Just when many analysts claimed that Bitcoin had entered a bear market months earlier than expected, the price of Bitcoin exploded from $29,000 to $40,000 in less than a week, liquidating over $1 billion worth of short positions. My original minimum price target of $88,000 by year’s end has not changed. However, my framework for analyzing this bull market cycle has. This market cycle has exhibited eerily similar characteristics to the 2013 price cycle.
I start this article by providing an update on the current health of the bitcoin network through on-chain analysis, ultimately concluding that the bull market is largely intact. I then offer evidence that this bull market cycle will play out similarly to the 2013 cycle, although the hypothesis of shorter cycles of diminished volatility and smoothed returns over time is still in play. Throughout the article, I offer my personal take on the Chinese ban narrative that contributed to the 50% fix in the first place.
Reading: Bitcoin 2013 bull run chart
network health examples
Middle to late bitcoin cycles are characterized by the participation of retail investors. The chart below is a heatmap of the total coins purchased by retail investors, or those with less than a full bitcoin. The recent short crunch saw some big retail buying, but nothing compared to the 2017 peak market cycle. The bottom line? retail trading has not entered this market en masse, indicating that we are nowhere near the peak that typically marks the end of a bull market.
(source: @woonomic)
Next, we are witnessing a bullish recovery in the hash rate. hash rate refers to the overall computational power used for bitcoin mining on the network. the hash rate saw a significant drop to 2019 levels after news of a ban in china. That’s because the recent ban led to a mass exodus of miners out of China to the United States, Kazakhstan, and other global jurisdictions with less hostile policies. the chart below shows the global hash rate share by national jurisdiction. Since January 2020, China’s share of the hash rate has dropped from 72.7% to 46.0%. Meanwhile, the US share of the hash rate increased from 3.4% to 16.8%.
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(source: Cambridge Bitcoin Electricity Consumption Index)
Although price and hash rate are positively correlated, correlation does not equal causation. There are differing opinions on whether price follows hash rate or vice versa, with the exact relationship up for debate. regardless, a global restructuring of hash rate jurisdiction as various miners go offline is bearish for the broader market and creates a higher level of uncertainty. however, as the chart below demonstrates, the hash rate is recovering and probably bottomed out in late June. miners are bringing their rigs back online in new jurisdictions and the network will continue to function as usual without china. I believe this hash rate speed increase is now behind us and the price will recover to new all-time highs in the coming months.
This Looks Like 2013
The first chart below is the current price of bitcoin overlaid with the price in 2012-2013. the similarity is striking and points to a cap of $256,000 by the end of the year.
(source: The Held Report)
The following chart below shows the 2013 bitcoin price with dates and percentages included. even the months in which the peak, consolidation, trough, and recovery occurred are exactly the same as in 2021. in 2013, bitcoin hit a local high of $255 in april, only to drop to $66 in july and reach $1150 in December. the local cap in 2021 was approximately $64,000 in April. I think the bottom is $29,000 in July and we will see a continuation of the bull cycle in Q4 2021. History doesn’t repeat itself, but it does rhyme.
See also: John Lanchester · When Bitcoin Grows Up: What is Money? · LRB 20 April 2016
Despite this, I am not convinced that the top will be $256,000 as the first chart suggests. In 2013, Bitcoin crashed by roughly 70% mid-cycle compared to 55% this time around. As Bitcoin adoption increases, its volatility smoothens. With nations adopting it as legal tender, hedge funds, insurance companies, and investment banks involved, Bitcoin does not have the same diminutive market cap and small pool of investors to cause wild fluctuations in price.
In the last two bull markets, bitcoin topped approximately 70,000 blocks after the halving, which would point to an all-time high in September. however, both highs occurred in November and December, respectively, which could hint that the trigger for the bear markets has more to do with taxes and portfolio rebalancing than an arbitrary block reward marker. furthermore, each subsequent bull market saw lower returns than the previous one, meaning that $88,000-150,000 is more realistic than simply implanting the 2013 number on a 2021 chart.
conclusion
I’ll leave the reader with two final thoughts. First of all, bitcoin just witnessed ten consecutive daily closes in the green. this has only happened five times in the history of bitcoin. As the chart below suggests, the average 60-day return after this event is over 100%, and bitcoin has posted a positive 30-day return 100% of the time this happened. a confluence of factors suggests this was a strong mid-cycle correction similar to that of 2013.
(source: @Pladizow)
Furthermore, bitcoin is similar to a commodity in many respects. Mining converges towards the countries with the cheapest energy costs similar to the global workforce that converges towards Asia or Central America. With a large excess of energy capacity due to a policy of overproduction, China was the perfect candidate for bitcoin mining. mining served as an outlet for its excess energy capacity, while also bringing a profitable industry to the country. I think the pcch made an incredible mistake in an attempt to maintain tight control over its population.
Bitcoin is simply a distributed ledger that verifies all transactions without the need for permission or trust from a centralized authority. it will continue to provide block rewards and verify transactions regardless of who supports it. bitcoin got past the china ban with flying colors in that miners simply moved to new jurisdictions, reconnected their mining rigs, and the network continued to function as usual. The fact that many of these rigs have relocated to the US is a bullish sign in terms of acceptance of what I believe to be a nascent global reserve asset.
See also: How Many Bitcoins are there left? How many Bitcoins have been mined? (Updated 2021)
