Market cycle update: Paradigm shift

2020 has been a volatile year for bitcoin and crypto – and this is still only the beginning. All factors macro, micro, fundamental and technical are bullish.

In our last article we wrote about the defi boom and how it was likely to cool off. Since then the entire defi sector has had a significant slip in price. After such an explosive run its no surprise it cooled off. Since then bitcoin has been taking its turn to pump. The past couple of weeks even months have been especially good, seeing a bitcoin bull run with the price surging over 50%, setting yearly highs and reaching for the all time. But what is next?

In this article we will outline our opinion on where the market is heading. How far it could go. What metrics and milestones back up our thesis, and what to look out for in the future as signals or confirmations.

Fundamentals

Fund managers are beginning to run for the entrance. The likes of Stan Drukenmiller, famous for never having a down year in his career,  Raul Paul, Michael Saylor, Paul Tudor Jones, and Bill Miller have spoken publicly on the prospects of bitcoin and announced substantial investments in bitcoin personally and through their funds.

Paypal has announced its platform will support crypto purchases and payments. Recently fast tracking the service to its US users due to unforeseen demand. It also raised its daily buy-limit from $10,000 to $20,000. One drawback however is that Paypals system is self-contained, you cannot transfer bitcoin on PayPal to a wallet off PayPal, Just to other paypal accounts and merchants.

Microstrategy and Square have announced they are building bitcoin reserves with Squares CEO Jack Dorsey saying he is also buying it weekly.

Institutional interest 

Fidelity (one of the largest asset managers on earth with $3.3 trillion in AUM) released a report called the ‘bitcoin investment thesis’ that in-essence called bitcoin the perfect hedge, quoting its world leading performance and strong characteristics as the reasons for its decision. 

JP Morgan released a report calling Bitcoin an alternative to gold and stated it has “a lot of potential” while stating that Square and Microstrategies investments were a “vote of strong confidence”,

Grayscale is stacking bitcoin at an ever-increasing pace, this week it bought 15,000 btc, its largest capital raise week ever. Taking it to a total of over 481,700 btc

Government interest

Germany is implementing smart-metering and smart-energy grids using blockchain technology.

Central banks around the world are announcing trials of CBDCs (central bank digital currencies), including the ECB and bank of England with some even announcing that they are holding bitcoin reserves.

In the UK, the chancellor of the exchequer, Rishi Sunak spoke about stable coins and financial regulation in the house of commons, with what seemed like a positive tone. The UK government have since released plans confirming everything he stated in parliament.

In the US we have ex-treasurers and other politicians speaking out on behalf of bitcoin calling it a store of value and saying that bitcoin is a more favourable asset to the dollar in that respect. Some states themselves are now holding some of their reserves in bitcoin.

Off-chain metrics

With all this in mind its surprising that bitcoin search volume and mainstream coverage is still low. The below graph shows usage of the term ‘bitcoin’ on google since 2016. It shows that search queries hovering around the baseline since the 2017 pump and lower than many other points post the 2018 crash.

Source: https://trends.google.com/trends/explore?date=all&q=bitcoin

Other search terms in the space are far behind bitcoin, take ethereum for example in the yellow, and btc in red. Note the interesting spike in searches for ‘btc’ in the first week of September 2019. But ethereum is nearly invisible on this graph in comparison this highlights the higher risk reward of in eth compared to bitcoin.

Source: https://trends.google.com/trends/explore?date=all&q=bitcoin

On-chain metrics

Looking at the stock to flow we are perfectly on track to hit $100,000 in late 2021. If the model proves to be true across a further cycle it would infer a million dollar bitcoin by 2026. is extremely likely. It also bolsters the argument for Bitcoins lop-sided risk reward.

Source: https://digitalik.net/btc/

Bitcoin spent output profit ratio

Zooming in on the recent price action, you may be asking yourself how the price action is still bullish – even at these highs. Bitcoin hasn’t seen a blow off top yet, just steady organic growth. Top bitcoin analyst willy woo spoke about the most recent rally in price

Realised Price estimates the average price the market paid for their BTC. Now at its steepest slope for this cycle, meaning capital influx into #Bitcoin is at its highest rate since the last bull market. (Higher than last year’s $4k-$14k move; the current move is more organic.). For the sake of this comment I’ll define “organic”. Organic price action happens when BTC price tracks closely with investor capital entering and leaving. When it’s inorganic BTC price is dominated by short term derivative traders.

he also wrote an article on the subject. Where he includes the pair of graphs below showing detailed on-chain metrics. The red line graph below  shows the spent output profit ratio against the bitcoin (yellow) over the past year. The large spike at the end of the SOPR estimates the ratio of profit investors made from coins that moved on the blockchain to other investors.

Source: https://willywoo.substack.com/p/the-organic-rally

This action indicates that profit taking is happening at these ranges around 16k. However this is not bearish just an answer as to why bitcoin is facing some resistance at this point. Fact is there is multiple times more money waiting to come into bitcoin than there is going out so that spike and the resistance it is causing is just a drop in the ocean.

