Bitcoin Breakout
Summary
Donald Trump’s election has sparked a long-awaited move to all-time highs for bitcoin. But what happens next? Will the rest of crypto follow? We examine bitcoin supply dynamics through the lens of onchain data and MicroStrategy’s proposed buying spree. It’s going to get tight.
Signs of mainstream adoption continue to drip feed. Cracks are appearing in the adoption dam, at some point it will be a flood and very few are ready for it. This will made easier by declining volatility. We revisit a price target based on gold’s move this year.
Chokepoint 2.0 has been horrible for crypto. We look at the implications of the GOP’s election victory. It’s notable for the amount of people close to the President who are crypto sympathetic. This could be a big turning point for the technology and the sector.
Technical
The obvious long-term technical pattern in play for bitcoin is the “cup and handle”. This reflects a price which once got overbought, has been working through a period of consolidation, corrected at a high and has more recently been through a shorter and shallower period of consolidation.
Gold did much the same, albeit over ten years compared to the three or so for bitcoin. But the fact that gold behaved like this should be encouraging for investors in bitcoin. This is because there are similar macro drivers propelling both higher.
The massive move in gold since it broke above the previous high is an indicator of the pressure that builds up inside these trading environments. The resolution of a tug-of-war like this is often spectacular and bitcoin holders will be hoping for a similar outcome as the price breaks out to all-time highs.
The massive move in gold since it broke above the previous high is an indicator of the pressure that builds up inside these trading environments. The resolution of a tug-of-war like this is often spectacular and bitcoin holders will be hoping for a similar outcome as the price breaks out to all-time highs.
The obvious behavioural driver behind this is the Fear Of Missing Out, or FOMO. This implies that people are only buying because other people are buying, the ultimate bandwagon approach to investing.
This is an example of momentum trading, a hugely popular – and broadly successful – form of market participation over a 30 year period when liquidity has become the prime determinant of market behaviour. The irony is that it’s not a particularly good way of investing in bitcoin. The best returns come to those who are comfortable enough in their understanding of it to buy on weakness, make a long term commitment and tolerate short term volatility.
This requires strong discipline through the rough patches.
The power of compounding
At this early stage, bitcoin’s volatility is the price you pay for compounding your returns. Compounding is incredibly powerful in finance (the 8th wonder of the world, according to Albert Einstein).
A sensible strategy with a volatile asset – assuming you think the long term price is going to be meaningfully higher - is to allocate steadily over time. This is know as dollar cost averaging (“ DCA”). Generally speaking, a fixed sum invested at regular intervals, brings steadier long term rewards than a lump sum at the start.
Let’s take an example:
If you had invested US$1,000 in bitcoin at the end of each of the 38 months starting in September 2021, at the end of October 2024 you would own 1.15 BTC, worth US$80,969. (I’ve taken that starting month because it was close (but not at) the previous all-time high and is just over a sensible three year timeframe).
If, on the other hand, you had invested that US$38,000 in a lump sum at the end of September 2021 (at a price of US$43,859), you would own 0.87 BTC, worth US$61,176, a 61% gain.
The DCA method is a 32.4% improvement. Furthermore, you’ve avoided the trauma of watching your lump sum crash 62.2% by December 2022, and allocating a small sum per month doesn’t feel like an overwhelming commitment.
Obviously, there were a numbers of months in the middle when it would have been more profitable to allocate a lump sum to bitcoin. The maths here is obviously contingent on the start date, but I’ve tried to be fair.
Well done if you did manage to time it well. But if you didn’t, why not…?
Here are some possible solutions if you ticked any of the above:
Bad Breadth
One thing worth noting is that Bitcoin’s recent strength has not been backed up by the rest of crypto. The implication is that this move to an all-time high is not about the promise of decentralised finance. Rather, it is about bitcoin’s credentials as a global monetary network and store of value.
It’s hard to find a precedent for a dispersion of this magnitude, suggesting that something has changed.
The euphoria following the Donald’s victory will drive many to argue that we are on the cusp of a new altcoin rally. We’re not so sure and would tread carefully. We strongly believe that the next set of winners will be very different from the last and are positioned accordingly.
