Yes, This Cycle Actually IS Different...

Introduction

I tweeted the other day that I had an epiphany regarding Bitcoin’s (BTC) future price action (PA). Strictly speaking, that is inaccurate: one cannot have a sudden realization about something that hasn’t yet occurred. BUT, what I have had is a sudden attack of clarity about where I think where BTC is headed and how it will get there.

Spoiler: We are going to the moon much more quickly and painlessly than anyone currently envisions.

Past is NOT Prologue

“This time is different.” I know. Famous last words. The most popular retort seems to be, “History may not repeat, but it certainly rhymes.” Well, perhaps, but the part of history that rhymes with the current cycle is NOT the 2017 cycle, despite everyone repeatedly trying to find connections, only to fail. Every. Single. Time.

Perhaps the most prolific recency bias to paralyze Crypto Twitter (CT) manifests itself through the myriad tweets repeatedly prognosticating a violent 30%+ correction because, well, they happened during the previous cycle, and particularly during the late-2017 parabolic bull run, so they will happen again this cycle, right? History rhymes, right?

No. Because 2017 doesn’t rhyme with 2021. In reality, no previous cycle rhymes with the current cycle for the reasons I delineate below, but if any cycle comes close to rhyming with the current cycle, it’s the 2013 cycle, not the 2017 cycle.

One need look no further than the endless parade of crash predictions over the past several months to illustrate just how different this cycle is from the 2017 cycle. Predictions of a steep correction (30%+) have been tweeted ceaselessly since at least October, back when we were still at $11.5K. And they’ve only increased in number and decibel level ever since: at $13K, $14K, $16.5K, $20K, once we broke $20K, and now, right after we were rejected at $40K yesterday. CT is positively REPLETE with these price-crash predictions.

Quick question, though: how many of these prognostications have come true thus far?

By my count? ZERO. Not one. And yet they ceaselessly continue. But they will also ceaselessly continue to be wrong. Let me explain.

On the surface, it seems logical to study the price action (PA) of the previous halving cycle to try to infer what will happen this cycle. Ironically, most people who do erroneously look to the late-2017 spike for their source of comparison, putatively because the price increases then and now seem comparable. That is where the comparability ends, however. The true apples-to-apples comparison between now and the previous halving cycle is early 2017, not late 2017, when the former all-time high (ATH) was broken on January 4, 2017 (at a whopping $1,130, if you can imagine). Comparing what happened at that point in the cycle is far more apt to where we are in the current cycle because it much more closely matches the current environment - similar time has passed since the last halving and the former ATH was just eclipsed.

Regardless, even if looking at comparable halving-cycle time periods, one would still be unable to make accurate PA predictions for the current cycle because the 2017 cycle is completely, totally, absolutely, in-every-way different from the 2021 cycle in terms of market dynamics. i.e., BTC is no longer the exclusive playground of retail investors; it’s all about the institutions now, and that change in dynamic has a FAR more profound impact on the current cycle than people have yet to realize or acknowledge.

I in fact have been pleading my case on Twitter for months now - that current/future dips will be both shallower and briefer than the pullbacks of the past. But CT superstar prognosticators have, by all accounts, ignored my claims. The good news is, they will no longer be able to ignore my claims once 2021 plays out in the way I describe below (provided of course there is no exogenous catalyst that alters the current BTC trajectory or narrative - more on those risks later).

The simple reason this cycle differs so markedly from the 2017 cycle is the mass arrival of institutional money. While no one seems to dispute the fact that institutions are indeed arriving on our shores, people for whatever reason continue to discount the tectonic shift in market dynamics that is unfolding as a result. Hence the continued calls for steep corrections and ongoing surprise at how quickly price is advancing.

Before going further, it is important to note that institutional investors are not homogenous in nature, as I explain here. But what is common among all types of institutional investor is the size of their wallet. And it is this factor that leads me to believe that we will not only avoid severe, sustained dips for the foreseeable future, but we will also reach the lofty price levels of so many predictions much more quickly than people currently imagine. This isn’t just my intuition; it’s mathematics.

A Tale of Two Markets: By the Numbers

While most people seem surprised that we’re currently tracking ahead of the 2017 cycle in terms of price appreciation, it actually makes perfect sense mathematically speaking. As mentioned, the incoming wave of institutional investors, or more precisely, the size of their respective wallets, is the primary reason that the worst correction we’ve had thus far is the 20% tip-to-toe intraday swoon on January 4. But even that dip was so short-lived that people missed it if they blinked (or live in North America and were asleep). To add some perspective, despite that 20% intraday swoon, the market ended up only closing down 3.2% on the day. And the closing price of that day - $32K- is now so far in the rearview mirror we can no longer see it. And it was only three days ago!

