Market Update Q1 2023 - sent 24 April 2023
A validation of the 4 year cycle theory - The last group email I sent before creating the substack
Dear all,
I hope this email finds you well. It has been a long time since my last email (November 2022). The market cycle theory is intact. In my October 2022 update, I mentioned that we will not be able to confirm the bottom of this cycle before Feb/March of 2023. This has played by the book. We are now past Q1 2023 and BTC crossed the 30k threshold for about a week, now correcting to around 27k. The crossing of 30k downwards in the past confirmed that we were in the long bear market. It now has been crossed in the reverse direction and most likely means that the 15.5K that we experienced past November was the cycle low. Unfortunately, the unprecedented macro conditions remain and with that an amplified uncertainty. In terms of Bitcoin cycle, we are now probably in the late consolidation phase of this cycle or the early accumulation phase of the next one.
To remind everyone, the Bitcoin cycle theory, often referred to as the "four-year cycle" or "halving cycle," is based on the idea that Bitcoin's price tends to follow a repeating pattern roughly every four years. This cycle is primarily driven by the Bitcoin halving event, which occurs approximately every four years and reduces the block reward (newly created Bitcoins given to miners for validating transactions) by 50%. The cycle can be divided into four main phases: Accumulation, Bull Market, Post-peak Bear Market, and Consolidation. The cycle can be divided into four main phases:
Accumulation Phase: This phase occurs post-bear market when the price of Bitcoin has bottomed out, and smart money starts accumulating at discounted prices.
Bull Market Phase: After the accumulation phase, Bitcoin's price begins to rise, driven by increased demand, media attention, and speculation. This phase tends to last for an extended period and eventually leads to a parabolic price increase.
Post-peak Bear Market Phase: The market reaches a point of exhaustion and profit-taking, causing a sharp decline in Bitcoin's price. This phase often comes with negative news and sentiment, leading to further selling pressure.
Consolidation Phase: After the bear market, the price stabilizes, and the market sentiment begins to shift from negative to neutral or positive. This phase sets the stage for the next accumulation phase.
In the past I have used different names for these phases, but I believe this naming version makes more sense. Here are examples of how these phases played out in past cycles:
BBull Market Phase: 2013, Bitcoin price rose to an all-time high of $1,150 in November.
Post-peak Bear Market Phase: Late 2013 to 2015, Bitcoin price dropped over 80% to a low of around $200.
Consolidation Phase: Late 2015, the price stabilized and began to rise gradually.
Accumulation Phase: Early 2016, Bitcoin price was around $400.
Bull Market Phase: 2017, Bitcoin price reached a new all-time high of nearly $20,000 in December.
Post-peak Bear Market Phase: 2018, Bitcoin price dropped over 80% to a low around $3,200 by December.
Consolidation Phase: 2019, the price stabilized and began to rise gradually.
Accumulation Phase: Early 2020, Bitcoin price was around $7,000.
Bull Market Phase: 2020-2021, Bitcoin price reached a new all-time high of around $69,000 in November 2021.
Post-peak Bear Market Phase: 2022, Bitcoin price dropped over 50% to a low around $15,000 by November.
Consolidation Phase: Dec to Apr 2023, the price stabilized and began to rise gradually.
The other significant event that, in the absence of adverse macro conditions, is generally positive is that we are now about a year from the next halving.
While there is no strict pattern, historically, Bitcoin has not typically experienced new lows within a year from the next halving event. Instead, the price has generally trended upward as the halving approaches. However, it's important to note that past performance is not always indicative of future results, and various factors can influence the market.
This pattern is due to the mathematical, deflationary, and predictable monetary policy of the network. The block reward in about a year from now will be cut in half from 6.25BTC per block reward to 3.125BTC, effectively causing a supply shock overnight. The anticipation of that event leads to more accumulation by smart money. The supply shock causes further increases and attracts the mainstream ultimately leading to an unsustainable buying frenzy that affects the whole crypto market, and the unavoidable crash that follows. This has happened in all three halving cycles so far.
Here's an overview of Bitcoin price action approximately one year before and one year after each halving event:
First halving (November 28, 2012):
One year before the halving (November 2011): The price of Bitcoin was around $2.
At the time of the halving (November 2012): The price of Bitcoin was around $12.
One year after the halving (November 2013): The price of Bitcoin reached an all-time high of around $1,150.
Second halving (July 9, 2016):
One year before the halving (July 2015): The price of Bitcoin was around $270.
At the time of the halving (July 2016): The price of Bitcoin was around $650.
One year after the halving (December 2017): The price of Bitcoin reached an all-time high of nearly $20,000.