The main reason for our caution is that the next wave of adoption and investment has to come from institutional investors. While we see early signs of bitcoin becoming a mainstream portfolio allocation (see Macro section), investment in the rest of crypto is still out-of-bounds for most professionals.
That’s understandable. The vast majority of coins and tokens are speculative and impossible to value. Many will end up worthless. The next generation of buyers are too smart to be exit liquidity for the rapacious, morally barren venture capitalists seeking to offload their overpriced rubbish.
The long term
CHAINLETTER spends a lot of time talking about the long term. That’s because bitcoin is a very long term project, so it should be considered slowly and carefully.
With the price making new all-time highs, it’s worth reminding ourselves where we are situated in the long term trend. It doesn’t look remotely stretched.
Gold’s performance
The gold price has been the talk of the town recently, but a couple of comparisons provide a more sober assessment for portfolio construction purposes.
The first is that it has done no better than the S&P500 Index of US equities over the last few years. If anything the two appear to be increasingly correlated.
The second is that bitcoin’s performance against gold has recently picked up again, much as we anticipated a few weeks back.
For genuine portfolio diversification, we suspect that bitcoin will turn out to be the better choice between these two forms of “sound money”.
Volatility
Unlike previous cycles, we don’t expect an explosion higher in price this time around. While that might disappoint some readers, what we expect is better than that.
As bitcoin becomes more institutionally owned, it makes much more sense for the price to rise in a steady incline rather than massive gyrations. As shown below, it’s volatility has been trending lower, the classic sign of a maturing asset.
It is hard to shunt an asset worth US$1.5 trillion around by 10% a day, particularly when it is surrounded by larger and larger hedging instruments, like futures and options.
This type of price behaviour will make it much easier for a new generation of investors to dip their toes in.
On-Chain
One thing that has surprised us from the on-chain data is the continued supply of BTC emanating from wallets which have been holding for a year or more. This is shown by the recent dip in the gold line in the chart below.
This runs counter to the idea that there are an increasing number of longer term holders. Or does it?
Looking at the HODL waves across various time spectrums since the start of 2022, there are two bands that have materially declined. Those are the 1-2 year band and the 2-3 year band (light yellow and light green, below).
Work those timelines back, and what you have are investors who bought in late 2020 and early 2021.
At the top. These were the last generation of FOMO punters and – in classic “buyers’ remorse” style – they’ve been getting out at the bottom.
The good news from the chart above is that they haven’t got much left, and we have to assume that not everyone who bought then is going to sell.
This means that an important chunk of supply is about to disappear.
MicroStrategy to soak up more supply
This is made even more pertinent by the recent announcement from MicroStrategy (the US bitcoin company run by Michael Saylor) that they will be issuing US$21bn of fresh equity and a further US$21bn of debt over the next three years. That US$42bn will be used to buy bitcoin.
Over the period, assuming a price of US$70,000, US$42bn will account for around 60% of new bitcoin supply. There really isn’t much left.
领英推荐
We’re not huge fans of MicroStrategy, because its behaviour feels distorting to the wider eco-system. But we can’t ignore it, and as long as the bitcoin price doesn’t completely melt down, it’s an important source of demand. Also, as mentioned in a previous edition, owning MicroStrategy shares provides institutions like the Sovereign Wealth Funds of Norway and South Korea with a way of owning bitcoin without owning bitcoin, even if the shares trade at a ludicrous premium to NAV. One day those institutions will own bitcoin more directly, at which point MicroStrategy will become less relevant.
Valuation vs gold
The rise in gold’s market capitalization this year is in the region of a remarkable US$5 trillion. Using data from the World Gold Council we can estimate gold’s market capitalization at around US$20 trillion.
The rise alone is more than 3x the market capitalisation of bitcoin, which today stands at US$1.5 trillion.
Our initial target for the value of bitcoin is the investment portion of gold, not including Central Bank holdings. Using World Gold Council data again, this comes to around 22% of gold’s market cap, or around US$4.5 trillion .
To meet this, the price of bitcoin needs to rise to US$227,525.
