First point of business – I’d like to invite you to a digital bitcoin webinar on Wednesday 9 December (1700 GMT, 1900 South Africa (GMT+2), 1100 Pacific Standard Time. This is for bitcoin investors. It is less suitable beginners who don’t have any holdings. Goals: Prepare for the bitcoin bull market; understand past cycles, strategize for the next, price ranges and position sizing. I strongly believe in the value of sensible interaction as we navigate bitcoin’s volatility, and the emotion it elicits in us, over the coming quarters. 2021 will likely repeat 2017’s emotional rollercoaster. I’d like to think that we’re battle hardened and have better research in place to navigate the experience more effectively.
Please let me know your interest via email and I’ll forward you the meeting invite, SOUNDMONEYMACRO@GMAIL.COM. If you’re interested, but the time difference doesn’t work, let me know and I’ll see if I can organise something in your time zone on another date.
If you have any burning questions, send them through ahead of time. It’ll be good to see where people’s headspace is at and I’ll see if I can incorporate them.
Let’s get going with this months post, “Shifting from accumulation to aggressive price appreciation phase.”
TLDR: With clockwork-like precision, Bitcoin is shifting out accumulation towards aggressive price appreciation phase, 7 months after the halving. All Time Highs are a confirmation of the bull-market. The price could still gain another 400%-750% as participants scramble to get their hands on the scarcest monetary asset in the world. A bitcoin price of $100K in late 2021 is possible. Obviously, it’s not going to be a one-way bet. Volatility, pull-backs, fear, greed and FOMO will take on new meanings in 2021 as we navigate the next instalment of bitcoin’s monetisation.
After hitting new record highs (on some exchanges) or at least getting very close to the December 2017 high, bitcoin has pulled back approximately 17%. I don’t think we need to spend a huge amount of time on this type of price correction, but here are a couple of comments to put it in context:
- Corrections and volatility should be expected in bitcoin. The 17% decline falls within the range of possible bull-market corrections. I wrote a longer piece about bitcoin volatility and bull-market corrections here.
- This volatility could be jarring for newer entrants to bitcoin who aren’t used to the volatility. The answer is simple; strategize, prepare and get used to volatility.
- For perspective, bitcoin is still up 25% in November and 135% year to date
Identifying the “cause” for each pullback is a fool’s errand
- Identifying the exact reason for a market movement is a fool’s errand. It always some combination of events.
- When an asset gains substantially in a short period of time (like bitcoin has in Oct and Nov) then a pullback is probable at some point. The market is just looking for a trigger to gather its breath.
- All-time highs themselves are a possible trigger. There are probably some investors who ‘promised’ themselves (maybe their wives) to take profits when we reached all-time highs.
- Reports emerged than the Trump administration may rush to impose burdensome crypto wallet rules before leaving office. Here’s a longer article from Coindesk.
Trump/Mnuchin KYC Threat is a Rumour
If implemented, greater KYC stringency would be noteworthy, but not a train smash. Detailing the owner of the next address when withdrawing from exchanges would discourage some users and hinder bitcoin’s functionality as a fully sovereign permission less money. Ideally bitcoiners want the ability to “be their own bank” – stricter KYC makes this more difficult. Nevertheless, many people don’t care about KYC. Paul Tudor Jones and Stanley Druckenmillar don’t mind telling the IRS where they’re moving their millions of dollars’ worth of bitcoin. They’re likely buying the dip in the price.
For those who want to avoid KYC, there are ways to mitigate against these risks. Some bitcoiners don’t use exchanges at all. For those who do, they’ve already been KYC’d. If they want to reduce the risk thereafter, they can withdraw from an exchange into a KYC’s wallet and shift funds towards wallets that obfuscate identity from there.
Lastly, legislation approval is still an “if”. Is this legislation really Trump’s top priority before leaving the White House? I doubt it. At this stage, it’s a rumour. Most likely this will turn out to be noise.
Shift from Accumulation to Aggressive Price Appreciation phase
The outlook is always uncertain and I’ll try to avoid being foolhardy, but I expect we’re embarking on the next phase of a bitcoin bull-market that will last until Q4 2021 and see bitcoin between $50K and $100K. It may sound foolhardy to utter these words, but I was playing around the with data this week and it dawned on me just how systematically bitcoin revolves around the ‘halving’.
New bitcoin supply (blockreward) is provided to the winning mining each 10 minutes. After starting at 50 bitcoin per block, this has halved every 4 years and is now 6.25 bitcoin/block). We refer to the halving in blockreward as the ‘halving’
I knew the importance of the halving but it really smacked me in the face this week. In the past its taken less than a year for bitcoin to surpass its previous peak after the halving and less than a year from then to reach a new peak for the cycle. I’ve included the data in the table below.
While bitcoin demand is unpredictable, supply is perfectly pre-determined. Added to this bitcoin has a consistent incentive mechanism which encourages miners, users, merchants and developers to act faithfully on the network. The consistent incentives and fixed supply characteristics result in similar patterns of demand and a very methodical adoption cycle. We cannot guarantee this cycle will mirror the past cycles, but it already looks pretty similar as we test previous highs 7 months after the May 2020 halving. Bitcoin is ticking over like clock-work from one phase to the next.
