The Bitcoin Blockbuster Continues: This Time It's Personal

In the world of film-making, the three-act structure is a storytelling technique that divides a narrative into three distinct sections. Act 1, the setup, introduces the characters, the initial conflict, and provides the setting for the story. Act 2, the confrontation, presents the characters with obstacles, challenges, and opportunities, leading to a turning point. Act 3, the resolution, resolves the conflicts, provides closure, and concludes the story.

While Bitcoin’s story is only just beginning, and won’t conclude any time soon, we can borrow from this technique to look at the way Bitcoin's fundamentals are lining up for the Big Setup.?

In Act 1, we look at the fluctuations in the Bitcoin dominance rate to understand how this number relates to market sentiment, and why today’s value of a 50% dominance rate sets the scene for the final event. Act 2 presents Bitcoin, our main character, with a challenge it is destined to solve which then leads to a turning point. And in Act 3, we step into the grand finale: the Big Setup.

*Press Play*

Opening Titles

Bitcoin dominance is the proportion of Bitcoin's market capitalization to the total global market capitalization of cryptocurrencies.?

Today, that rate has hit 50%, steadily increasing every week.?

The last time we saw this, it marked the early days of DeFi Summer.

Based on true events.

Act 1: BTC Dominance as the Backdrop

In 2009, when the first test transaction was initiated by Satoshi by sending 10 BTC to famous cryptographer Hal Finney (before BTC had a quotable price), the OG orange coin dominated the market 100%. It was the market.?

The successful launch of Bitcoin was the spark to ignite the crypto industry we know today, with new coins such as Litecoin, Dash, and Ripple entering the market shortly after. That flame turned to a blaze when Ethereum joined the game in 2015, making it easier for anyone with just an inkling for a crypto project to launch their own coin on the ERC-20 standard.?

During the ICO days of 2016-2018, projects were able to raise millions in minutes using only a copy-pasta whitepaper. The Brave Browser infamously raised $35 million in 30 seconds - with a legitimate use case, but the point stands.

The altcoin sector was now in full swing, vying for attention and capital. Up until 2017, BTC dominance remained afloat in the 75-85% range, but as altcoins gained their strength that rate dropped quite rapidly within a few months.?

Many bagholders began anticipating the Flippening: a fictional point in time when Ethereum would overtake Bitcoin in terms of market dominance. To be fair, we got pretty close in June 2017 when BTC dominance fell to 38% with ETH closing in at 31%.

But alas, the Crypto Gods were displeased with all this revelry and cast a deep freeze over the industry we now know as Crypto Winter.

With prices tanking to incredible lows, it was painful at times but on the upside it gave everyone time to actually build what they promised early investors. It filtered out projects that were never truly committed in the first place, or those that simply never had a real chance (but keep doing you, Cardano).?

The cultural mantra of ‘bear markets are for building’ was born during this time.

During Crypto Winter, the narrative around Bitcoin changed from a hard currency designed for decentralized payments, to something akin to decentralized digital gold. A form of Outside Money free from the monetary policy set by any government, exclusively ruled by code. There will only ever be 21 million Bitcoins in the world, no matter what happens.?

As that narrative took hold, BTC dominance slowly rose starting in 2019 and inched back towards the 50-60% range in 2020, fuelled by new money looking for a strategic position amidst the early days of the global pandemic.?

In hindsight, it marked the start of the next bull market but we were only certain of the seasonal change when Bitcoin’s dominance rate peaked at 72% in January 2021. It was time to ditch the down jacket and don a pair of rose-tinted sunglasses. It’s DeFi Summertime.

Many of the projects launched during the ICO years that made it through winter now finally gained pace. Altcoins were in fashion, and speculation ran high. After years of anticipation, it seemed that the Institutional Wall of Money was finally making its way to crypto - albeit at a glacial pace.?

But much of that capital was funneled into Ethereum and its many Layer 1 and Layer 2 cousins. Institutional money wasn’t looking for digital gold. It was investing into a decentralized tech narrative.