Macro
Trump victory
It is hard to overstate just how difficult life has been in crypto since the imposition of “Operation Chokepoint 2.0”. This is the informal title for a coordinated attack on the sector, chiefly using regulatory and legal black ops to delay progress, impose fines, hamstring crypto banks and restrict liquidity transfers between crypto and the traditional finance sector. It’s remarkable how well the sector has held up under the circumstances, thinking about it.
The election of Donald Trump as US President will incite great optimism that things are going to get better. Furthermore, according to Stand With Crypto, 247 seats in the House of Representatives were won by pro-crypto candidates, versus 113 anti-crypto.
The cause will be helped by the presence of crypto enthusiasts in Trump’s team. JD Vance, the new Vice-President, is known to be an enthusiast, with personal bitcoin holdings estimated between US$250,000-US$500,000. Elon Musk has an intimate working knowledge of payments and crypto, and through his companies has held bitcoin. Remember when Tesla announced that people would be able to purchase their cars in bitcoin?
Robert Kennedy Jr declared back in July that if he were elected President he would instruct the US Treasury to start a bitcoin reserve, and buy 550 daily. Kennedy is part of Trump’s transition team and has strong views about the need to reduce bloated government bureaucracies.
Of these, Vance is arguably the most important. That’s because he belongs to a younger generation, for whom it will be normal to hold and invest in digital currencies. Furthermore, he is perfectly positioned in Trump’s slipstream to build on the task of turning the political tide back to the right and away from the corrosion of identity politics and government incompetence and waste on the left.
Understanding the value of money is at the heart of what makes bitcoin so special. It is easy to take other people’s money and spend it. Hard money, like gold and bitcoin, imposes discipline.
The other thing about an entrepreneur and a member of the younger generation coming into power is that they will be more willing to let the market experiment with the technology. Crypto has a lot of resistance because of the size of the entities it threatens to disrupt, who lobby intensely and use the law courts to stifle competition. This victory brings in people who believe that it is the government’s role to facilitate innovation and private enterprise, not stand in its way.
If only the UK electorate had had a credible option.
Dollar strength, China tariffs and inflation
The knee-jerk reaction of the markets has been to buy the dollar. This is the markets declaring approval for a new government that has private enterprise and smaller government at the heart of their strategy. Better economic performance – and the spectre of inflation - is likely to keep bond yields elevated, which attracts international capital flows.
You’ll hear a lot about how Trump’s intention to impose 60% tariffs on Chinese exports will be hugely inflationary. Obviously, it doesn’t help. But while it is true that China has become dominant in multiple areas of manufacturing, we suspect the inflationary impact will be hard to discern. This is partly because companies are clever at finding ways around these issues (setting up factories in tariff-exempt jurisdictions to produce finished goods, for example) and partly because the sale price of most imported goods tends to be much higher than the imported cost, so US companies can absorb some of the hit.
Furthermore, there is little doubt that China has created an uneven playing field over time, via subsidies, currency manipulation and other forms of government assistance. Re-shoring key strategic and value-added manufacturing makes commercial and risk management sense.
While underplaying the impact, this doesn’t mean that inflationary pressures will disappear. Far from it. Currency debasement – the loss of purchasing power of your paper currency – will continue as long as governments spend more than they earn, and have to bloat balance sheets to service their debts. There is absolutely no indication that this is going to change under the new Republican government.
Becoming mainstream
The path to mainstream acceptance of bitcoin as part of the financial framework is going to be similar to a dam breaking. At the moment the dam consists of compliance experts and risk managers. They don’t know what crypto is, but since it doesn’t appear on the “acceptable” list there is no reason to let through something that could cost them their job.
But the pressure continues to build, and cracks in the dam are starting to appear. If you’re living in the valley below it’s probably worth figuring out a route to higher ground.
Just in the last couple of weeks we’ve had the following:
1. Emory University has added bitcoin to its endowment
2. Michigan Pension Fund has added ethereum to its pension fund (on top of its bitcoin holdings)
3. Microsoft shareholders will vote in December on whether to develop a bitcoin investment strategy
4. Cartwright, a UK pension specialist, announced that a defined-benefit pension scheme that it had been advising had made a 3% allocation to bitcoin.