I wrote on 30 October in “preparation for bitcoin All Time Highs” that “All Time Highs (ATHs) optically appear expensive, but this event merely confirms the next phase of the bull-market.” This remains a high conviction view.
100K bitcoin increasingly possible
Where could the price go? No one knows exactly! In August 2020 I said, “base case range of $23K-$28.75K over the next year, with downside risks towards $5.75K-$8.75K and upside potential towards $57.5K.” In hindsight, these ranges may prove a little conservative. Here are a few more numbers to contextualise:
- Peak to peak bitcoin gained 3832% in 2013 and peak to peak it gained 1542% in 2017 so is a peak to peak gain of 750% realistic in 2021? That would be half as strong in percentage terms as the previous cycle and take the price to $140K. Is a 500% gain realistic? That would one third as strong as the previous cycle and take the price to $94K.
- If bitcoin market cap grew to 50% of the private gold market it would be at a price of $75K; $150K if 100%.
- Plan B has two different stock-to-flow models, which use bitcoin’s constrained supply as the only determinant of price. The one with bitcoin alone predicts that bitcoin could reach $100K during this cycle. The cross-asset model predicts that the price could reach $280K during this cycle.
After looking at these numbers and the health exhibited by the market in 2020, its starting to look a little more realistic that bitcoin surpasses $100,000 in 2021. I’m not saying this as click-bait or a promise! I know it sounds outlandish to some and perhaps I’m getting ahead of myself, so please critique away. As you know, this is NOT all about making money for me. But as an analyst, I’m trying to provide as clear insights as possible and navigate our capital through this cycle as best I can. We have a responsibility to strategize because its open waters for the price above $20K.
Regarding health of the market, here’s a short update of a few indicators.
Retail activity picking up but room for more
Google searches for bitcoin have started to rise in Nov, to the highest levels since 2018, so retail activity is coming back. But when we normalise the data to account for growing interest each cycle, the data remains contained. As adoption grows in each cycle I expect more google searches, which was the experience from 2013 to 2017. The normalised data suggests we’re a long way away from a speculative phase. Anecdotally, my experience confirms this. I’m speaking to numerous people about bitcoin, but very few of them have chosen to contact me. In Q4 2017 I received questions left right and centre from people I’d hardly ever met. All they wanted to do was “BUY BITCOIN” because their friends were making money. I shifted from bitcoin advocate to telling cautionary tales at that point. In hindsight this was a STRONG warning sign that the top was near, but I was too deep into the weeds to see the signs. Unfortunately, I think that another retail frenzy may characterise the last phase in this cycle. I expect the normalised index to rise above 10 at that stage, which will be a strong signal to take profits.
No signs of exuberance in the Grayscale trust
GBTC premium is ticking up again but at 20% it’s still contained relative to previous BTC rallies. For context, the spread jumped well above 30% during the 2019 rally to $11K. I think it’s unlikely that we reach the 2017 levels on this premium again because financial infrastructure improvements since 2017 creates easier opportunities to arbitrage this premium. Nevertheless, demand for bitcoin in tax advantaged brokerage accounts implies that the premium will likely remain until an ETF is approved. I expect that the premium will still provide a useful indication of demand exuberance. I think the bull-market has solid foundations at current levels and will get more concerned when the premium heads towards 40%.
Market pricing is very efficient
Cross-exchange spreads (price differentials between exchanges) are tight with efficient price activity across bitcoin markets. Once again, this data must be contextualised. Improving financial infrastructure, including arbitrage hedge funds, implies that the market is more efficient than 2017. I don’t expect cross-exchange spreads to blow-out like they did in 2017 again. Nevertheless, if the bitcoin market enters peak bull-market, I expect pricing efficiencies may emerge.
Bitcoin is shifting out accumulation phase towards the more aggressive price appreciation phase in stereotypical fashion, 7 months after the halving. All Time Highs are a confirmation of the bull-market. The price could still gain another 400%-750% as participants scramble to get their hands on the scarcest monetary asset in the world. On closer inspection of previous cycles and the strength of the foundation in 2020, a bitcoin price of $100K in late 2021 is possible. Obviously its not going to be a one-way bet. Volatility, pull-backs, fear, greed and FOMO will take on new meanings in 2021 as we navigate the next instalment of bitcoin’s monetisation. I’m looking forward to our webinar to answer any questions, get your perspectives and see what additional support I can provide you on this journey.
Lastly, I’d highly recommend listing to this podcast with Preston Pysh and Robert Breedlove. Robert has a wonderful ability to explain complex bitcoin concepts. Its a great interview for everyone, beginners in particular because he starts with “what is money?” Enjoy!
Disclaimer: Nothing in this article constitutes financial advice. These are merely ideas for you to digest at your own leisure. Make of them what you will, do your own research and speak to your trusted financial advisors to make sure you fully understand the risks of any investment you decide to make.