The Breakdown - What Drives BTC's Predictable Four Year Cylces?

Episode Date: December 10, 2023

A reading of: https://www.coindesk.com/business/2023/12/06/why-are-pros-craving-a-spot-bitcoin-etf/ and https://www.coindesk.com/markets/2023/12/06/bitcoin-and-the-predictability-of-crypto-market-cycles/ 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, December 10th, 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 in the show notes or go to bit.ly.L.Y slash breakdown pod. Hello, friends. Well, in a week where we raced up over 40,000, and even for a moment touched 45,000, the long reads this week had to be focused on markets and market cycles.

And so for our first piece, we turned to the inimitable Kevin Kelly from Delphi Digital. Kevin has been a frequent guest on the show, although not for some time, and he wrote a recent opinion piece called Bitcoin and the predictability of crypto market cycles. TLDR? History shows there's likely a bright year ahead for Bitcoin. price. Kevin writes, the crypto market may seem like a foreign world to many, with no real rhyme or reason for how it trades. Just like traditional markets, though, crypto goes through its own cycles, and these price cycles are remarkably consistent, including their timing between peak-to-troughs bottoms, price recoveries, and subsequent rallies to new cycle highs. We believe we're in the early stages of a new

cycle. Using Bitcoin as our benchmark, here's the typical structure of a crypto-market cycle. Bitcoin's price peaks at a new all-time high. Bitcoin then suffers a painful 80% or so drawdown, the price eventually bottoms almost exactly one year after the prior cycles high. Bitcoin starts to recover and takes about two years to reach a new all-time high. Bitcoin continues to rally for another year before topping out at its next cycle high. Then the cycle repeats. The last few cycles have followed this playbook to a T. The consistency of these cycles isn't by coincidence. It's driven by bigger, more powerful macro trends, and one that lies at the very heart of Bitcoin's value proposition. Bitcoin is not an inflation hedge in the way many believe it to be. Bitcoin is not a hedge on the

consumer price index. It's a hedge against currency debasement. That distinction is important because currency debasement is driven by monetary inflation and the expansion of central bank balance sheets. In essence, Bitcoin is one of the most leveraged bets on an expansionary liquidity environment. Bitcoin halvings aren't the primary catalyst for Bitcoin bull markets. Liquidity cycle uptrens are. It just so happens that each halving has lined up with an expansionary liquidity environment. The next halving is expected to occur in April 2024, which once again looks to be right on Q. That's not to say the halving isn't important. It's a strong narrative that can certainly pour fuel on a bullish uptrend, especially if we see a spot Bitcoin ETF approved ahead of time

given liquidity upcycles tend to turbocharge fund flows. Section. Bitcoin's promising path ahead. Bitcoin's price bottomed in November 2022, almost exactly one year after its last cycle peak. If Bitcoin follows its historical playbook, that would imply a new all-time high by the fourth quarter of 2024, and its next cycle peak roughly a year after that. We noted back in the fourth quarter of of 2022, that last year's downtrend and global liquidity appeared to be bottoming, putting Bitcoin's price bottom in the rear view. The subsequent rebound in central bank liquidity has been a key support for the recovery and risk assets this year, especially crypto. And we expect these trends to continue. Looking out over the next 12 to 18 months, we expect central bank balance sheets to continue

expanding, largely because they'll have to. Many of the world's largest economies are saddled with huge debt burdens, and here in the U.S., fiscal deficits are only expected to get worse, and that's without a recession. Larger deficits mean more debt issuance, which eventually means more Federal Reserve support. That is, unless the relationship between U.S. public debt versus Fed's total assets decouples drastically. And if we are in the early innings of a new global liquidity uptrend, Bitcoin and crypto assets should outperform considerably over the next 12 to 18 months. All right, back to NLW here. One of the interesting things that Kevin gets at is this interplay between narrative and market structure. Kevin points out that Bitcoin's real correlation,

has to do with the larger liquidity environment, but the alignment with that to the narrative of the having provides a really potent force. And of course, going into this next cycle, the other narrative element that we have, adding fuel to the fire, is of course to spot Bitcoin ETF, which brings us to our second piece by ETC Group Head of Research, Andre Dragosh, called Why Are Pros Craving a Spot Bitcoin ETF? Andre writes, gradually then suddenly, as they say, Bitcoin is becoming mainstream. The biggest asset managers in the world, like BlackRock and Fidelity, have lined up to launch a spot Bitcoin ETF in the US. Based on the Grayscale Bitcoin Trust's NAV discount, which is narrowed dramatically, the market assigns a probability of around 90% that the SEC will approve such a vehicle.