Intermezzo:

Anecdotally, I was surprised by how many people started going down the crypto rabbit hole with fringe coins on the outskirts of DeFi DegenTown as their first purchase. Meme coins were young and hip, and Bitcoin was for boomers, apparently. Of course it didn’t help that all you could do with Bitcoin was buy and hold. It didn’t do any of the fancy farming and turbo LP swaps that $GenZDollah did. It didn’t promise to hold a stable USD value at 20% APY only to enter into a death spiral leaving everyone empty-handed like a bad magic trick.

Back to the main plot.

Bitcoin lost much of the dominance it had gained, receding back to around 40% which at this point made total sense. A lot of financial and intellectual firepower was being deployed on the many different Layer 1 protocols, the Layer 2s that scale this Thing of Ours, the dApps that serve institutional money within the DeFi sector, and the new kids on the block combining blockchain with entertainment and arts. Bitcoin was simply no longer the only player in town.?

We all know the entire market tanked again starting 2022, after a series of centralized players got caught with their hands in the cookie jar. But let’s focus on a particularly hairy moment in TradFi that demonstrates how Bitcoin lived up to its core purpose.

Act 2: Cometh Crisis, Cometh Crypto

Up until now, 2023 has been a good year for crypto, and Bitcoin in particular. Reaching the psychological mark of $30,000 for the first time since passing it on the decline in June 2022, BTC has gained over 80% this year. That makes it the best performing digital asset within the top 10 coins in terms of market cap.

There are many factors that have contributed to Bitcoin rising, including growing (non-transitory) inflation worldwide, uncertainties around stablecoins, and regulatory troubles. But the most important moment for Bitcoin was earlier this year.?

The banking crisis that started in the US, triggered by the liquidation of Silvergate Bank, and spread into Europe with the forced acquisition of Credit Suisse, highlighted the importance of the fundamentals on which Bitcoin is based. It was the perfect setup for people to realize there is an alternative where digital assets like Bitcoin provide true ownership - a unique value proposition.

In case you forgot what Bitcoin is all about: unlike digital fiat in your bank account, holding Bitcoin means you truly own the assets yourself. No intermediary gets to play roulette with your Bitcoin. Nobody can bank run the Bitcoin blockchain. No centralized authority can influence the monetary policy of Bitcoin. All assets and transactions are transparent and verifiable.?

This narrative is more than just providing a hedge against inflation, it offers protection against your funds being caught up in banks losing a game of musical chairs and governments bailing them out with new money, freshly created out of thin air.

And finally, people understood the assignment.?

Money flowed into Bitcoin for the right reasons, fuelling the BTC dominance rate to hit 50% for the first time since its decline in 2021. It’s important to understand that this time around, it wasn’t so much about ‘buying the dip’. That’s just a diamond-handed trading strategy. Buying Bitcoin when banks feel unsafe is a worldview.

The fact that this was the reaction across the board is a turning point in Bitcoin’s story and leads us to the final Act.

Act 3: The Big Setup

Using our understanding of what a rising BTC dominance means as a backdrop, and how Bitcoin has recently proven its value proposition during a TradFi crisis, we get to the Third Act. There are several factors at play here which in combination set the stage for the Big Setup.

The Great Delisting

Regulations have always been an icky subject for crypto. There’s no agreement on what good or bad rules look like, and some say we don’t need any at all. What most people do agree on however, is that a harsh stance and ‘regulation by enforcement’ doesn’t help anyone.?

The SEC’s recent warning shot claiming some of your favorite altcoins are indeed unlawful securities (after the fact) have only harmed the crypto industry in the US. Many companies have already signaled their intent to leave the country in search of more favorable jurisdictions.

The SECs overreach has led to The Great Delisting, as US based exchanges took the coins targeted by the regulator off their platforms. SOL, ADA, MATIC and more, all took a beating as word hit the wires, and some money left the crypto world entirely. But what also happened, was a renewed interest in Ye Olde Bitcoine.