The cracks are appearing, folks. These are serious and smart institutions making considered asset allocations decisions.
Or maybe someone showed them this chart.
Cryptoverse
Maple Q3 Report - Relentless Growth
Jake Anderson
In our September 18th edition of CHAINLETTER, we introduced you to Maple Finance, a rising star in the DeFi space with an impressive suite of products and a robust balance sheet.
Their latest Q3 Treasury report showcases some remarkable achievements.
With the SYRUP token upgrade set to launch on November 13th, Maple Finance is poised for even greater success. The Q3 report reveals that active users have soared by an astounding 1,300%, while deposits have skyrocketed by 1,176%. This isn’t just growth—it’s a revolution, with Maple leading the charge in bringing institutions on-chain.
Throughout the summer, Maple and Syrup saw their Total Value Locked (TVL) increase by 69% quarter-over-quarter (Q/Q), coming in at $557M at the time of writing.
Revenue paid out grew by an impressive 230% Q/Q, reaching approximately $930,000, total deposits surged by 106% Q/Q, crossing the $107 million mark and the number of active liquidity providers (LPs) on the platform grew by 436% Q/Q, driven by the success of Syrup.
Maple Finance is not just growing; it’s setting new standards in the DeFi industry. The upcoming SYRUP token upgrade is expected to further accelerate this momentum, making Maple a key player in the on-chain institutional finance revolution.
Bitcoin Layer 2s are heating up – STX and Cardano
Stacks (STX) announced on the 29th of October that the Nakamoto upgrade has officially gone live. The upgrade will bring increased transaction throughput and 100% Bitcoin finality to Stacks, which in turn will allow developers to utilise the security of the Bitcoin blockchain and build more efficient and secure decentralized applications.
This upgrade improves Bitcoin by enhancing transaction speed, ensuring transaction irreversibility, and mitigating miner extractable value (MEV) opportunities.
Also on the 29th of October, Cardano made a surprising announcement. Charles Hoskinson revealed that Cardano will now run a Bitcoin Layer 2 (L2) solution called BitcoinOS. This new system verified the first ZK-Proof on Bitcoin, enabling the Bitcoin blockchain to perform tasks similar to other blockchains without forking its code.
Cardano isn’t abandoning its Layer 1 (L1) status but is introducing “UTXO-enabled interoperability.” This allows Cardano to work alongside Bitcoin, leveraging each network’s strengths to enhance user experience and boost Bitcoin’s capabilities.
Is Polygon Dying?
In recent developments, the liquid re-staking protocol Swell announced its decision to join Optimism’s Superchain ecosystem by launching an optimistic rollup on the OP Stack. This move marks a significant shift from Swell’s initial plan to use Polygon’s chain development kit (CDK).
Polygon was once seen as a formidable Layer 1 (L1) solution, boasting high-profile partnerships with major companies like Starbucks, Disney, Meta, and Reddit. These collaborations highlighted Polygon’s potential to revolutionise the blockchain space by enabling secure and efficient digital asset transactions and experiences.
However, this recent move by Swell might indicate a broader trend that raises questions about Polygon’s future. Recent data shows a concerning decline in the number of transactions and core developers on Polygon. Although Polygon’s transaction volume remains higher than Optimism’s, the trend is moving in the wrong direction.
Polygon - Transactions
Polygon - Core Developers
By contrast, Optimism has seen a significant increase in both transactions and core developers, with the latter surpassing Polygon’s.
Optimism - Transactions
Optimism - Core Developers
While it’s too early to declare Polygon’s demise, these developments suggest a shifting landscape in the blockchain ecosystem. As more projects like Swell migrate to Optimism, Polygon will need more than shiny big-name partnerships to bring back users and developers.?
There’s a big lesson here, which is that the competition in this space is intense, and the ground is rapidly shifting. What looks like a sure-fire winner one moment can become a stranded asset the next. This is why position sizing is so important when putting together a crypto portfolio. We will all make mistakes, and we need to get out with minimal damage when our thesis turns out to be wrong.