The Breakdown - Crypto Winter Is Over (Says Morgan Stanley)

Episode Date: October 22, 2023

NLW reads a new piece from Morgan Stanley about the seasons of crypto. https://www.morganstanley.com/articles/the-four-seasons-of-cryptocurrency-explained Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, October 22nd. And that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod.

Hello friends, happy weekend. It has not been, I will say, the beautiful, pleasant October that we had all requested here in the Bitcoin and Crypto Space. No, instead we have dealt constantly with shi-head Sam and its stupid trial, along with a seeming unending set of accusations that somehow the incredible horror and tragedy that has played out in Israel is the fault of the crypto industry. And given all that, I thought it would be nice. to maybe switch gears just a little bit for today's Long Read Sunday and read a more positive slanting piece this time from none other than Morgan Stanley. This piece was published by their wealth management group and was called Will CryptoSpring

Ever Come? So what we're going to do is read this. It's not too long. And then we'll talk about what I personally think about the issues that it brings up. The piece begins, while cryptocurrency used to make headlines for its radical performance, these days, it's often in the news because of lost fortunes, exchange bankruptcies, and business fraud. As investors monitor the crypto market, now is a good time to search for insights from past cryptocurrency trading cycles to understand what may lie ahead.

Section. How Having affects crypto supply. Bitcoin is the leading cryptocurrency, accounting for about 50% of total digital assets by market capitalization, and in many ways acts as a proxy for the overall crypto market. One unique aspect of Bitcoin is that it is designed to go through a process called halving that creates scarcity so that Bitcoins can maintain their value. Specifically every four years, the number of Bitcoins created every 10 minutes is cut in half. Eventually, when there are 21 million Bitcoins in existence, no more Bitcoins will be mined. By intentionally limiting the supply of new Bitcoin, the shortage caused by the halving can't

affect the price of Bitcoin to potentially spurable run. There have been three such runs on Bitcoin since its incentives. in 2011, each lasting 12 to 18 months after the halving. Section. Four phases of cryptocurrency prices. The four-year cryptocurrency cycle roughly corresponds to the four seasons of the year. Summer. Historically, most of Bitcoin's gains come directly after the halving.

This bull run period starts with the having event and ends once the price of Bitcoin hits its prior peak. Fall. Once the price surpasses the old high, it tends to attract interest from the media, new investors, and businesses, which can then drive prices even higher. This period represents the time between when Bitcoin passes the old high and reaches a new one, which signals that the bull market has run its course. Winter. In previous cycles, the bare market decline has come when investors decide to lock in their gains and sell Bitcoin,

causing prices to drop while scaring off new investment. This period takes place between the new peak and the next trough. There have been three winters since 2011 lasting about 13 months each. Spring. During this period preceding each halving, the price of Bitcoin generally recovers from the cycle's low point, but investor interest tends to be weak. Section. Is Crypto Spring here? Just as a farmer avoids planting seedlings in the winter or too late in the spring, crypto investors want to know when CryptoSpring has arrived to maximize their investment growing season. Here's what to consider when trying to determine whether CryptoSpring is truly here or if the market is still in the midst of crypto winter. Time since

the last peak. The trough of Bitcoin in previous crypto winters has historically occurred 12 to 14 months after the peak. Magnitude of Bitcoin drawdown. Previous troughs were about 83% off their respective highs. Minor capitulation. When Bitcoin has neared the trough of past cycles, many Bitcoin miners shut down their operations because they were losing money. When a miner shuts down, it makes it a little easier for the remaining miners. A statistic called Bitcoin difficulty measures how easy or hard it is to mine Bitcoin. When difficulty decreases, it's a sign the trough may be near. Bitcoin price to thermocat multiple. Thermo cap measures how much money has been invested in Bitcoin since its inception. A lower Bitcoin price to thermocat multiple indicates a trough, while a higher multiple indicates a peak.

Exchange problems. When the price of crypto drops, it tends to impact the viability of some crypto exchanges. Bankruptcies, bad news, or new regulations may all indicate a trough. Price action. A 50% increase in price from Bitcoin's low is typically a good sign that the trough has been achieved, although there have been examples of such a gain being followed by significant declines. Estimates of when exactly the next halving will occur vary, but history indicates it has the potential to occur sometime around April 2024. Based on current data, signs indicate that crypto

winter may be in the past and that crypto spring is likely on the horizon. However, keep in mind that there have been only three crypto springs to date. In other words, there is still a lot to learn. One key thing to keep in mind, as with any investment, past performance doesn't indicate future results. Potential risks such as encryption breaking, software bugs, recession, or coordinated government action could emerge before the expected halving and disrupt the cycle. Well, no one can tell you if now is the right time to buy or sell cryptocurrency. Today is the right time to learn more about the crypto market's cyclical tendencies so that you can ask questions, monitor trends, and determine for yourself if the cycle will repeat a fourth time and whether to invest. All right, so like I said,