Third halving (May 11, 2020):
One year before the halving (May 2019): The price of Bitcoin was around $5,700.
At the time of the halving (May 2020): The price of Bitcoin was around $8,500.
One year after the halving (November 2021): The price of Bitcoin reached an all-time high of around $69,000.
In all three cases, the price of Bitcoin experienced growth in the year leading up to the halving events and continued to increase in the following year. However, it's important to remember that past performance is not necessarily indicative of future results, and various factors can influence the market. The cryptocurrency market is still relatively young and subject to risks and uncertainties.
During a recent deep dive into various Bitcoin network metrics, several noteworthy developments were observed. Segregated Witness (SegWit) adoption is impressive, with an 89% adoption rate and over 80% utilization. SegWit is a soft fork that changed Bitcoin's transaction format, speeding up transaction times and lowering fees. However, users and products must adopt and utilize this change to reap the benefits.
Taproot adoption, designed to increase privacy and reduce transaction fees, lags behind SegWit with only 22% adoption and just over 11% utilization. While SegWit has been around for thrice as long as Taproot, the difference in adoption rates is still significant.
A new all-time high of 53% was reached in the metric "Supply Last Active 2+ Years Ago", meaning that over half of the Bitcoin in circulation has not moved in the past two years. This level of illiquidity is rare in financial assets and supports the argument for Bitcoin as digital gold. Taking the analysis further, almost 29% of all Bitcoin in circulation hasn't moved in the last five years, and just under 15% hasn't moved in over a decade.
Lastly, we have seen bitcoin on exchanges continue to fall significantly since March 2020. This continued drop in Bitcoin on centralized exchanges has been driven by various issues with different companies, including bankruptcies and fraud.
Major News
In Europe, MEPs have approved the first EU legislation for tracing crypto-asset transfers, such as Bitcoin and electronic money tokens, with 529 votes in favour, 29 against, and 14 abstentions. The law aims to ensure that crypto transfers can always be traced, and suspicious transactions blocked. It will cover transactions over €1000 from self-hosted wallets interacting with hosted wallets managed by crypto-asset service providers. The legislation does not apply to person-to-person transfers without a provider or among providers acting on their own behalf. Additionally, MEPs have approved common rules on the supervision, consumer protection, and environmental safeguards of crypto assets, including cryptocurrencies (MiCA). These rules cover transparency, disclosure, authorization, and supervision of transactions, aiming to protect consumers from market manipulation and financial crime. Significant service providers will be required to disclose their energy consumption to reduce the high carbon footprint of cryptocurrencies.
The European regulation can be seen as both positive and negative for the crypto industry.
Positive aspects:
1. Regulatory clarity: The new rules provide a clear legal framework for crypto-assets and their service providers, which could encourage more businesses and investors to enter the market.
2. Consumer protection: Enhanced transparency, disclosure, and supervision requirements aim to protect consumers from fraud, deception, and market manipulation.
3. Market integrity: The legislation seeks to support financial stability and market integrity by regulating public offers of crypto-assets and preventing money laundering, terrorist financing, and other criminal activities.
Negative aspects:
1. Increased compliance costs: The new rules may increase the administrative burden and compliance costs for crypto companies, particularly smaller start-ups and innovators.
2. Potential barriers to entry: The additional regulatory requirements might create barriers to entry for some businesses, potentially limiting innovation and competition within the industry.
3. Privacy concerns: Some users may be concerned about the increased surveillance of crypto transactions, particularly those who value the privacy and anonymity typically associated with digital assets.
Overall, I believe the regulation's impact on the crypto industry is net positive because it allows for clarity and for businesses to operate without being uncertain about how they are viewed by regulators.
USA Banking sector house of cards ongoing shake out and the start of a war on crypto. It all started with the banking collapse domino and all the unprecedented "QE but don't call it QE" measures taken to contain it, followed by really coordinated efforts to cut the exit roots from traditional finance to crypto. This movement is primarily driven by Treasury Secretary Yellen and her sock puppet Garry Gensler, the chairman of the SEC. Their actions are not supported across Congress or entirely within the SEC. And has found strong supporters in populist politicians such as Elizabeth Warren, that is including the “War on Crypto” as one of the main themes of her re-election campaign. They are pushing regulation by enforcement while maintaining the lack of regulatory clarity. There are several lawsuits ongoing against the SEC and surely more to come. Ultimately BTC cannot really be stopped, and the industry will only move out of the US if this unreasonable stance endures. Eventually, favourable regulations will be established when inevitably the people who drive the offensive will be replaced or are told to change their tune. More info on operation “Chokepoint 2.0” you can read here (by a law firm opposing it) and here (by Nic Carter who is a great analyst). Meanwhile, individual states are moving to protect Bitcoin mining. Several states have introduced favourable regulations in order to attract more BTC miners. In general, USA is divided. There are supporters and adversaries in both parties and in all states. For or against Rulings prevail dependent on which type of individuals occupy what positions.
