War & Peace
A Redistribution of Wealth
As Leo Tolstoy wrote in his book War and Peace (1869), "the two most powerful warriors are patience and time." Even though his creation is 155 years old, the thesis still applies to asset allocation, as well as many other aspects of life.
Last month, the leading cryptocurrency bitcoin reached a new all-time high, as a parabolic advance threw it above the 73,000 US dollar level. Since then, the currency has weakened almost -16 percent, dropping to the surface of 61,000 dollars. Bitcoin's recent descent was fueled by the short-lived armed conflict between Iran and Israel.
Looking back, the most popular bitcoin investors we know have made their entries early, and they have patiently held the assets through years of heavy volatility. With the world's most scarce asset, patience and time are your most valuable friends.
From a positive vantage point, falling prices also represent an opportunity, and this is a perfect epoch to accumulate your high conviction tokens. As a wise man once said, liquidations are a forced transfer of wealth from traders who need leverage to wealthy spot buyers. A redistribution of wealth.
Risk On - Risk Off
So why has bitcoin been crashing since the last weekend? Despite its gold-like scarcity features, from a mainstream perspective bitcoin still is a risk-on asset. When the market sentiment is favorable for more risk taking, investors buy risk-on assets.
Vice versa, a developing conflict is a risk-off event, in which many people sell their risk-on assets. This is one of the main reasons why bitcoin crashed during the conflict. The risk on/off effect is even more pronounced in higher beta tokens.
Sources: Timo Oinonen, CryptoQuant
From a purely technical perspective, bitcoin still oscillates between 60,000 and 70,000 US dollars. However, this structure might be broken by the halving event in just three days. While the halving enhances bitcoin's scarcity and reduces its supply, the event is positive for the ecosystem per se. In contrast, it might still cause a sell the news event, affecting the spot price negatively.
In a bigger picture, our long-term bitcoin outlook still remains positive. The post-halving market might calm down for the summer, and rise again for the last quarter (Q4). Trailing the year 2021, this year might also form a double top structure, with BTCUSD potentially reaching six figures in November or December.
Is This Cycle Different?
Looking at bitcoin's different cycles, the status quo has been that BTCUSD breaches the previous cycle high with significant momentum, not retesting the area before the next major downturn. In 2020, bitcoin penetrated the 2017 spot peak ($17K) in December and the level was not tested until the spring of 2022.
So what's different now? Bitcoin breached the old all-time high of 2021 ($69K) in mid-March, however the critical level was almost immediately tested, and bitcoin fell through it after a couple of days. This deviation raises obvious concerns.
Source: Justin Bennett
Considering bitcoin's historical cycle structure, the first quarter of 2024 looks like a red flag, so far. However, someone might argue that we're still early and bitcoin's cycle continues until 2025. We're not denying that.
We have mixed feelings about the topic. The immediate retesting of previous cycle peak signals danger, however bitcoin could build a double top structure similar to 2021. In the double top pattern, bitcoin could potentially reach six figures during the last quarter of 2024. That's the hopium scenario.
The Power Law Model and 2024
Bitcoin's recent price action can be explained by the power law model, developed by Harold Christopher Burger and Giovanni Santostasi. The power law essentially is a predictive model developed to forecast bitcoin's price trajectory.
The model fits in the same category with the law of diminishing returns, a principle stating that profits or benefits gained from something will represent a proportionally smaller gain as more money or energy is invested in it. I.e. bitcoin will continue to appreciate over time, but with a calmer cyclical pace.
Unlike the ordinary linear models, the power law forecasts bitcoin's long-term price appreciation on a log scale, meaning that both price and time scale exponentially along its Y-axis and X-axis.
Source: Giovanni Santostasi
The power law model forecasts a 100,000 US dollar valuation level for bitcoin by the end of 2024, and a $142,000 level by the end of 2025, which both represent reasonable spot price targets.
Halving in 3 Days, How to Prepare?
Bitcoin's anticipated halving event is approaching in just three days. The halving (or halvening) literally halves bitcoin's block reward, reducing it from the current 6.25 to 3.125, increasing the asset's scarcity. Let's explore the most probable halving scenarios here:
Negative: Halving is completely priced in. Spot bitcoin ETF demand remains low, funds sell the news and outflows continue. No spot interest from the retail sector. Miners are unprepared, and market dump coins. A negatively skewed spot market.
Neutral: The halving is largerly priced in. Spot bitcoin ETF demand stays neutral, and there are no major outflows. A little spot interest from the retail sector. Miners are prepared to the event. A sideways spot market.
Positive: The halving is not priced in (is it ever?). Spot bitcoin ETFs buy the news, and inflows increase. Retail buys coins in correlation with the institutions. Miners are well prepared for the event. A positively skewed spot market.
Source: 21metrics
In our opinion the most likely outcome is neutral, although some sell the news effect might emerge, leading to selling pressure. In a historical context, bitcoin has reached new highs 6-18 months after the halvings.
A final quote by Arthur Hayes:
"The narrative of the halving being positive for crypto prices is well entrenched. When most market participants agree on a certain outcome, the opposite usually occurs."