a short little piece from Morgan Stanley. Now, a couple things that I want to do. I want to do. I want to wanted to flag and point out coming off of this piece. First, I have seen a lot of breathless coverage in places like Bitcoin Twitter, with the headline being some version of Morgan Stanley says crypto winter is over. First of all, as you can tell from the piece, their position is a lot more temper than that, and really the goal of the piece is not even to assess where we are in the cycle, but just to explain the cycle. And two, I would argue that everyone kind of has a sense that we are past crypto winter, at least the depths of it. There has certainly been a thawing that has been reflected not only in price, where we are meaningfully off the cycle lows that we hit around the time

of FTX's collapse, but also just in terms of sentiment. Now, my personal feeling, one that I've articulated a number of times, and frankly a number of places, is that the key inflection point moments in 2023, when we look back historically speaking, will be seen to be one, the banking crisis, at which point Bitcoin went up even as banks were going down, leading to a raft of headlines that said exactly that in mainstream media, and calling into question just how dead the industry really was, even after all the madness of SBF. And two, I believe that BlackRock's decision to file their spot Bitcoin ETF proposal will also be seen as an incredibly significant moment. This is the world's biggest asset manager getting into this game in an

extremely direct way, and effectively throwing their weight behind the asset and saying this thing is here for real. Up until that point, you might still have been able to argue that the sheer fallout of everything that had happened in 2022, not just FTX, but Luna and BlockFi and all these things, was still dragging crypto ever downward, and that with the wrong regulatory regime and the incredible pressure that it was feeling in Washington, D.C., it still might end up being something very different and neutered as compared to what it once was. Populari-fink getting involved really stopped that momentum. It was a signal to the rest of the traditional financial world that this wasn't something that they should just write off. Now, interestingly, if you talk to folks who have been around that more

trad-fi set, there had never been quite as aggressive a turning away from the space after all the badness of 2022, then it might have seemed if you were just hanging out on Twitter. Certainly there was a significant decline in how much those companies were willing to talk about their activities in and around the crypto industry. And what's more, there certainly hasn't been any sort of broad-based momentum when it comes to buying or accumulating crypto assets themselves. But that hasn't meant that those actors have really gone away. I think very early spring is a fairly decent analogy for where it feels like we are, if we are sticking with this seasonal theme. The worst of winter is over, but it's still pretty cold. It's still kind of gloomy. It feels like

there's still a lot to go, and we haven't really yet gotten visions of where the seedlings of the next cycle are going to come from, at least not outside Bitcoin. In fact, I would say that we're just starting to see those little seedlings now, at least from a narrative perspective, once again, with people like Larry Fink going on TV and talking about how in a context of increasing global instability, Bitcoin alongside other flights to quality like gold might have even more of a role to play. That said, we don't have any indications of where other interests. from outside is going to come when it relates to defy or NFTs or anything else that's really not Bitcoin. That doesn't mean those things won't come. It just means that we don't have visibility into

them yet. So again, if we're sticking with the seasonal analogies, that very, very early spring period doesn't seem too far off. One other thing to discuss is how likely the halving is to, in and of itself, drive the next bull market. What Morgan Stanley points out is that there is a correlation historically that bull runs happen in the periods following halvings. That's so far as how the cycle has played out. Yet what's important to remember is that the having was never the narrative that pushed a bull market to happen. It was a context that focused more media attention around the space and did so in a way

that really reinforced what makes Bitcoin different. It's fixed decreasing supply schedule that leads to an ultimately static supply. That is rich, fertile narrative ground, and it can help contribute to the actual stories that markets tell themselves that end up driving new participants in. In 2020, that was obviously Paul Tudor Jones and the great monetary inflation thesis coming off of all COVID-era stimulus. We don't know what it will be this time, although again, some early indicators look like they're pointing towards global instability as a potential reason for people to take another look at Bitcoin. That would certainly reinforce that story told back during the banking crisis,

so who knows? The point is, when it comes to how much to look at the having as catalyst, It will be important. It will be a step on the way to whatever the next bull run is. But it's probably going to have the function of concentrating more attention on whatever narratives are emerging than in supplying the narrative on its own. So certainly what I am looking out for is what those stories that the market seems to be grabbing onto, and in particular which ones resonate with the folks outside of us, the folks who aren't listening to the breakdown on the daily to try to understand the space. I think the closer we get to actually understanding those stories, the more likely we are to

actually be in that full spring when things are gearing up for what will be an inevitable summer. Still, it's nice to see a big financial institution like Morgan Stanley, not only writing with cautious optimism about where we are, but also doing so in a way that's actually quite useful and probably helpful to people who are still trying to learn about the space. Anyways, friends, that is going to do it for today's Long Read Sunday. Nice little one for your weekend. I appreciate you guys listening as always, and until next time, be safe and take care of each other. Peace.