Bye-Bye Bitcoin Bear

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The bitcoin (BTC) bear market of 2022-2023 was a doozy. Having also held bitcoin through the bitcoin bear market of 2018-2019, I can attest that this one was just as painful despite being slightly shorter and having a less dramatic maximum drawdown.

Perhaps my increased financial exposure this time was the reason for this difficulty. Or maybe it was my shattered hopes for better-informed mainstream media coverage, as I found myself addressing the same old worries as before (prohibition, quantum computing, environmental effects).

Regardless, I’m glad to see the tail end of this bear. Although nothing is certain, barring any significant negative surprises, like the COVID-19-induced bitcoin liquidation of March 13, 2020, the bitcoin bear market of 2022-2023 is likely over. Here’s why:

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The halving is nigh. The Bitcoin halving, which reduces the issuance rate of new bitcoins, happens roughly every four years. The prior two halvings both catalyzed major bitcoin bull markets. It’s not hard to see why. Holding demand constant, a downward supply shock forces an upward recalibration in price. Supply and demand always rule, and when supply is cut the price rises. The next halving is less than a year away.

No more tourists. Once the halving-induced bull starts running, it always draws the momentum crowd. These traders see the bitcoin price rising and they pile on. This causes a bubble that eventually ends, and they get washed out in the months following the peak. Today we have passed the washout point, as evidenced by the average age of bitcoin unspent transaction outputs (UTXO). The tourists are gone, and the HODLers remain.

More bad news can’t cause new lows. Last year had plenty of bad news in cryptoland, and that carried over into bitcoin’s price. Terra, Three Arrows Capital, Celsius Network, BlockFi, Voyager Digital, FTX and others all fell apart. But this year the bankruptcy of Genesis and worries about DCG, Grayscale and Binance didn’t take bitcoin down to new lows. The last of the sellers were already washed out. (CoinDesk, like Genesis and Grayscale, is owned by DCG.)

The cycle repeats: Someday Bitcoin will outgrow its four-year price cycles. Until then, it’s “deja vu all over again.” In the bitcoin bear market of 2014-2015, the price gravitated to around $350 until finally capitulating to $200 and staying there for months. In the bitcoin bear market of 2018-2019, the price gravitated to around $6,000 until finally capitulating to $3,200 and staying there for months. And in the bitcoin bear market of 2022-2023, the price gravitated to around $28,000 until finally capitulating to $16,000 and staying there for months. In each of these cases, the price followed a similar pattern of a peak, a multi-month series of lower price highs and a final capitulation of over 40% that lasted for several months, staying true to the past trends.

So what does the future hold? I don’t make short-term price predictions. But if bitcoin’s four-year cycle plays out again, and I expect it will, then a few things are true.

We will probably never see $16K bitcoin again. Two cycles ago, bitcoin’s price never revisited the lows after it returned to the pre-capitulation price low. One cycle ago it almost revisited the low, but it required a massive market liquidation due to the COVID-19 pandemic. The next bitcoin halving is less than a year away. Absent a major liquidation event, bitcoin’s price has likely bottomed.

Bitcoin remains regulatory teflon. Bitcoin has proven to be relatively immune to regulatory pressures. It’s been clear for years now that bitcoin is a commodity and not a security. Even the ultra-active current Securities and Exchange Commission Chair Gary Gensler, who has been the most active and aggressive chairman I’ve seen in my professional career, admits that there is only one crypto asset that is clearly a commodity (and, by implication, not a security). He obviously means bitcoin. With or without him, the SEC will likely continue to pursue actions that imply the vast majority of digital assets are securities. None of this risk sticks to bitcoin.

Financial advisors and institutions are severely under-allocated to bitcoin. I can attest from my involvement with Swan Advisor Services that financial advisors and their clients are significantly under-allocated to bitcoin. In prior cycles they had reasonable excuses for that positioning, including a lack of reasonable products and significant regulatory risks. For the broader digital asset market, these problems largely remain. But for bitcoin they are largely solved. Therefore, I expect major adoption of bitcoin by financial advisors in the coming bull market.

So, what’s next? Now is a good time for financial advisors to start educating their clients about the benefits of including bitcoin in their investment strategies and help them implement bitcoin allocations in their portfolios. Bitcoin bear markets are great times to accumulate bitcoin. But the end of the bear market is also a great time to add a truly unique asset to any diversified portfolio. The next bitcoin bull market has likely just begun.

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