But why is there such a big need for a spot Bitcoin ETF in the first place, especially since there are already futures-based Bitcoin ETFs. As a starter, Bitcoin futures ETFs have many drawbacks compared to a spot-based product, including high roll costs that can eat up to 30 percentage points of the annual performance if the Bitcoin Futures curve exhibits a steep contango. In plain English, Bitcoin futures are priced significantly higher than today's spot price, Bitcoin futures investors surrender a large chunk of their performance. Hence, the full performance benefits of holding Bitcoin do not come to fruition when investing into a futures-based product. Broadening investment access to Bitcoin and other crypto assets can open up a whole new universe of potential portfolio

allocations that were not possible before. In portfolio managers Parlance, investments into Bitcoin significantly enlarge the so-called efficient frontier of possible multi-asset portfolios. The efficient frontier represents all the potential portfolios displayed in a return risk diagram based on varying weights of the different asset classes. For instance, one dot represents a portfolio that invests X into equities, Y into bonds, and the rest into Bitcoin. Portfolio managers want to be at the very edge of the frontier, since they receive the highest possible return for the lowest possible risk. Now, editors note, there is a chart that shows a huge array of these possible portfolio compositions in green, with a much smaller set of options in black

and Andre writes, the Black Cloud of Dots represents the universe of potential portfolios based on traditional asset classes only. The Green Cloud represents the whole new universe of potential portfolios when adding Bitcoin. As you can see, the addition of crypto assets like Bitcoin greatly expands things. Thus, it is not surprising that including Bitcoin in a classic 60-40 stock bond multi-asset portfolio has led to a significant increase in risk-adjusted returns in the past with only a minor increase in portfolio drawdowns. When these spot Bitcoin ETF applications will ultimately be approved is still uncertain, though the consistent. census expects a batch approval most likely in January. These prospective Bitcoin ETF issuers have a

significant amount of assets under management. We estimate around $16 trillion, so they could have a huge impact on crypto. If only a small percentage of that amount gets invested into Bitcoin, the effect would most likely be very significant because, currently, Bitcoin Exchange traded products only amount to $38.8 billion of assets, based on our calculations, including Grayscale's trust. But this capital won't be invested overnight. It will probably take many months before investors start replacing parts of their traditional asset allocations with Bitcoin, gradually, then suddenly, as they say. So what's interesting about this one? In many ways, I have to say it's the banality of it. There is no highfalutin explanation of Bitcoin's purpose

as a hedge or as a reserve asset or as an independent store of value or anything that actually animates, probably most of you who are listening to this podcast. Instead, it's just about portfolio composition and structure. Now, in previous cycles, we have had little time. tiny bits of this. There's been the whole get-off zero conversation, 1% allocation conversation, and of course there have been lots of times that big hedge fundies like Paul Tudor Jones or Stanley Druckenmiller have extolled the virtues of Bitcoin in a particular narrative context as well. What I think Andre is getting at with this piece is that the introduction of a spot Bitcoin ETF begins a new era in which Bitcoin is more than ever, not only a thing to be judged on the

merits of what it means for the world, but just as a thing to be considered as part. of a robust portfolio. Now, all of you and I know that from the starting point of number go up and great part of a portfolio, there comes a lot of very mission-oriented alignment ultimately. What I mean by that is that people come for the gains and stay for the real true value of Bitcoin that goes far beyond those dollar profits. Yet still, it's pretty exciting to be starting a new cycle where a whole new set of people are going to have a whole new instrument and a whole new set of reasons to get engaged. Now, once they do buy in, then it's up to us to keep them around for all the right reasons. I have no doubt that you are all up for the task.

For now, however, that's going to do it for today's Long Read Sunday. Until next time, be safe and take care of each other. Peace.