People dusted off their copy of Satoshi’s whitepaper, conveniently pre-installed for Macbook users, and reminded themselves of the purpose for this Thing of Ours. The risk of Bitcoin being considered a security is negligible. And as per all the points mentioned in Act 2, Bitcoin offers something that few other assets do. Crypto or otherwise.?

The more people realize this, the more BTC dominance continues to rise.

To be clear, the Great Delisting is not necessarily great for crypto. Yes, people in the US will find their way somehow for as long as the workaround is feasible (ruh-roh, it’s too late to get a VPN. Let’s get outta here Scoob!). And yes, there are far more interesting, positive things happening in the rest of the world. But it does put a cap on the retail user base in the Land of the Free, which is not ideal.

Unless…

Make Way for the ETF?

There’s no need to indulge in conspiracy theories, but the timing of recent Big TradFi moves is convenient.?

Just as leading crypto exchanges Binance and Coinbase were cornered by US regulators, we saw multiple ETF filings by large financial institutions ready to sell Bitcoin indirectly to retail. Nothing concrete has been passed or approved as of yet, but that hasn’t stopped the bulls from calculating the next potential Boolean highs if this plays out.?

While these Effectively Traditional Finance ‘crypto’ products are not aligned with the core tenets of Bitcoin, that doesn’t mean it won’t have a continued long-term positive effect on the market. To be fair, holding coins on a centralized exchange for the long term is also not in line with the virtue of self custody as promulgated by Satoshi, yet many of us were caught red-handed last year when some of those centralized platforms failed.?

In other words, making it easier for Mom and Pop investors to ‘buy’ and ‘hold’ Bitcoin indirectly through ETFs will prove to be another catalyst in the current market cycle whether you support it or not. After all, these asset managers do need to buy their Bitcoin from someone, keep it safe somewhere, and sell it to a particular type of investor.

Even in Hong Kong, which has finally come around to Say Yes to the Crypto Dress, crypto ETFs will become more widely available next to regular crypto exchanges being able to serve retail customers directly.

Especially Blackrock’s ETF filing has people sitting up in their seats. With a track record of getting such products on to the market, and the CEO comparing Bitcoin to digital gold, this may just be the signal TradFi and non-crypto retail need to get (back) into the game.

The comparison to gold is also particularly timely, as it provides a segue into the final and perhaps most important event in the Third Act.?

Bitcoin Halving

Similar to how it becomes harder and more expensive to mine new gold over time, mining new Bitcoin mimics that dynamic by cutting the rewards for miners who validate transactions and add new blocks to the blockchain in half - effectively reducing the rate at which new Bitcoins are created.

The next Bitcoin halving will likely take place in April 2024. And while that seems like a distant future in Crypto Land where things develop and unravel so quickly, the effect it has on the market takes years to play out. The typical low-point is 1.3 years before the Halving and the market peaks 1.2 years after - on average. The whole process might take around 2.5 years.

Looking back at previous halvings, we can observe their effects on the Bitcoin market. The first halving took place in 2012, reducing the block reward from 50 to 25 BTC. The second halving occurred in 2016, reducing the reward to 12.5 BTC. And the last halving was in 2020, putting the current block rewards at 6.25 BTC. Each halving event led to a significant increase in Bitcoin's price over time, as the reduced supply collided with growing demand.?

Check out the graph below by Pantera Capital, showing Bitcoin's price movements around the previous three halvings.

You can see how Bitcoin tends to hit its low point approximately 480 days before the halving, starts climbing in anticipation, and then soars afterward. Similarly, the bull cycle after a halving event has historically taken approximately 480 days to reach their peak. If we take April 2024 as the anchor point for the next halving, this Low End Theory would suggest that we hit the bottom in November 2022. That certainly seems true today.

We’ve only seen a few stories in Crypto Media discussing the upcoming Bitcoin Halving, but over the next few weeks you can expect more of those to come out and influence market sentiment as a self-fulfilling prophecy. Keep your eyes on that dominance rate as it inches up.

For the crypto class of 2020: all that pain was part of your schooling. Buckle up, and get ready.?