NYDIG: What will happen next for Bitcoin from a cyclical perspective?

NYDIG is an institution specializing in Bitcoin financial services, including savings accounts, trading brokerage, 401(k), etc. The latest round of financing has brought its valuation to nearly $7 billion.

Highlights

● Bitcoin prices have been sluggish since the second quarter, and this article looks back at past cycles to understand what may happen next for Bitcoin.

● Regulatory activity has been a hot topic, but this does not involve Bitcoin, and the outcomes of recent cases may not be known for several years.

● When looking for catalysts to drive future prices, past cycles suggest that issues such as unresolved stress on the banking system need to calm down before markets can stabilize.

The road ahead

A lot has changed in the cryptoasset space since the end of Q1. While Bitcoin enjoyed impressive returns in Q1, driven by declining confidence in the U.S. banking system, the opposite has happened in Q2. Much of the underperformance has been due to actions taken by financial regulators against the cryptoasset industry. Despite a 53.6% year-to-date gain, 2023 has been a mixed bag so far. Frustratingly for some Bitcoin investors, unlike Bitcoin’s stellar performance in Q1, the cryptocurrency underperformed other risk assets, such as equities, in Q2. Against this backdrop, we thought it might be helpful to review past cycles and how they inform our view of Bitcoin’s future performance. Past performance is no guarantee of future results, but unlike other technological revolutions we’ve studied or experienced, this one seems to exhibit a clearer repeating pattern.

Regulatory shadow

Without a doubt, the most significant events of the second quarter revolved around actions taken by U.S. financial regulators against some of the industry’s largest service providers. We believe that the SEC’s case against Coinbase, as well as the CFTC and SEC’s cases against Binance, are the most significant, even though these cases do not involve Bitcoin and do not question its regulatory status. These cases highlight the fact that Bitcoin is the crypto asset with the greatest regulatory clarity, while the classification of many other crypto assets remains in question. These cases can take years to resolve, and unless there is new legislation, we will not know their impact on the industry anytime soon. For example, Ripple’s lawsuit against the SEC has been ongoing for two and a half years and remains unresolved. While there may be some announcements about the case, appeals may continue to prolong the final clear outcome. We do not know what other actions the regulators or enforcement agencies may take, so our advice is to watch the price reaction to the news to see what factors the market has already anticipated. For example, after the news of the SEC’s lawsuit against Coinbase was released, the price of Bitcoin initially fell slightly, then recovered the entire drop and moved higher, which is a signal to us that investors’ positioning has already taken this news into account. An old market adage may well apply here: “Climb the wall of worry.”

Shadows of 2019

The two-sided performance of 2023 so far is reminiscent of 2019. For those new to the industry, 2018 has performed very similarly to 2022, with a sharp retracement following the peak of the bull market in 2017 and 2021. Prices bottomed out in December 2018 at around $3,200, then quickly rose in the first half of 2019, reaching nearly $14,000 by the end of June. From the low to the high in June, Bitcoin rose 328%. At first, there was no fundamental reason for Bitcoin's rise, but then a narrative emerged around the depreciation of the yuan and the desire of Chinese investors to preserve value through Bitcoin. But the second half of 2019 was a very different story than the first half, with Bitcoin falling nearly 50% to $7,100. Although Bitcoin is still up 90.9% in 2019, the journey to get to this point was not smooth. However, the most important thing about 2019, and what we believe applies to Bitcoin today, is that it marked the first year of a new bull market that continues into 2021.

Re-evaluating Bitcoin

After the pullbacks in 2014 and 2018, cryptoasset investors began to rally around Bitcoin as the cryptoasset that best aligned with the market. Ethereum did not exist in 2014 and was suffering from the aftermath of its ICO in 2018, while many other altcoins were still questionable in their utility in 2014 and 2018. As a result, Bitcoin’s dominance, or its share of the total industry market cap, rose during pullbacks when altcoins fell further, and in the early and middle stages of the subsequent bull cycle. It was not until the late stages of the bull run, the most speculative part, that Bitcoin began to cede dominance to higher-beta altcoins. We are seeing this phenomenon again in this cycle, but the situation may be different. With many altcoins facing regulatory uncertainty (an issue Bitcoin does not have), Bitcoin may take a larger share of the industry this time around.

All is quiet on the search and social media front

The cryptocurrency community is a very social group, and many conversations take place on social media platforms such as Twitter. Mentions of the term "Bitcoin" on these platforms are often an indicator of market sentiment, with mentions positively correlated with price. The same is true for Google searches, with search volume positively correlated with price. Google Trends, which is not an absolute measure of search volume but an index where 100 represents the highest number ever, is currently showing a significant drop in searches for "Bitcoin." Search volume has not yet fallen to the levels of the last cycle, which could mean that things may still need to calm down, or that we may have reached a higher floor than before. The highs in search volume have never reached the peak of the last cycle, but this could just mean that there is more general public awareness of the asset. Regardless, if we were to develop an aggressive strategy based on this information, it would be to sell when Bitcoin is a hotly discussed and searched topic, and buy when it is not being talked about or searched for.

Banking crisis eases, but may not be over yet

It has been a month and a half since the last major event of the regional banking crisis, the closure of First Republic Bank and the acquisition of its assets by JPMorgan Chase. That event, which occurred on May 1, coincided with a sharp drop in total withdrawals from the Federal Reserve System’s (Fed) support credit facilities, primarily through discount window credit and the newly established Bank Term Funding Program, but banks continued to increase withdrawals from the support measures provided by the Fed. The discussion about the health of individual regional banks seems to have subsided for now, but comments this week from Federal Reserve Chairman Powell suggest that we are still facing future interest rate increases, which have been the root cause of the regional banking crisis.

Final Thoughts

Both regulatory and social aspects may need to calm down before markets stabilize. Market bottoms are often formed in apathy rather than disgust, and given some of the indicators we have highlighted, markets appear to be heading in that direction. The situation in 2023 is becoming very similar to 2019, which was the first year of a three-year bull market that peaked in 2021. While the events of the recent cycle look very different from those that came before, the shape and duration of the cycle continue to have strikingly similar characteristics. Again, there is no guarantee that this will necessarily happen in the future.