BTC Dips are Normal; Prepare Your Mind

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  • Tue, May 04, 2021 - 06:27am

    #1
    VTGothic

    VTGothic

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    BTC Dips are Normal; Prepare Your Mind

As someone who has been through a couple of bitcoin’s 4-year cycles, I get strangely bored when the price action moves sideways, as it’s been doing for awhile. Sometimes, I have to step back and take the long view. For anyone else interested, here’s what my trusted sources are conspiring to teach; but first, some data points for context:

  • Over the last year (May 4 2020 – May 4 2021) bitcoin’s price has gone up $47,000 – around 538%.
  • From the first of this year, it’s gained about $26,500, or nearly 89%.
  • In the last month, however, bitcoin has been ranging within a roughly $17,000 range from about $47,000 to $64,000.

Bitcoin’s short-term ranging, that produces price swings in the $5-10,000 range – sometimes on a daily basis – can cause heart palpitations for traditional equity investors and new bitcoin investors. More experienced bitcoin “hodlers” find the same action tame.

The difference resides, I think, in expectations and experiences. While traditional investors and newbies look at the dramatic price increase and current sideways action and think things like “volatility” and “possible topping action,” we who have been through several halving cycles know that traditional investors and newbies reach this point of uncertainty and fear at about this time in every 4-year cycle. We, on the other hand, become increasingly impatient for the beginning of the significant cycle-driven price increase that is yet to come.

Bitcoin’s cycle-driven history tells us that bitcoin’s top will not arrive until Q4 2021, and when it does it will be in the $250,000-$300,000 range per coin, as recently detailed in an article in the UK Independent. The Independent’s expectation is anchored in the S2FX (stock-to-flow cross-asset) model of PlanB that I have cited several times in the past, and the article ends on a reminder that after reaching a dramatic cycle high, bitcoin typically corrects deeply.

Let’s look at that. After its first run-up, bitcoin declined almost 95%, to just $2 in November 2011. After its third run-up (the last cycle), bitcoin’s decline was a still very noticeable 84%, down to $3,100. But in between, the coin’s price had moved from the $2 low in 2011 through a whole intermediate cycle to a high of more than $19,000 in late 2017. And in the months after hitting bottom in 2018, bitcoin’s price rebounded to a pre-halving 2020 price of around $8,600.

These cyclical movements are examined in this article from October 2019, that goes on to predict that we could see the high price of the current cycle reach nearly $400,000 by the end of 2021 or early into 2022. That prediction was based on taking an average of the previous two cycles’ percent rise from bottom to top and projecting it forward. An 84% retracement from there suggests a follow-on cycle low of about $84,000.

If PlanB’s $288,000 projected top proves more accurate, the follow-on low could be around $45,000.

These numbers roughly accord with on-chain analyst Will Clemente III’s observation that each cycle’s bull market forms a base of capital that is 2-3 times higher than the previous all time high, and that those bases mark a “point of no return” that serves as the floor for the subsequent bear market. If he’s right, the coming low of the current cycle will be $54-64,000. Between that low and the next halving – roughly a year and a half later – bitcoin’s price can be expected to slowly rise toward $100,000.

A growing cadre of bitcoin hodlers are now embracing Dan Held’s supercycle thesis. First advanced in the down market of 2019, the supercycle thesis looked toward a future cycle in which the bear portion is erased or dramatically mitigated. Dan’s argument has been that as adoption broadens and deepens, and bitcoin’s per-coin value rises, volatility declines. In particular, as high net worth persons and entities, along with funds, corporations, and even state actors, enter into bitcoin ownership the weight of ownership will shift from retail investors (who spook easily) and short-term traders toward long-term holders of large (dollar-denominated) positions at ever higher prices per coin.

(Dan just reviewed his thesis in a Twitter stream here that closely tracks the short December 2020 article in which he restated his thesis, first put forward orally in a 2019 podcast interview.)

Reduced down-side volatility is to be expected as the reduced number of coins available to trade daily is coupled to the steady upward pressure on bitcoin’s price. That price pressure emerges when the increasing demand for the smaller pool of available coins runs into the cyclical 4-year reduction in the number of daily mined coins, approaching the inescapable total cap of 21 million coins. (About 19 million are already mined, which means the future supply is diminishing as investor interest is increasing.)

For all the people now climbing aboard the supercycle train, there are plenty of others who doubt we’ll see a supercycle until bitcoin’s total market capitalization is 5 or 10 times larger than its current $1 trillion. I’m agnostic because I just don’t know. It does seem to me, though, that it requires a lot more institutional and high-net-worth adoption to mitigate the bear portion of the cycle than we’ve seen to date because what has to occur is the elimination of the classic characteristic of bull tops: running out of new buyers at elevated prices. It just seems to me that at some point people decide the price is too high for the asset to constitute a wise investment. That should be particularly true for smart-money people.