If BTC price falls in an empty forest, does it make a sound?

To illustrate the magnitude of the tectonic market shift currently taking place, let’s hang some numbers on it. Regrettably, I haven’t had time to track down actual market data, but my primary purpose here is to illustrate the way this cycle differs from the previous cycle more so than to generate my own set of predictions. The numbers I use below are therefore estimations for now, and reasonable ones I would argue, but even if actual market data vary significantly, we can quickly update them here to derive a better sense of the magnitude of the current market shift.

And away we go…

My primary thesis is that the only way to accurately estimate near-term price action is by looking at lot sizes, meaning the number of coins being purchased by a single entity (person or institution) within a relatively short period of time. In fact, it is for this reason that every other recent/current PA prediction has fared so badly. The lot sizes being purchased now much more closely resemble those of the 2013 cycle than the 2017 cycle. i.e., Given that BTC has a fixed supply (or more correctly, a very slowly inflating supply), PA is most correctly estimated by how (in)elastic the market is relative to the lot sizes that the current crop of buyers is seeking to acquire.

THAT is what makes this halving cycle so markedly different from the 2017 cycle; it is also the reason we will not only avoid severe, sustained dips this cycle, but also the reason we will reach lofty price valuations much more quickly than people anticipate. Point in fact, current lot sizes are the reason we haven’t had a severe, sustained correction before now, as well as the reason we are now almost double the previous all-time high (ATH) after only a few weeks.

Let me illustrate by way of example. Below are some data estimates. By all means, PLEASE contact me if you have more accurate/real data so we can update the estimates. But for the purposes of illustration…

Estimated Average BTC Investment (USD):

• Retail investor: $5K (including non-CT retail investors, not just us CT maniacs)

• High-Net-Worth (HNW) Individual: $100K (1% of $10M net worth)

• Institutional Investor: $50M (e.g., Square)

In terms of purchasing power then:

1 institutional investor = 500 HNW individuals = 10,000 retail investors

It is this magnitude of purchasing power that forms the nucleus of my thesis. Just look at those numbers: one single institutional investor brings to the market the equivalent purchasing power of 10,000 retail investors. TEN THOUSAND! Again, you can quibble with my numbers, but the point is clear: Square’s single treasury asset purchase was equivalent to +/- 10,000 retail investors purchasing the same number of BTC at $5K a pop. THIS is the reason we will not see severe, sustained dips this cycle. Institutional lot sizes, including those of aggregated individuals (e.g., Grayscale for HNW individuals; PayPal and Square/Cash App for retail investors), are orders of magnitude larger than that of the garden-variety retail investor.

As shown above, an institution w/$50M to invest will buy a lot size of 1000 BTC at an average price of $50K (price chosen just to simplify comprehension of the math - this number will soon be outdated). On the other hand, it would take 10,000 retail investors each investing $5K to buy the same number of BTC.

From this perspective - lot sizes - it makes much more sense to study the first halving cycle if trying to predict near-term PA for this cycle. Why? The last time the average retail investor could buy a lot size of 1000 BTC is when the price of 1 BTC was $5. FIVE dollars. When was that? It’s so long ago, I can’t even find an Internet source to reliably tell me, but I suspect it was in 2012.

Stated differently, what was the average lot size purchased during the late-2017 bull run? If we assume the market was dominated primarily by retail investors, even at a mid-mania price of $10K, each lot size was only 0.5 BTC ($5K / $10K = 0.5). This relatively small lot size is in fact the reason that the parabolic spike at that time was unsustainable, leading to the subsequent 85% peak-to-trough drawdown: the rally was VELOCITY induced, not LOT-SIZED induced. In other words, the run-up was enabled by the tens of thousands of micro-purchases that occurred within a very short period of time, such that price could keep advancing as long as the velocity of purchases kept pace. But once velocity slowed (due to a lack of new buyers), price rolled over, FUD ensued, and everyone ran for the exits.

Put another way, the only way we could induce a similar face-melting collapse now, even temporarily, would be if a number of whales dumped significant bags on the market simultaneously. This has in fact been tried several times over the past several months, but to what effect? Very temporary, if mildly steep, corrections. This story has played out the same way over and over and over, ever since October, when BTC’s price was $11.5K. The problem for OG whales this cycle, however, is that there are hungry, comparably sized buyers, something these whales never experienced in previous cycles. i.e., In times past, when whales dumped, e.g., 1,000 coins on the market, it caused a significant and sometimes sustained drop because it required +/- 1,000 retail investors to soak up the new supply (@ $5K/coin). But of course, most of the would-be buyers - predominantly inexperienced and/or speculative retail investors - were too scared to actually buy the dip. The result? FUD ensued and the market tanked.

