Bitcoin: Stuck in Place, But Getting in Shape for Its Next Move

It’s been a few weeks since our last Bitcoin update as we remain stuck in the same range we've been in since March, and our midterm to long-term view remains unchanged since our last article. This blog post is a combination of an article we published on Seeking Alpha with the IOFund, material we presented at their webinar last week, and some recent data we've analyzed since. It presents our most up-to-date view on Bitcoin.

History suggests that this long and boring consolidation should come to an end soon, and that we may be about to break out of this range. This reflects our current view, but predicting Bitcoin’s near-term path has never been easy, and we could very well be wrong. That being said, we remain very bullish on Bitcoin’s midterm to long-term prospects, and even if we end up having to wait longer for Bitcoin to break its months-old resistance, I am confident about where Bitcoin should be trading a few months from now.

Cooled down

The Spot Bitcoin ETF approval in January triggered an unprecedented move that brought us to an All-Time High (ATH) for the first time before the cyclical halving. This euphoric run triggered an extreme reading of our Metcalfe's Law Discount/Premium model, which on March 4th, 2024, reached 3.3 standard deviations ahead of the fair price. This was in the 99.9th percentile reading of all Bitcoin history for this indicator that looks at the relationship between the number of participants in the Bitcoin network and its value.

At that time, it was clear to us that Bitcoin was in for a well-deserved correction and consolidation. This is exactly what followed, and since then, we've been stuck in a wide trading range that we might finally be about to break.

This MLDP indicator is designed to provide consistent readings across all overbought or oversold markets and works effectively both at cyclical peaks and during strong uptrends between bull runs, like the one we experienced in the summer of 2019.

This indicator is very effective at helping us determine where we stand in terms of being overbought or oversold.

The good news is that while the first time we reached a similar price to what we are seeing today, this model indicated an extreme value (around 3 standard deviations). Today, we are almost exactly at the fair price according to our Metcalfe Law model (near 0 standard deviations), and this estimated fair price is continuously trending up.

This represents a very healthy and low reading from a historical perspective in a bull market, which should provide plenty of room for the next leg up. In fact, the last time we reached such a reading was in October 2023, when Bitcoin was trading around $29k. Bitcoin's price then climbed to $49k over the following two months before its first real cooldown, representing a 69% run. As Bitcoin's market cap increases, the chances of seeing legs of that percentage magnitude decrease, but if Bitcoin climbs at least $20k after breaking its range like in the previous run, this would still put Bitcoin at around $90k before the next cooldown. That is a conservative assumption, so seeing Bitcoin's price slightly higher than that in the two months following the breakout of the trading range would not be surprising.

Breaking the range

I mentioned above that we could be about to break that range. The data leading me to think this includes our MLDP Z-score model, which seems to have reached a reading a few days ago similar to the bottom of the 2023 consolidation and the 2021 summer drop. Moreover, the supply and demand equation is starting to become healthier. The net buying volume in ETFs is picking up again,

 And the number of newly created accounts with a non-zero balance seems to have bottomed out and is now climbing, albeit a bit chaotically.

I think this data may continue to be quite noisy as more people are drawn to holding this crypto asset through an ETF traded on the stock market. However, seeing it make higher lows and higher highs despite market turmoil is encouraging.

I personally believe that the attention BTC is currently receiving in the ongoing US presidential race lends legitimacy to Bitcoin and will continue to attract more interest in this asset.

Moreover, on the supply side of the equation, Bitcoin is now scarcer than ever following the halving, with only 450 Bitcoins being mined per day. Additionally, the German government has completed its sales, and more than half of the Mt.Gox holdings have already been distributed to creditors without causing significant market turmoil. Finally, hodlers have returned to their usual behavior of holding their coins. Following the ETF approval, the number of coins that hadn’t moved for more than a year was consistently dropping, indicating that long-term participants were willing to sell. This trend has now come to a halt, and excluding one massive transaction in June where a large amount of very old coins moved, this number is now significantly on the rise, despite a small retracement during last week’s sell-off.

So, in summary, we now have increasing demand with consistently decreasing supply. This is the sine qua non condition for seeing a strong uptrend in Bitcoin.

I was also surprised by how quickly Bitcoin recovered last week from the drop that started Sunday night when the Japanese stock market was crashing. The fact that Bitcoin was the only liquid asset for North American and European investors while the Nikkei was crashing likely explains why Bitcoin dropped so much. However, from the opening of the stock market on August 5th, Bitcoin’s path was only upward, which I think shows how strong the floor around $50k currently is. This uptrend culminated in a very strong 12% candle on Thursday.