Net flows of Bitcoin at exchanges

The red graphline below indicates bitcoin flow onto and off of exchanges, the grey horizontal line shows the midpoint, when the red is above it indicates bitcoin flowing into exchanges and when below, off exchanges . The yellow in-case you didn’t instantly recognise it is bitcoins price. Interesting points to note are the large spikes in red to the upside of the grey central line showing massive flows onto exchanges in the previous bullrun. The next interesting point to note is the recent peak to the downside in red as the price has started going up indicating massive amounts of bitcoin going to long term hodl wallets. One last thing to note in the red graph below is how the most recent withdrawal datapoint spike eclipses every previous spike since the beginning of the previous bullrun.

Source: https://willywoo.substack.com/p/the-organic-rally

Whale map

The below is a map of unspent bitcoin vs price and shows huge amounts of BTC being accumulated between the 12k and 16k levels. This signals these levels are likely to be the new bottom and that the price probably wont sit here for too long. 

Source: https://whalemap.io/charts

The Altcoin Cycle

Bitcoin dominance is finding support on weekly moving averages, this shows its momentum is being maintained in an upward direction for the meantime. That does not howerver mean that the altcoin market is dead. Certain altcoins with good fundamentals will pump through this time like Celcius or Avve have been so far.

Source: Trading view

Speaking of Def it has also seen steady growth of over 50% in value locked since prices slipped in September of this year. Platforms for the most part have been free of hacks and rug-pulls have decreased since prices declined. But since then key projects like Curve, Uniswap and Aave have been in stealth mode slowly and steadily rising in price again.

Soure: defipulse.com

Key altcoin sectors & trends

Defi

Defi will become as central to crypto as oracles are, providing liquidity for traders and returns for users that provide liquidity, it will become the financial rails for all crypto not just its corner of the industry. Much like how traditional stock exchanges and banks are central to the traditional market, defi will be central in the growth of the sector and the future crypto markets. Not only that but they will provide financial services to anyone that visits them, no bias, no censorship, just financial freedom.

Key tokens in this space are Aave, Synthetix, Ren, Curve DAO, Balancer, Uniswap, Xdai, Xdai stake, Honeyswap, and the list goes on. Check out our up coming article for potential top performers in the next alt cycle.

Enterprise solutions

It goes without saying that any project greasing the wheels of enterprise adoption will perform well. Right now the state of crypto user experience is terrible. You have to transfer fiat to an exchange, exchange it for crypto then send that crpyto to your metamask, then once you get it in there you gotta make sure you have the eth for the fees to move it elsewhere, say you want to use a layer two for reasonable fees you would then have to use a bridge to convert your layer 1 to layer 2 currency. So yeah not ideal for business use at the moment.

However these ‘issues’ are just cosmetic and an interface that can do all of this in a few clicks will soon emerge.
Unibright, Ankr and Orion protocol are notable projects in the space.

Oracles

Oracles are going to be the backbone of decentralised infrastructure serving as conduits for verified the off-chain data required to run smart-contracts.

Chainlink, Band and Parsiq are good examples of oracle blockchains each serving a slightly different niche of the market. Chainlink is an offchain data provider for smart contracts. Band is an on-chain oracle allowing blockchains to communicate. And Parsiq allows off-chain apps to use on-chain data.

Non Fungible Tokens & Gaming

Non fungibles will be huge, not only do they allow gamers to keep assets across various games and trade them on open marketplaces, but NFTs have a far bigger use. NFTs will be used as proof of ownership of real world assets i.e. land ownership, provinence, even identity could be thought of as an asset and could be proven using the correct NFT network.

Enjin, Sandbox, Decentraland immutable x and Luxso as well as quite a few more look poised to launch solid gaming platforms.

Synthetic Financial Instruments

This sector is a little way off still and relies on governments regulating the sector properly. It is worth considering now however. Its more commonly referred to as ‘security tokens’ but these tokens will be what exchanges will use to enable trading of nearly any asset in the future.

Hedgic and Synthetix are making strides in this sector and definatly ones to watch.

Ethereum Layer 2

Speeding up ethereum is big business and scaling solutions such as plasma and rollups will be implemented into ethereum at some point but some chains are offering that functionality now. projects like xdai, matic and omisego.

Polkadot

The polkadot networks looks set to be as big as eth, it has a strong dev community and is seeking to inter-operate with ethereum not to ‘kill’ it.
Notable projects that are built using polkadot are Kusama, Sora, Ocean, Mantra DAO and Ankr.

Looking forward

In 2021 and beyond, i see an increasingly bullish view for bitcoin, gone are be the days of the bitcoin obituary. I think the cycle we just concluded was the last time we will hear of the death of bitcoin or crypto. Infrastructure is being built around the world to integrate with blcvkchain.

Altcoins will see a run at the beginning of next year, a run that will dwarf anything we have seen before. Once bitcoin cements its credibility with traditional investors, they will undoubtedly look into these alternatives for speculative investment. I estimate the altcoin market to be nearly 10x the size over the course of the next two years. As investors seek safety and yield they will discover Bitcoin, Defi and everything else frictionless decentralised asset transfer protocols have to offer.