bitcoin assets in America, and globally
- Coinbase Exchange & Custody (USA)
- Kraken (USA)
- Gemini (USA)
- Binance (International)
- Coinsquare (Canadian)
- NDAX (Canadian)
- BitFinex (International)
- BitStamp (International)
- Huobi (International)
- OKEx (International)
… and many more (smaller, national/regional exchanges).
Greater Access to Bitcoin for Retail
If you were into bitcoin back in 2016/2017 you’ll remember that towards the end of 2017 there were only a few onramps into bitcoin (Coinbase, Kraken, NDAX, Coinsquare, Bitmex, Bitfinex, LocalBitcoins, and many small unregulated exchanges) and their capacity was very poor. The main exchanges were backlogged with customer sign-ups and verification (KYC/AML) for days and sometimes weeks. The gateway into bitcoin was literally bottlenecked, causing much frustration and potentially stifled the bull market at the time.
Four years later, in 2021, we have significantly improved number of regulated/trusted exchanges as well as increased capacity for each.
We also have indirect ways to invest in bitcoin for institutions/funds that cannot directly purchase the crypto asset, or retail investors who do not want to bother buying bitcoin directly:
- GreyScale Bitcoin Trust
- Two Canadian Bitcoin ETFs
- Fidelity Digital Assets
As well as non-crypto native platforms to buy bitcoin for retail investor exposure:
The funds and platforms listed above must have actual bitcoin held in cold storage or with a custodian in direct proportion to the dollar in-flows invested.
Institutional Investments in Bitcoin
Many institutions are recognizing that they need some exposure to bitcoin. Merely 12-14 months ago there was significant career risk by investing in bitcoin, however, after Paul Tudor Jones and Stan Druckenmiller publicly endorsed bitcoin as a store of value/inflation hedge, paired with bitcoin’s amazing performance in 2020, it became irresponsible not to have a position in bitcoin.
Some institutions/large companies that have bitcoin:
- Mass Mutual Life Insurance Co.
- Ruffer Investment
- Skybridge Bitcoin Fund
- Greyscale Bitcoin Trust
- Marathon Patent Group
- Rothschild Investment Corporation
- Miller Value Funds (Bill Miller)
- University Endowments:
- University of Michigan
- Pension funds (according to Grayscale CEO)
- Bitwise 10 Crypto Index Fund
In fact, institutions now hold a total of 3% of bitcoin’s supply. The CEO of NYDIG reports having 280 institutional clients compared to 25 last year (2020).
Bitcoin as Collateral
Bitcoin collateralized Loans
With bitcoin collateralized loans you no longer need to sell your bitcoin to access the cash value of it. If you’ve seen massive appreciation in your bitcoin holdings, you can take a loan out against your bitcoin to finance your life or other investments.
This will decrease the sell-side pressure, contributing to a strong and/or longer lasting bull cycle (perhaps a super-cycle).
Bitcoin Interest Products
The counter side to needing a loan, is giving a loan. You now have the ability to earn interest on your bitcoin with companies such as Blockfi, Unchained Capital, and HodlHodl. Interest on your bitcoin varies from provider to provider, but generally ranges between 2-6% per year.
People often sell an asset to realize price appreciation. However, if you can hold your asset and let it earn interest for you, then you decrease the sell side pressure, contributing to the bitcoin super-cycle.
The “contango effect” can have some complicated discussion, so I’ll boil it down to the basics. Contango is said to occur when the futures price of a commodity is higher than the spot price of a commodity, the positive difference is known as a premium. Investors earn the premium when they sell the futures contract at a higher price than the spot.
In order to execute this trade, investors must lock up TWO bitcoin for every ONE in contract. The investor borrows one BTC from a lending platform (such as BlockFi) in order to sell BTC short and take on the long/short trade. In order to borrow one BTC, the investor must lock up two BTC, for a LTV (loan-to-value) of 50%.
The contango effect is a bitcoin vacuum that exacerbates the supply shortage due to the over-collateralization requirement.
- Record low interest rates
- Printing of money/monetary stimulus
- Inflation of asset prices, money is chasing yield and hard assets, bitcoin is the world’s most hard asset.
- Also a lack of bitcoin “civil war” that was had in 2017 and 2018 with the bitcoin/bitcoin cash fork and bitcoin cash/bitcoin satoshi’s vision fork respectively, which obviously signal instability in the underlying narrative of the bitcoin asset. Today both Bitcoin Cash (BCH) and Bitcoin Satoshi’s Vision (BSV) have dropped to insignificant value
In all of bitcoin’s existence we have not had a global financial crisis – it was born out of the last one, published white paper 31 Oct 2008, first block mined 03 Jan 2009.
Bitcoin’s Quantitative Tightening Vs. The Fed’s Quantitative Easing
Catalyzed by the COVID pandemic, we have massive government money printing (Quantitative Easing), debasing fiat money, as well as numerous international restrictions. Conversely, bitcoin experienced it’s third halving event in May 2020, executing its programmed quantitative tightening, mere months after the most massive government stimulus.
This increases the wealth gap as main-street loses jobs to the pandemic but big box stores are able to stay open, stocks and real estate prices are skyrocketing as the rich can access credit/loans (aka fiat money) during the pandemic (the Cantillion effect) while the poor and unemployed cannot.
Animosity Between the Rich & the Poor
The recent GameStop short squeeze fiasco of WallStreetBets (WSB) vs. Big Institutional money is an allegory of the conflict and animosity of the poor/middle-class against the wealthy/rich. Bitcoin (along with other cryptocurrencies like Ethereum) solves this via a decentralized programmed monetary policy that is enforced via mining and game theoretics to prevent dishonest behaviour, an escape from the traditional financial system, and a hedge against the inflation of fiat. Blockchains are transparent and readable with blockchain analytics, where the rich cannot hide the movement of their funds, or their short positions.
Never before has Bitcoin had such a macro set up to propel its value proposition forward.
Positive On-Chain Analytics
There are many positive on-chain analytic indicators, but in order to keep things brief, I’ve selected one
Bitcoin Balance on Exchanges:
As you can read from this graph, the bitcoin balances on exchanges has been decreasing since February/March 2020.
Take a look at the BTC balances on exchanges in May 2017, September 2017, December 2017, all the way into January 2018… it was increasing. The amount of BTC on exchanges INCREASED during the crazy bullish, parabolic phase of the last bitcoin bull run.
Right now the supply on exchanges is being drastically reduced, while demand seems to be only increasing. You do the math.
Anti-thesis to the Bitcoin Super-Cycle
What are the holes in this theory? Well if there is a steep price drop, that can trigger liquidations in over-collateralized loans, leading to a snow ball effect of sell pressure as the dominos of collateralized loan liquidations occur. This may contribute to the bitcoin correction of 30-60% in the coming 6-18 months.
Personally I do think that we’ll see a super-cycle coming up.
Final Thoughts on The Bitcoin Super-Cycle
So, if you couldn’t tell from reading this post, I’m quite bullish that this bitcoin cycle may be a super-cycle. There have been some pretty insane bitcoin price predictions, ranging from $55,000 all the way up to $500,000.
I think that there are two ways this “super-cycle” plays out:
- We see an astronomical rise in the bitcoin price, between $300,000 – $500,000, then a slow fall, but not 80% correction, perhaps a 30-60% correction.
- Or, bitcoin doesn’t have a huge peak, but rather it jumps to between $150,000 to $300,000 and doesn’t have a steep correction, but rather hovers in that range for the next 3-4 years before the next cycle.
I do not think that we’re going to see hyper-bitcoinization this cycle… I think that that might take another cycle or two to play out.