The bitcoin rhymes for now almost precisely 13 years have been broken this 2021 as for the first time ever bitcoin ranges at high levels.
The deal used to be simple. Up, down, range, then slowly up, then UP again, each being one year. That means there have been three ranging years, 2012, 2015 and 2019, all at the very bottom.
This 2021 however was ranging at the ‘top.’ Up during winter bull to $64,000, down down during spring and summer to $30,000, up to $69,000 in November, and now at $50,000.
This presents a mystery. Have the laws of physics been broken? Are the ‘laws’ of social behavior recalculating behavior? Is it just a delay? Or is the asset now, at one of the best ages of 13, becoming a lot less childish and prone to tantrums and more an actual asset?
The laws of physics have been ‘broken’ in as far as miners now can raise funds from stock markets rather than from bitcoin alone. Actual circulating inflation thus has reduced, making this a fundamental change.
The ruthless and endlessly revolving carousel continues to professionalize the mining industry as actors by now should have began playing with sophisticated models which aim to maximize profits by account for the pricing effects of new supply, and thus how as well as when it should be introduced.
Logically we’d expect this to be at a very crude and unsophisticated stage since, if such models are being used at all, they would be barely months and at best a couple of years old.
Yet whether fleshed out in code algorithms or in mental ‘algorithms’ and executive decisions, the better management of such funds as experience grows may have reached a stage where it contributes to a more mature bitcoin.
The Young Bankers
Hayek called them, and they’ve arrived. Young here being a metaphor, with 2021 seeing a significant transformation that may indeed have changed the ‘laws’ of ‘behavior.’
That may include the somewhat superstitious suggestion that since now many know about these bitcoin cycles, it won’t repeat because people will front run it.
Superstitious we say very unfairly because there is probably some truth to it, but by the old rules bitcoin should have been at $200,000. Front-running at $50,000 therefore would have been a bit stupid, and therefore if there is or was such front-running, it would be just temporary presuming it operates simply based on what in effect kind of amounts to ‘no u.’
Why $200,000? Well, you double 4 times from $10,000 with that doubling occurring because of a delay between new adoption and its reflection on price.
It’s not some physical rule, but you’d think it would be where it concerns the traders game of ‘they know about the cycles and so front-run them.’
We dismiss it, tentatively, due to it being too abstract, but there has been a behavioral change in this 2021 in particular that could in part explain this ‘ranging at the top’ (sing it Lil B).
The math wizes in their glittery glass houses have taken our bitcorn and mashed it up with their stocks and oils to cook all sorts of soups in their 9 to 5 qubicles.
This is a very new development that we’ve had no option but to observe and acts to pet bitcoin in a cuddly little way so that if the little lion roars they laugh, and if it drops too much they play the ball, and if uncle Powell does a dance he has to watch.
We like it, not that we have a choice. It’s cool though because we’re actors in the party. And so we get to play with them and they get to play with us, and thus it’s different.
The trillion dollars a day transacted in the forex markets now have a bitcoin component. Stocks too, commodities.
That’s a lot of money with a lot of power and often it has first say. From what we have seen however, their say is temporary. The old bankers with their bias therefore do get swept away as bitcoin, at least from what we have seen, has tended to assert itself.
This has changed behavior, but not quite fundamentally. They can not tame what is still a 13 year old that can still have tantrums, and in this case comes with a lot of other rebels as eth at times revolts and defi-ance nfts or airdrops.
What they have changed is that the once completely own universe bitcoin has become part of the universe. The small town boy has gone to the City.
All They Have is Delay
Or maybe the range is just because bitcoin was slapped when it looked like it was stratosphering.
Elon Musk added fuel at the beginning of the year, sending the crypto nuts, to only rug pull shortly thereafter, sending it plunging.
The new Mt Gox, Chyna, has also intervened, kicking out miners and then asking offshore exchanges to kick out the Chinese.
When bitcoin reached sixty thousand therefore, it was diverted both times, although it isn’t really very clear how much that is quite true because a correction was expected both times.
Both are somewhat external events that might have interfered with bitcoin’s natural price movements, but did not affect it fundamentally as bitcoin recovered to make a just about new all time high.
They may have thus delayed its natural progression, which may explain the ranging year, but of course it may also be a matter of disbelief that bitcoin rose again, and so the first ‘cynics’ got out.
Ranging at the top is more what Dow does, flirting all day as it crosses all time high by one dollar, to then -2% or for November -5%.
That’s a bit like what bitcoin has been doing, although with -20%s and -50%s to then cross all time high by $5k. Giving credence to the suggestion the new wizzes are playing a role.
But arguably this is what bitcoin did in 2013, reaching $250 in March. But, it then 4xed in November to $1,000, not to just $270.
Maybe as the asset is now far bigger, it gains more slowly, but it 7xed over last year. So rather than a new paradigm, this might be the same old with $70k not being that far off from $200k.
In which case nothing would be exceptional, all within the cycling models, and therefore we may get the other parts repeat as well.
Because arguably keeping such levels in this year is maybe what you’d expect. The big question is whether it continues to do so in year 3, after there has been a repricing and thus the question becomes whether demand can keep up with the repriced levels of new supply.
The new supply is 7x over last year but halved, so 3x. As it happens 3x of 200,000 is 75,000, so we’re actually ranging at the bottom, but without traveling to the actual top.
That would be one way of seeing it, in which case what does this do for the next two years if we’ve gotten such perfection of bottoming imaginary tops while ranging at the upside down?
Well, it responds to moving things instead of being all hangover. In which case, why on earth did it not think of that before?
There are many potential reasons, with it unclear whether such proper evaluation and pricing in is really what is occurring, or whether it’s same old and we just don’t know it yet.
However, fundamentally, it is all about supply and demand and while supply has been a big factor in the past 3 four year cycles, it is now a lesser factor as going from 25% inflation to 12% is obviously more than say from 4% to 2%.
Except you have to account for fees too, but they are more organic as they depend on demand, unlike the fixed supply which technically doesn’t quite care about demand.
So, at some point, the cycle will shift from the supply dynamics to the demand dynamics as the supply aspect will become irrelevant because it won’t really change.
The current inflation rate for bitcoin is 1.75%. Way less than the dollar, for the first time. In about two years now, it will drop to 0.84%. Is it thus really relevant anymore?
A bit, of course, everything is relevant for the price. But, we’re getting to practically zero inflation. So there will be less downwards pressure from constant mining supply, and thus maybe that is the ultimate explanation as to why we didn’t have a blow off top.
The supply crunch, so to speak, was smaller than previously and thus there was less price pressure to release. Which means that supply pressure will also be less on the other side because one newly mined bitcoin won’t be 4x the price the market can handle, as arguably was the case in previous cycles.
The effects of demand on price therefore might gain prominence over the effects of supply now that it’s at less than 2%. And so the cycle might break.
On the other hand, many would want to see it to believe it because the first half of the cycle acted as before, so why shouldn’t the second half?
Except it didn’t blow off top, giving both camps sufficient evidence which maybe means they both right because we are now at a very low inflation rate, so the downside might be more limited to perhaps $30k and the upside is still at maybe 4x from here.
Depending on what demand does of course, which you’d expect it to grow at least in line with global GDP growth as bitcoin becomes a more normalized asset class and a more common instrument in the global traders toolbox.