Do you believe that the crypto spring is already here?

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Mikael Syding
30/10/2023 | 5 min read
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Bitcoin price has significantly moved up so far this year. Calculated in USD. In kronor, the increase is even greater.

Historically, the Bitcoin price has developed according to a four-year cycle with three strong years followed by a weak one. The third strong year has normally followed in the wake of a reward halving, i.e. a built-in cryptographic technicality that causes "miners" to receive a 50% reduction in compensation every four years. This means that the computers that work in the mine itself, which is behind the security and stability of the entire Bitcoin system, have to share, for example, 6.25 BTC (which happened in 2020) instead of 12.5 BTC to ensure that the latest block in the blockchain definitely contains exactly what everyone agrees on. The next halving (to 3.125 BTC per block) will take place in April 2024.

The reward is paid out every ten minutes. When the opportunity to earn Bitcoin through mining is halved, the Bitcoin price must double for the business to be equally profitable for the mining jobs. It has so far appeared as if the system dynamically adjusted the supply of BTC so that the price has increased sharply the year after a so-called halving. In 2017 the price went up to 25x the starting point, and in 2020 about 10x from the local bottom. The peak of $69k was then 250% higher than the peak of the previous cycle, which in turn was 20x the peak of the cycle before that. As we know, past perfosmance is of course no reliable indicator of future performance.

If one dares to believe that Bitcoin has a future, despite massive opposition from bankers and politicians, it has a long way to go to the top. Cryptocurrencies, just like fiat currencies, need sufficient capacity, "bandwidth", or wide pipelines to be able to fulfill their purpose. For common currency, this purpose is simply all payments that take place in society. If annual GDP is $100,000 billion (which is the latest figure for global GDP) and money spins exactly once a year, then there must also be $100,000 billion valued at one dollar per dollar. It works the same way for the cryptocurrencies.

If Bitcoin is to be used in transactions worth $1000 billion per year, and Bitcoin in total is traded exactly once per year, then the total value of all Bitcoin must be $1000 billion. With 20 million Bitcoin, it requires a price of 50,000 USD per Bitcoin for the calculation to add up, then 20m x 50k = 1000B. If there is a need for $2000 billion of transactions per year, the price and turnover rate must be adjusted so that there is actually $2000 billion of value that can be included in the transactions.

The areas of use are still expanding as more and more people get used to its presence and adjacent infrastructure is being built out in the form of companies that accept Bitcoin as payment. In practice, many Bitcoins sit idle in their accounts. Only half are actually included in transactions each year, but they are traded at double the speed. The value of the trade is roughly $25 billion per day, or $1000 billion per year, just like in the example above. The number of Bitcoins in circulation is just like above also just under 20 million, but only about 10m of these are actually moved (three times per year (3x10m x $30k => $1000B). If 2% of the world economy goes to Bitcoin instead of one percent requires $2000B in bandwidth instead of $1000B. As it is difficult to increase the speed of transactions, the price may need to reflect this. In practice, however, something much more potent happens. When increased demand causes the price to rise, it becomes more attractive to not sell their Bitcoins. Then the supply decreases and not least the amount of free-flowing Bitcoins that make up the bandwidth itself. Thus, a relatively small increase in demand can lead to an even greater decrease in supply and several times as large an effect on the price. This calculation is highly theoretical and the price is considered to be much more directly flow driven than annual economic bandwidth.Coupled with an idea of what percentage of asset managers want their asset portfolios to be made up of Bitcoin, one can still triangulate a rough order of magnitude for a reasonable price of Bitcoin. Professional asset managers have roughly $100 trillion in assets under management (AUM) from which they earn fees. A few percent of these consist of gold. Gold has a total market value of approximately 10 thousand billion dollars, of which a few thousand billion dollars are in these portfolios. Bitcoin today has a total market value of 20x35 = $700 billion, ie 0.7% of AUM, but virtually none of this value is held by professional wealth managers.

If trustees would like to allocate 1% to Bitcoin, i.e. $1000 billion, but only manage to get hold of 2 million during the allocation, then the would have to rise to significantly. Suddenly Microstrategy's and El Salvador's $30-40k ventures wouldn't look so silly. And 1% is still only a small chance item in the context, maybe a third as big as the gold exposure, which in turn is almost a rounding error. The problem is that no trustee wants to be the first to risk their reputation and banking relationships by getting involved in the crypto world. However, it is bubbling in the traditional financial world with constantly new attempts to list exchange-traded funds for spot crypto (so not futures but real cryptocurrencies). The latest rush was associated e.g. with just one piece of news about a Bitcoin ETF.

There usually comes a false dawn, a sunny and "warm February" during the first strong Bitcoin year (out of three years in a row, as stated above). After that there has usually been a substantial decline and prolonged sideways movement at a lower level. This year's rise has the potential to be just such a false dawn. It is a little strange that the most risky and speculative of all assets is doing so strongly when interest rates are soaring and the recession is standing in the hallway stomping its boots, while both OMX and Nasdaq have fallen rapidly from their last failed attempts to reach the all of the covid hysteria time highs January 2022.

As always, don't get carried away. In the past, it has paid off to just hold on to your Bitcoins over time. But it has also paid off to buy on major declines and sell in year three when the price has gone 5-10x, even if the local peak later turns out to be much higher than that. Today at $35,000 I don't think you should jump on the buy button. Rather the opposite, maybe sell off a little to have the strength to buy in weak months. But if you don't have any exposure at all, I would really look to find a psychologically comfortable enough way to add a little bit all the time on weak days to make sure you at least have some exposure if the rally takes off (should it take off).

Please note that there are of course no guarantees that Bitcoin will survive or rise in terms of fiat currencies such as dollars and kroner, but for every year that the cryptocurrency exists, the "Lindy effect" works in its favor (this is the idea that the longer something has been existing, the more likely it will still be around in the future). The probability that Bitcoin will still be around in five years is increasing all the time. And if Bitcoin remains and is used for more things, the bandwidth should increase, which in practice means the price should rise. And the more people choose to sit still on their holdings, the more the price has to rise for the bandwidth to rise fast enough. There is a similar effect for gold, but gold lacks many of Bitcoin's properties such as divisibility and portability, as well as from the authorities' perspective: traceability. Nevertheless, one should't forget about a number of failures of some players in the crypto industry we have seen, and more could follow if regulation is tightened.

Have you chosen a crypto strategy yet? Own discretionary trading and market timing or monthly savings in a crypto index tracker? However you do, you should decide whether you believe in the burgeoning crypto spring or should speculate that it will get cheaper before it gets more expensive. The halving will take place in April 2024. Tick, tock, tick, tock.


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