Last time we wrote about Bitcoin, it was trading around $25,000.
Our view then was that the dip was not going to be much deeper, and we mentioned that we liked how Bitcoin was holding up despite the SEC suing Binance and Coinbase. The SEC quickly settled with these two popular exchanges instead of escalating the situation, which helped boost the market sentiment. Additionally, the enthusiasm around Blackrock filing for a Bitcoin ETF contributed to a quick 20% gain, pushing the Bitcoin price back to $30,000-$31,000.
However, since it reached that level on June 21st, Bitcoin has been stuck around that price, and its price movement has been relatively stagnant.
Previously, we mentioned that one of the reasons we are cautious about trading in our "green zone" is that pullbacks tend to be shallow and bounce back quickly. Moreover, in this zone, Bitcoin is not often oversold nor overbought, making onchain metrics less informative. Historically, after recovering, Bitcoin has usually entered a rather uneventful phase in the months leading up to the halving. The next Halving event is scheduled for March 16th, 2024, just 8 months from now, and we could very well find ourselves in that zone.
For those who are new to Bitcoin and unfamiliar with halving, it will become a significant topic as we approach this event. Here's a short recap of what halving means for Bitcoin:
Bitcoin Halving
Bitcoin halving is a pre-programmed mechanism that occurs approximately every four years and is designed to control the issuance rate of new Bitcoins. During a halving event, the number of new Bitcoins created with each block mined by miners is cut in half. At Bitcoin creation, when miners were mining a given block of transactions, they were receiving 50 BTC as rewards. On November 28th 2012, this was reduced to 25 BTC, then 12.5 BTC in July 2016, and 6.25 BTC in 2020. This reduction in the rate of issuance has a profound impact on the supply of new Bitcoins entering the market, leading to a deflationary effect.
The main purpose of Bitcoin halving is to maintain the scarcity of this digital asset over time, as it has a fixed total supply of 21 million coins. By halving the block rewards, the rate at which new Bitcoins are generated gradually decreases, creating a diminishing supply curve. This scarcity is intended to mimic the characteristics of precious metals like gold, making Bitcoin a "digital gold" and potentially driving its value higher in the long term.
Historically, Bitcoin halvings have been associated with significant price increases and heightened market interest. As the reduced supply comes into play, it can trigger a surge in demand, potentially leading to upward price movements. However, the impact on the market is not immediate, and price fluctuations may occur before and after the actual halving event.
The fourth Bitcoin halving is currently scheduled to occur on March 16, 2024, where block rewards will reduce from 6.25 bitcoin to 3.125 bitcoin per block.
Impact on the Network and Ecosystem
Halving is a significant event that instantly reduces the reward in the Bitcoin ecosystem to half of what it was before. This abrupt change can have a brutal impact, rendering some mining hardware obsolete as the new lower reward no longer covers the electricity bills required for mining. Consequently, many people shut down some of their older equipment, leading to a significant reduction in the network's capability to process blocks.
This reduction in mining power triggers another mechanism that adapts the difficulty of mining a block. As a result, the remaining mining gear can suddenly process as many blocks as before but with the reduced reward. The following graph illustrates the sequence of events during the last halving event (2020), which closely resembled what happened during previous similar events.
To summarize, the halving event only temporarily affects the network's capability to process transactions, and it eventually return to its previous equilibrium of around 144 blocks processed per day. Therefore, after the halving in March of next year, there might be a month of disruption, but the network is expected to be back to processing 144 blocks per day, but generating only 450 new BTC daily.
Supply Shock: Hodlers Instead of Halving
In my personal opinion, the halving will likely play a less important role than it used to, as its impact on the available supply becomes marginal compared to other factors in the network. Previously, the halving triggered Bitcoin cycles because it created a considerable supply shock – fewer Bitcoins on the market than potential buyers resulted in upward pressure. This was particularly evident when the daily supply went from 7200 BTC to 3600 BTC, but I'm not convinced that the same effect will be as pronounced at 450 BTC per day.
One of the very popular price forecast models that has been widely discussed since 2020 is the 'Stock to Flow.' This model, typically applied to commodities as a way to value the relationship between existing supply and newly created supply of an asset in USD, was also applied to Bitcoin by the well-known analyst PlanB. It “kind of” accurately predicted the end price of each past cycle before its introduction. However, it failed to predict the maximum price for the 2020-2021 bull cycle. As highlighted by various analysts, several reasons contribute to why this model is fundamentally flawed at predicting Bitcoin's price. One of the main points, in my opinion, is that it has a very simplistic view of the balance between supply and demand, as the main variable in this model is the flow of newly created Bitcoin, which is mostly affected by the pre-programmed halving events.
Have you ever heard the story of Diamonds? Contrary to popular belief, diamonds were not always considered scarce resources. Initially, they were mined and exchanged mostly in India and Brazil, and their rarity was only witnessed among nobles or the very wealthy. However, in the mid-1800s, someone made a significant discovery in South Africa, revealing that the region was incredibly rich in diamonds. This sparked a Diamonds rush that flooded the market and drove the diamond prices down substantially.
At this crucial moment, a brilliant businessman named Cecil Rhodes had a genius idea. He bought up almost every diamond mine until his company, De Beers, controlled a staggering 90% of the supply. Through a combination of skillful advertising and controlled selling, the price of diamonds skyrocketed, making them one of the most expensive resources on the planet. This captivating story highlights that the influx of new diamond supply had nothing to do with the subsequent price increase; instead, it was a monopolistic company "Hodling" the existing supply and selling only a fraction of it in a controlled manner.