The aforementioned market dynamic is no longer relevant, thankfully. Now, Microstrategy or MassMutual or Stone Ridge or SkyBridge Capital or Grayscale or PayPal or Square or any one of the myriad institutions banging on BTC’s gates will happily devour such dumps, and in one fell swoop. In fact, large-lot-size demand is now so abundant, I would argue that current and future dips are really only a reflection of market inefficiency rather than FUD (although admittedly, there is some FUD-induced exiting via liquidated stop losses). Regardless, the dips that now occur between the time of a dump and full price recovery is only the time it takes for one or more of these incoming institutional investors to react and buy. That’s it.

NB: I hope this perspective will add a bit of strength to new retail-buyer hands, especially those who bought at/near $40K. Not financial advice, but IMO, all of these dips will be bought up, and quickly, in the current environment. Heck, it’s happening literally as I write: we closed the day at $39.5K, quickly swooned to $36.6K, and we’re now already back up to $38.8K, only two hours later. We’ll be through $40K in no time.

So What Does My Thesis Mean for the Current Cycle?

As I’ve explained, we should focus on lot sizes above all else in the current environment. They are so large at the moment that virtually no one whale can cause the market to swoon in a severe, sustained way, despite their best effort. Want even better news? OG whales are about tapped out now, which is precisely the reason we will not only avoid severe, sustained dips going forward, but very soon, we will also start making 4- and 5-figure leaps north over a single day. Why? There’s no float!

Per Glassnode, 78% of all BTC is already HODLed, and that percentage is quickly rising as institutional investors like MassMutual and MicroStrategy take their bite of the BTC pie. In other words, the generational transfer of coins from OG whales to new whales is nearing its completion. Therefore, virtually all new institutional investors entering the market here forward will be able to buy their desired lot sizes from only one source: the 20% float, which is held mostly by mid- and small-size retail investors (along with the +/- 900 new coins minted daily). If this indeed is the case, what do you think will happen to BTC’s price when several institutional investors, each with, e.g., $50M+ in cash, want to buy in simultaneously? I don’t really need to elaborate, do I?

I don’t, but I will: the price leaps we will soon see will take our breath away. I’m not exaggerating when I say we’ll start seeing 5-figure gains in a single day, especially as price increases because the percentage gain will become increasingly smaller (e.g., a $10K gain on a $40K price is 25%, but a $10K gain on $100K is “only” 10%).

TL;DR

So, let’s pull all these puzzle pieces together:

1. Current buyers, specifically institutional investors (including entities that aggregate the wealth of numerous individuals), are purchasing in lot sizes that haven’t been seen since BTC was $5 per coin (circa 2012).

2. OG whales have now either exhausted their formerly large holdings or are sufficiently sated and thus are beginning to re-enter hibernation.

3. Four out of every 5 BTC is already being HODLed, so only 1 in 5 BTC remains in the float, and miners can only mine +/- 900 additional coins each day.

4. Many, many, many institutional investors are lining up to make their initial BTC purchase, with no end in sight, particularly given the current macroeconomic environment, where fiat debasement is the name of the game, sovereign bonds are yielding negative real rates, and gold has now been shown in a number of ways to be vastly inferior to BTC as a store of value.

These are the facts, and they are indisputable. On-chain data via, e.g., CryptoQuant and Glassnode, combined with on-chain data analysis by, e.g., Ki Young Ju and Willy Woo, all support these facts.

So, if we can agree that this is the state of the current BTC market - this novel, never-before-seen market - a market that, if anything, more resembles the 2013 market than the 2017 market due to the lot sizes being purchased, then the conclusions are clear:

1. Drawdowns will be both shallower and shorter. But when they do occur, they should be viewed solely as a symptom of market inefficiency as opposed to any real cause for concern. i.e., They will sort themselves out in short order (with important caveats below).

2. With so little float remaining and the generational transfer of BTC wealth now nearing its completion, we will very soon see, quite regularly, 4- and 5-figure USD price spikes on a daily basis, meaning we will blow through $100K and go much much higher, and much more quickly, than people currently imagine.

The price action of Q4 2020 provides ample evidence that these conclusions are valid, and that was at a time when OG whales were only starting to sell their sizable holdings. i.e., Whatever additional float was available then is all but exhausted now, so the parade of new institutional investors lining up to take their own bite out of the BTC pie are going to pay a very dear price, and quite literally in USD terms.