I think it’s a matter of psychology tied to high dollar values – big numbers freak us out, even if the percentage rise is similar to what’s happened before at lower dollar values. So I expect some number of people and entities to exit the market when bitcoin’s price is in the 6 digits simply because the price is in the 6 digits. How much replacement interest shows up is the open question.

What could interfere with my expectation of a top followed by a deep retracement is continued flooding of the market with fiat dollars. The more inflationary pressure the Federal government and Federal Reserve generate, the more interest smart money people will have in escaping the devaluation trap. That would be bullish for precious metals and all cryptocurrencies, if it happens, but most likely mostly for bitcoin because it, alone among inflation hedges, cannot be directly pressured or confiscated. Its use can be discouraged, its conversion to dollars can be penalized, but any bitcoin held off government-regulated exchanges cannot be seized. Nor can access to it be strangled. So, enough monetary pressure put on the purchasing power of USD could produce a continuous run for exits, and that could keep bitcoin from a deep retracement next spring, when the bear would normally be expected to wake up and roar.

For now, and foreseeably, I’m operating on a base case expectation that we will see a spring 2022 bitcoin bear market following the bull’s fatigue at the end of 2021. My whole point in writing this essay is to warn and encourage new bitcoin investors and holders that deep dips are normal and should be expected. It’s just part of the bitcoin 4-year cycle. Prepare your mind accordingly.

You should also anticipate a follow-on slow and steady recovery from the lows toward a price in the $100,000 range over the 15-18 months that will precede the 2024 halving.

You could sell into the coming high if you’re willing to gamble that Dan’s supercycle theory is wrong, but there’s the potential that such a bet could cost you dearly compared to just holding on through the more likely bear cycle. You also have to continue to believe in the purchasing power of USD in order to trade strong BTC for it.

I think that’s the real gamble. I think USD is a growing risk while BTC is a steadily less risky store of value. I think over the coming years USD is going to become increasingly volatile, to the down side in terms of purchasing power, while BTC is going to become steadily less volatile to the downside while strengthening its per-coin value to the upside. I’m just not betting downside volatility disappears this cycle. It might prove less severe, though, due to the purchasing of dips by big money interests.

  • Tue, May 04, 2021 - 06:42am

    #2
    LBL

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    Reply To: BTC Dips are Normal; Prepare Your Mind

I bought a graphics card for mining, back in 2015.

Never figured out how to set it up, to do the encryption tasks associated with Bitcoin “mining”.

  • Tue, May 04, 2021 - 07:13am   (Reply to #2)

    #3
    VTGothic

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    BTC Dips are Normal; Prepare Your Mind

LOL. I’m not a miner, and don’t follow mining tech very closely, but I imagine that’s pretty useless today. Good paperweight?

  • Tue, May 04, 2021 - 07:23am   (Reply to #2)

    #4

    Jim H

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    How to explain DOGE?

Hello VT, aka The Crypto Therapist.  I have some troubles that I need to discuss with you.  When I finally put some money into crypto earlier this year, I put (relatively) a lot into BTC and a little into ETH.   Are there reasons to believe that BTC will at some point gain again relative to ETH?

Secondly, how to explain the DOGE phenomenon?  How can the cryptoverse so value a joke?

  • Tue, May 04, 2021 - 07:30am   (Reply to #2)

    #5
    Kathy

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    BTC Dips are Normal; Prepare Your Mind

Secondly, how to explain the DOGE phenomenon?  How can the cryptoverse so value a joke?

Fiat currency of Mars, when the time comes!

  • Tue, May 04, 2021 - 09:05am   (Reply to #2)

    #6
    VTGothic

    VTGothic

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    BTC Dips are Normal; Prepare Your Mind

1. The more trivial first.

how to explain the DOGE phenomenon?

Hey, people are irrational, right? Including newbie investors in general and crypto-innocent investors among them. Doge is a joke, meant as a joke. But Musk plays games, and we Americans suffer from idol-worship. As far as I can see from Musk’s amusement at the impact of his shilling on the limited resources of too many of those influenced by him, he’s a sociopath.

A little less frivolously on DOGE: sometimes people feel so hopeless they just swing for the fences. Add in that retail investors tend to think in terms of “how many units can I buy,” rather than make a % allocation to an asset regardless of how many units that affords (the professional approach). DOGE was, and relatively still is, very cheap per unit, so to the retailer it seems like a bargain. It’s just gambling, and we know what population buys most of the lottery tickets.

2.

Are there reasons to believe that BTC will at some point gain again relative to ETH?