A Hong Kong court has recognized crypto as property "capable of being held on trust" in a case involving the defunct crypto exchange Gatecoin. Justice Linda Chan stated that Hong Kong defines "property" broadly, like other common law jurisdictions. The case revolved around whether the crypto held by Gatecoin should be treated as property held on trust or be made available to the general body of creditors. The court determined that cryptocurrencies can form the subject matter of a trust, but no trust was established in this case. This ruling provides greater clarity on how crypto assets held by companies should be treated in wind-down procedures. Meanwhile, Hong Kong is pushing for clearer crypto regulations, which is attracting interest from state-affiliated banks in China looking to onboard regulated crypto companies in the city. In summary:
The Hong Kong branches of Bank of Communications Co., Bank of China Ltd., and Shanghai Pudong Development Bank have started offering services to local cryptocurrency companies or made inquiries about doing so.
Local crypto companies have traditionally faced difficulties setting up corporate bank accounts; the involvement of state-owned banks reflects China's support for boosting the digital asset industry in Hong Kong.
China banned crypto transactions on the mainland in September 2021, while Hong Kong has embraced the sector with policy documents released in October.
Over 80 foreign and mainland China companies are interested in establishing Web3 operations in Hong Kong, ahead of new crypto regulations taking effect from June.
Hong Kong's Financial Secretary Paul Chan announced last month that the government will allocate HK$50 million (US$6.37 million) to develop the sector, which he considers a "golden opportunity" for leading innovative development.
The Bank of Russia is developing a bill for an "experimental legal regime" allowing cryptocurrencies to be used exclusively for export-import transactions, while crypto trading and payments within Russia will remain banned, according to the head of the regulatory agency, Elvira Naiullina. The Russian government is also working on a bill to establish a national agency for licensing and supervising cryptocurrency platforms and introducing a new tax code for miners. The central bank's plan includes creating special organizations for mining crypto and processing payments for cross-border trade deals, with digital assets issued within Russia also eligible for such transactions. The Bank of Russia is currently discussing the types of organizations that can participate in the experiment, their business models, and their banking partners, with government-sponsored companies likely to be involved in the early stages.
The UK plans to introduce specific laws to regulate the cryptocurrency industry within the next 12 months, according to Andrew Griffith, economic secretary to the UK Treasury. The British government aims to position the country as a "global hub for crypto asset technology." In February, the government laid out plans to regulate crypto assets and opened them for consultation, with the consultation period ending on April 30. The UK's regulatory approach is expected to combine existing regulations with new ones, aiming to treat the same assets and transactions consistently while taking advantage of opportunities in the crypto asset and distributed ledger space
The Ethereum Shanghai Upgrade has been executed successfully and the network transitioned to proof of stake. While this promotes centralisation, it makes participation in token issuance very easy for traditional players and inevitably will lead to value appreciation. Read more here
Onto the Technical Analysis.
We have now exited the fire sales zone marked by the 1400DMA. This was the longest fire sales period in the history of BTC, and I hope you have taken advantage. If you DCA’d in BTC (and perhaps ETH) as advised under the 50k, and more aggressively under the 30k, it is very possible you are already sitting on profits. And we are not even near the Bull market.
Above we see that we crossed the 1400DMA with conviction(red line) on the 16th of March. In the past, there has never been a case of new lows after such an event, especially within a year of the BTC supply halving.
This is confirmed by the Puell Multiple indicator crossing above 1. And the MVRV decisively excited the “Green zone”. In general all metrics more or less point in the same direction that the bottom is in. You can explore many of these metrics with an explanation of what they are Here
BUT
I Can’t state more that we are in unique circumstances with an ongoing war, terrible inflation, a very flimsy financial system that is on the edge and a war against the USD as a reserve currency. There is plenty of room for surprises.
While these may cause great volatility in the near future, it is a period to accumulate and HODL. The fundamentals of the technology have not changed a bit and despite the development of CBDCs (Central Bank Digital Currencies) and against the mainstream media FUD, the use case and business adoption rate remain strong. The space requires conviction and knowing and understanding where you put your money. So keep educating yourselves and act in accordance with your own opinion.
As always any questions or comments are welcome.
Till next time HODL and keep your assets OFF exchanges.