To illustrate the point, let me throw a hypothetical (if implausible) scenario out there for consideration:

If the average retail investor during the late-2017 mania could afford to buy only 0.5 BTC when the price was $10K, what would the price of 1 BTC be if the current crop of institutional investors could afford to buy only 0.5 BTC?

ONE-HUNDRED MILLION DOLLARS ($100M/BTC * 0.5 BTC = $50M).

Now, before people lose their minds, I am NOT predicting a cycle peak of $100M! Remember, 2017 and 2021 are not comparable cycles. Instead, that lofty price prediction will occur during peak FOMO of the next cycle, near the end of 2025. :-)

Eye-watering price predictions aside, what this example should illustrate is that the current “lofty” projections of $250K, $288K, etc., for this cycle are actually way too conservative. i.e., The current cycle may end at/near such a price, but these predictions wildly understate the peak price we will see this cycle, which should be in the latter half of 2021. i.e., I very much believe in the ebb-flow rhythm of the halving-cycles, but for the reasons I have noted, this cycle will NOT elongate like 2017 did (relative to 2013); instead, it will contract, more resembling the rhythm and pace of the 2013 cycle.

In short, I think halving cycles will actually alternate in rhythm, with 2021 more resembling 2013 and 2025 more resembling 2017. We have another 4+ years to wait to see if my thesis is correct. But for the reasons I delineated earlier, I do think we will soon see BTC’s price skyrocket in ways that will melt our minds and soil our undies.

And while I do acknowledge that we will have numerous dips on our rocket-ride north, they will be both shallow and short, merely opportunities for market inefficiencies to sort themselves out. Otherwise, it will be straight to the moon, quite quickly and painlessly. The only open question is what price will we find once we arrive. No idea, but I can assure you it will be much higher - and arrive much more quickly - than most people expect. So my advice is to just sit back, relax, and enjoy the ride. Because it is going to be one epic ride.

Caveats

Everything I wrote above rests on the potentially untenable assumption that nothing materially changes for the worse in terms of BTC’s narrative or market conditions.

For example, if we experience a global/macroeconomic meltdown akin to something like the Great Depression that started in 1929, then BTC will obviously be affected in a meaningful way. Ironically, in this particular example, I think it would actually help BTC’s market in the long run, but not before a protracted, painful downturn, somewhat similar to what we just experienced in March 2020, but possibly even worse.

Any sort of fatal threat to the bitcoin network would be another obvious game-changer. While the network has proven itself bulletproof thus far, we can never be certain that will always be the case. If, e.g., some flaw in the code were discovered, or some bad actors figured out how to execute a 51% attack, or quantum computing progresses faster than imagined, or WHATEVER… any sort of credible network threat would negate my thesis (and likely wipe out our investments to boot - knock, knock).

Finally, while HIGHLY unlikely, world economies could potentially recover from the current calamity. I cannot imagine how, frankly, but what if, e.g., Modern Monetary Theory (MMT) actually worked? Then fiat debasement would be far less of a concern for many countries, thereby obviating the need for a hard currency like BTC. While a very very remote possibility, we need look no further back than 2011 for evidence that such a scenario is plausible. Not all of you are likely old enough to remember the so-called Great Financial Crisis in detail, but I remember it vividly. So many pundits at the time were calling for rampant inflation due to Fed quantitative easing, including our favorite punching bag, Peter Schiff, and yet it simply never materialized. In retrospect, it seems obvious now the reasons we didn’t experience (hyper)inflation. But trust me, no one I know of correctly predicted that the US was on the cusp of its single longest bull run in market history, and yet, that is exactly what transpired. Admittedly, primarily in nominal terms, but the point is, everyone was predicting economic doom, going so far as a total collapse of the US economy/dollar, and it simply didn’t happen.

The very same outcome could theoretically emerge this time, no matter how seemingly unlikely. And if it does - if in three years’ time everyone is back to work and inflation (however poorly approximated by the CPI) - is in check, then guess what? That flood of institutional money currently pouring into BTC will not only stop, it might even reverse. Gold has had numerous bear markets throughout its long history as a store of value, so BTC could as well (excluding for now the possibility of hyperbitcoinization, where BTC serves not only as a store of value, but also as a medium of exchange and unit of account). Anyway, the good news, if you can call it that, is that we are nowhere near getting ourselves out of the current global crisis, and certainly not within the next 12 months, so this particular risk is virtually non-existent for now.

Other than these three caveats - global economic meltdown, fatal network threat, or global economic recovery - there really is nothing standing in the way of my thesis unfolding as I predict. Other than of course me simply being wrong. :-)

Go BTC…