This strong candle instantly made me wonder what previous instances of similar pushes led to. My first attempt at filtering those spikes reminded me of how Bitcoin has changed over time. A 12% move is very uncommon now, but it was quite normal before 2017. So, on Friday morning, I decided to analyze these spikes in relation to the 365-day moving average, which led me to this graph.

There are two observations we can make from this graph:

1. These giant price moves usually lead to some consolidation right afterward, which is what we've seen since that giant candle last week.

2. These giant candles tend to occur more frequently in a bull market rather than in a downtrend. When they happen in a cyclical downtrend, it usually means we are about to have a relief rally. However, in a bull market, these giant candles are generally bullish and lead to more upside after a bit of consolidation.

   
   

This is another piece of data that adds to my conviction that we are nearing the end of the trading range that started in March of this year.

Long Term

From a longer-term perspective, although there was a lot of talk on social media about the March peak being the cyclical peak, none of our cyclical top indicators agree with that statement.

As a reminder (for the new members), one of the triggers that led us to develop a Bitcoin strategy was seeing analysts using indicators that were clearly giving diminishing readings through each cycle. We noticed some analysts missing the top, not because they were looking in the wrong direction, but because they didn’t have the right tools. Motivated by this, we spent several months developing indicators that would be correlated with market bottoms and tops but, more importantly, consistent across each cycle. Two of these indicators helped us call the bottom in November 2022. Here are examples of one bottom indicator and two top indicators.

Currently, our Kwiatkowski top indicator, which looks at the relationship between all the different Bitcoin capitalizations, as well as our Miner revenue to Hashrate ratio indicator, point toward readings that are consistent with the early bull run and not with a cyclical top.

These are very powerful indicators that helped us successfully call the bottom when Bitcoin was around $16k in November 2022. If they were to be wrong now, it would not only be surprising but would clearly indicate that Bitcoin has disconnected from its historical patterns. One other detail about our Kwiatkowski indicator is that it recently reached a reading where Bitcoin has always bounced back in a bull market over the last two cycles, suggesting that $49k was the bottom of that correction.

All of this makes us very confident in Bitcoin's near future, even if Bitcoin fails this week or this month to break its trading range. One last piece of on-chain data that we love to keep in mind when we're about to start a move is our Price Floor from Thermocap, which usually represents the upper range of the absolute bottoming price at the end of a cyclical run. While we don't think there's a chance of going there in the near future, this helps us assess the ultimate risk of our position at any time. While this zone started around $14.5K when we went to $68k over the last cycle, the current floor for the same price is now at $27.5K and climbing.

We find it encouraging that we are currently only a little more than twice the price floor, whereas at the peak of the last cycle, we were nearly five times that value. This is a promising sign that suggests Bitcoin has significant room for upward repricing.

Conclusion

Unfortunately, no matter how much data we analyze, we're still unable to predict Bitcoin's exact future trajectory. In fact, I’m fairly certain that no one can, which brings me to a caution about temporal analysis of this crypto asset. Bitcoin’s programmed halvings and the resulting supply crunches in its early years created a well-defined cycle for Bitcoin. Many analysts have used these defined cycles to develop time-based metrics aimed at predicting Bitcoin’s behavior at certain key moments. The problem is that the impact of halvings on supply has greatly diminished over time, and it's now evident that other, stronger forces are at play. As these forces follow their own agendas, it’s logical to expect Bitcoin to move more in sync with them, leading to behavior that could significantly diverge from its past patterns. I would even argue that the halving's impact was already much lower during the previous cycle, but the fact that this supply event coincided with the FED's massive money printing during the COVID emergency masked this reduced impact. After all, that Bitcoin cycle began its downtrend in sync with the stock market when it became clear that liquidity was drying up. I mention this because I often see time-based analyses that attempt to match the current cycle with previous ones, day by day. While there will naturally be similarities along the way, I believe that analyses based solely on what Bitcoin has done in previous cycles are fundamentally flawed in the context of Bitcoin’s 2024 reality.

Speaking of forces at play, with the FED potentially cutting rates soon, this could serve as a strong catalyst for Bitcoin, possibly helping it break out of its current range. When that happens, given our bullish outlook, we believe Bitcoin could quickly rise to at least $90k. We look forward to seeing that. In the meantime, even if Bitcoin seems a bit boring at the moment, we will continue to monitor it closely and update you if anything changes our view.

PS. I remember last year at the beginning of October, I was writing a very similar article, saying that I thought the long, boring range was coming to an end. Fifteen days later, Bitcoin was breaking out. I hope I’ll be as lucky with my timing this year!