This serves as a reminder that we should not solely focus on the new supply when analyzing Bitcoin. Hodlers, or long-term holders of Bitcoin, could exert a significant influence on the supply and demand balance. This is why I always keep a close eye on the number of coins that haven't moved in a year. Currently, this number is at an all-time high, with 69.25% of all coins remaining unmoved for over a year. Such a high percentage creates immense supply pressure on the Bitcoin ecosystem, potentially explaining why most price drops are shallow, even when faced with incredibly bad news.
To give you an idea of the forces at play, let's consider our WU BTC 1-year Hodl indicator after each halving event. Right after the first halving, a 1% move on the indicator represented the equivalent supply of 30 days of mining rewards. After the next halving, the same 1% move increased to be equal to 84 days of Bitcoin rewards. In 2020, this number further escalated to 205 days of mining rewards. Looking ahead to March 2024, a 1% move on this indicator will be approximately equal to 431 days of mining rewards.
The takeaway from all of this is that while everyone is eagerly anticipating the supply shock of the upcoming halving, the real supply shock might already be unfolding right under our nose. The substantial number of coins that haven't moved is akin to a massive coil, accumulating energy. As long as this situation persists, I firmly believe that the real risk lies in not being invested in Bitcoin.
Other metrics
Other than the 1-year Hodl metrics, another indicator that encourages me to adopt a bullish outlook is the number of newly created addresses with a non-zero starting balance. During the first part of the year when Bitcoin experienced a significant recovery, this metric displayed a very positive uptrend. The entry of new participants into the Bitcoin ecosystem, much like gaining new customers for diamonds, always brings about a sense of optimism and eventually affects the price positively.
However, in March, the surge in BRC-20 "crypto kitties like" frenzy and the exponential increase in transaction fees seemed to deter new users from entering the network. Fortunately, over the past month, this metric has shown an aggressive increase, which historically has led to price surges at some point.
WU BTC Active Signal
Although all the internal metrics of our BTC active signal are currently in good shape, there are two signals that could potentially trigger sell signals, and we are closely monitoring them. However, it's essential to emphasize that none of them are close to triggering at the moment; they are merely potential paths we are observing.
The first signal to watch is the SOPR (Spent Output Profit Ratio). Our processed SOPR data serves as a perfect trend spotter, acting as a safety switch to protect our capital in case we miss a top. Showing in the lower section of the illustration: if the SOPR (blue line) dips below our red line, it would indicate a return to our red environment and automatically trigger a sell. While we are far from that threshold, it is currently pointing downward.
The other metric we are monitoring is our MLDP Z-score model (middle section of the above illustration) that could eventually trigger in a bullish case. This model is excellent at capturing not only the great cyclical tops but also the tops of smaller runs. It computes the ratio of the network value (market cap) with the square of the number of people in the network, making it sensitive to both price and the number of network participants. Currently, with the amount of newly created addresses trending up while the price remains sideways, there is a downward pressure on this indicator, which was already approaching overbought conditions (recently in early July). However, if the price resumes its uptrend, we may see this indicator rise again. If it reaches a value of 4.25 or more, the strategy will trigger a sell signal on a 30% retracement from the highest recent value of this indicator, which has accurately captured some significant tops in the past.
Lastly (first section), even though the price is relatively stable, our price floor from thermocap is rising over time, signaling that we have less and less downside risk. Currently, the entry of our bottoming zone is at $21,787 (purple line), and the absolute bottom is at $14,158 (red line). While this would not be a negligible drop, the downside remains reasonable compared to when Bitcoin was at $68,000, and these floors were at $18,000 and $12,000, respectively. This metric, which accurately spotted the last bottom, is one essential tool for me in assessing my potential downside, and it tell me at this moment that the risk is moderate.
Conclusion
Although Bitcoin has not shown much activity recently, we believe that the ecosystem is very healthy and positioned for an upward move. While many are eagerly awaiting the halving event, we think that the current network situation is already set for a supply-demand shock. The media exposure that the halving will generate could serve as the catalyst for the next bull run to begin, but other triggers, such as the approval of BlackRock's BTC ETF, could also be that catalyst. Therefore, our opinion is perfectly aligned with our Bitcoin active signal, as we believe that the risk currently lies in not being invested in Bitcoin. While it may seem boring at the moment, we should never underestimate its potential. I know that one morning, I will wake up to a "Yahoo Finance" alert on my phones, reporting a 10ish % rise in Bitcoin overnight !
Currently, we have a small amount of extra cash on the sideline, and we may add to our position very soon, as we don't want to bet on a deeper correction. You will be notified of every move we make.
NEW INDICATOR ACCESS
We are pleased to grant you access to our WU BTC 1-year HODL percentage indicator. You should all see it within the next 24 hours in the Invite-only scripts of your TradingView account.
Hi Vincent, I assume that the BTC signal is still healthy?
Hi Vincent, any specific levels or signals you are watching before adding your last tranche? Thanks!
Thanks Vincent!!!
Hi Vincent,
Appreciate the update. I have a question on the following lines... "Lastly (first section), even though the price is relatively stable, our price floor from thermocap is rising over time, signaling that we have less and less downside risk. Currently, the entry of our bottoming zone is at $21,787 (purple line), and the absolute bottom is at $14,158 (red line)." If we did get that possible drop above, would any of your indicators let us know in advance or early in that drop so we could sell out and buy at lower prices?
Thanks