Yes, many. Just remember the basics:

ETH, along with the entire crypto space, is benefitting from the money printing and the need for escape from fiat. ETH is bigger than all other alt-coins and so gets outsized benefit. It’s also cheaper per unit than BTC, and so seems like the better deal for the dollar. BTC, however, is the more secure with the better long-term prospect. Its market dominance is the sign of that. However BTC and ETH prices might fluctuate relative to one another and to fiat currencies, the fundamental differences don’t change. However, not everyone who piles into a bull market understands the distinctions, which can temporarily skew the market. But the same people piling into ETH as it shows faster growth than BTC will be bailing out as soon as the narrative switches. They don’t understand the space, nor the relative merits of either protocol. They buy on hype and FOMO and sell on fear of loss. BTC is not immune to the same retailer behavior, btw. It just has a stronger foundation and use case, which is why it will hold value better over the medium and long term.

Then, too, ETH founder Vitalek just “burned” a bunch of coins to tighten supply. Well, that has the same impact on remaining coins as does stock buyback actions: Price goes up. It’s market manipulation, and Vitalek is the primary beneficiary, holding the bulk of premined ETH. Bitcoin’s total number is inexorable, its rate of mining new coins into existence is set and controlled by code, not human self-interest, and is impervious to human self-interest. There are no premined BTC.

Despite its claims to the contrary, ETH is not decentralized. The fact that Vitalek can change the number of coins – not to mention change the base protocol to proof-of-stake – testifies to its centralized, top-down character. Some people see that flexible nature of the coinage as a positive thing, noting that it can fluctuate to reflect market demand just like the dollar. But it means that just like the dollar it’s inherently and ultimately inflationary and will at some point succumb to the same problems USD has. Not so, BTC. BTC is impossible to inflate, and no central authority can change either the number of coins or the base protocol.

Government can put pressure on Vitalek to adjust ETH supply, availability, and use cases. That’s impossible with BTC because there’s no person or corporation to threaten or on whom to bring down the pressure of the State.

I think it’s very possible that a significant amount of the retail FOMO investment in crypto is feeding into alt coins because BTC seems so expensive on a per-coin basis. Because all the alts have much  smaller market caps, those new dollars can have a larger effect on their various unit prices compared to the more mature BTC market and its individual coin price. So even if the percent growth is larger than BTC, that doesn’t mean an alt coin is doing better. It just means the alt coins are starting at a lower unit price and a smaller market cap.

For comparison: if I bought $1000 worth of a $20 per share small cap stock I’d own more shares, and my purchase would have a larger influence on the stock’s price and the company’s market cap than if I bought $1000 worth of a $300 per share large cap stock. That doesn’t mean the cheap small cap stock is a better investment than the expensive large cap stock. Answering which is the fundamentally better – and safer – investment requires examining their fundamentals, and avoiding getting mesmerized by their price/unit.

Perhaps the small, cheap stock will outperform the large, costly stock in a short time frame, especially in a FOMO driven bull market. But what do you do when it reaches its top? DOGE will disappoint dramatically. It’s no different than the ICOs of the last cycle when BTC last led the crypto sphere to dizzying heights. Many got hurt then, and DOGE (and many other alt-coins) will hurt many this time, too.

ETH is a more thorny and sticky alternative but it, too, is riding BTC’s cyclical bull coattails. And it, too, will fall further and harder when BTC’s bull run is over than will BTC. At least, if history is any guide. I think it is because nothing fundamental has changed to improve ETH’s core use case.

  • Tue, May 04, 2021 - 09:51am

    #7
    MGRS

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    Reply To: BTC Dips are Normal; Prepare Your Mind

Thanks again for the summary VTGothic – I’ve followed PlanB for a while, but wasn’t aware of the others.

Hodl vs sell before the peak (since I won’t hit the peak of course)… I’m kicking around selling some of my non-capped/less scarce cryptos (ETH and LTC mostly, but a smattering of others) but hang onto the scarce BTC as inflation protection.  Since the moves will likely trend together.

Any macro trends like these for ETH/ETH2 that I should be educating myself on?

ed: Looks like you addressed most of it in the previous post; thanks 🙂

  • Tue, May 04, 2021 - 10:38am   (Reply to #2)

    #8

    Jim H

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    Thanks for the detailed lesson on BTC vs ETH Dr. VT!

I had no idea Buterin was actively exercising his ability to control ETH in this manner.. by doing so he is literally making the case for BTC’s absolute form of decentralization.

As with most successful therapy sessions, I feel better after this time on your couch VT.  I checked with my insurance and they don’t cover crypto therapy, so I will have to pay out of pocket.  Do you take DOGE?

 

  • Tue, May 04, 2021 - 10:58am

    #9
    Mountains are calling

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    BTC Dips are Normal; Prepare Your Mind

This is all so helpful.   As a novice, I really appreciate what you have posted on Crypto VTGothic.

  • Tue, May 04, 2021 - 11:11am

    #10
    Kathy

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    Trustless contracts

I will be the first to admit my knowledge of crypto is very limited.

As I understand it, ETH is (or will be) a blockchain tool to allow trustless contracts, whereas BTC is a currency.

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