VYSYN VENTURES Weekly Insights #27
This was originally published on the VYSYN VENTURES Website .
Bullish optimism has been brimming in Bitcoin as the asset approaches all-time highs. Cryptocurrency enthusiasts are closely monitoring price movements as anticipations of Bitcoin entering new horizons are high.
In the latest VYSYN release, we analyse some of the key tailwinds behind the recent price increases. We specifically review the broader Bitcoin market cycle, growth in hashrate, and demand-supply dynamics.
Bitcoin Market Cycles
Looking at the price chart or technical analysis is a common way to review a project. But much like reading tea leaves or palm reading, the results are often open to wild interpretation.
For the sake of simplicity, we will be referencing the work of trader Brian Shannon, author of Technical Analysis Using Multiple Timeframes. Brian’s work on market cycles and the resulting emotions is the foundation for the “Wall Street Cheat Sheet” that is widely circulated amongst traders. Brian’s original work partitions market cycles into several distinct phases as detailed below.
A “Market Cycle” describes a trend in price action of a particular asset over time. Brian provides an archetype for how market cycles evolve in the above diagram. We can use this archetype to break down market cycles for Bitcoin. The below Heikin Ashi Bitcoin chart suggests that Bitcoins may be entering its markup phase where price appreciation is accelerated. While past performance is not indicative of future returns, it is certainly worth considering what stage of the market cycle Bitcoin is trading in. If Bitcoin entered the markup phase after it recent appreciation, there is certainly more upside for price movements.
Hashrate Growth Indicates Significant Investment in Bitcoin
The hashrate of Bitcoin measures the global computing power dedicated to processing Bitcoin transactions. Between 2011 and 2013, mining Bitcoin was possible with a single computer. Now, entire warehouses are required to make mining profitable, as the difficulty of mining increases with hashrate.
Despite the rise in difficulty, the hashrate for Bitcoin has steadily increased since its inception. The hashrate has increased through times of historical highs and lows. This means that miners were dedicating massive amounts of capital, electricity, and human resources to mine Bitcoin through every market cycle.
Bitcoin miners are a huge source of capital inflow into the Bitcoin ecosystem. The capital flowing into Bitcoin supports its long-term price growth. As the mining industry operates just above the margin, the total revenue earned by miners can be used to estimate how much capital has been invested by Bitcoin miners. The total revenue earned by miners currently stands at $19 billion with an increase of almost $4 billion so far in 2020.
Bitcoin Demand Versus Supply Dynamics
This brings us to the supply versus demand for Bitcoin. With supply constraints hard-coded into the Bitcoin network, bitcoin price must rise to facilitate higher demand levels. Unlike other commodities that can produce a near-endless supply of a specific product, Bitcoin has a fixed total supply. There will only be 21 million ever created in the history of forever and there are roughly 2.4 million left to mine.
This fixed supply and mining schedule gives Bitcoin investors and speculators an additional edge that other commodities do not have. For example, no one knows for sure how many diamonds are left to mine, how many barrels of oil are left in the earth, or how many tons of lithium are left to be discovered. There are estimates and speculation based on evidence but no one can point to any real evidence proving their guess. With Bitcoin, the supply figures are enforced by code and computing power. The network is currently secured by 152 exahashes which is more computing power than the top 10 supercomputers in the world combined.
As if a verifiably limited supply wasn’t unique enough, millions of Bitcoin have been lost over the years. Private keys have been misplaced, old hard drives thrown out, and some gifted Bitcoin never redeemed. These Bitcoins are still visible on the blockchain but they will never move because the private key has been lost. This takes them out of the circulating supply as they will never be used again.
The amount of Bitcoin lost or inaccessible can only be estimated, similar to the aforementioned natural resources but it is estimated that between 4 and 7 million BTC has been lost. From a research note from Cane Island Digital Research — roughly 1,500 Bitcoin are lost each day. The research firm estimates 14 million Bitcoin will be left in 2140 after the last Bitcoin is mined.
“Since 2010, about 4% of the Available Supply of bitcoin has been lost each year. This puts the current Available Supply at about 13.9 million coins, well below the 18.3 million Total Supply figure publicized. This means that about 28% of all bitcoins have been Irretrievably Lost.”
Bitcoin Demand-Side Strengthens
While supply remains constrained, the Bitcoin demand-side has been significantly improving. Several institutions made significant allocations this year with MicroStrategy kicking off the trend with their $425 million purchase.
Square followed suit with a $50 million purchase and other exchange-listed firms like UK Mode Global Holdings are considering a BTC position. However, this is only one sector of serious investors who have been getting exposure to Bitcoin.
We have also observed several renowned investors and business people announce their positive outlook for Bitcoin. Stanley Druckenmiller and Bill Miller both recently announced that they hold positions in the asset.
Mexico’s third-richest man also revealed that he has roughly 10% of his portfolio in Bitcoin. He noted the following in a tweet:
“Bitcoin protects the common citizen against government expropriation”
Further Upside Price Movement Looks Likely For Bitcoin
To summarise, Bitcoin has several factors supporting its recent upside price movements. It appears to be in the “markup” phase of a market cycle where further increases are anticipated.
There has also been significant investment into the ecosystem by Bitcoin miners. The revenue earned by Bitcoin miners this year suggests that $4 billion has flowed into the Bitcoin ecosystem from miners alone.
Demand-supply dynamics are also favourable to further price movements. While supply remains constrained, several significant demand-side players have entered the market.
Given the entry of such players, it is easy to justify Bitcoin’s recent upside movements. As the asset approaches record highs amid such bullish developments, further upside movement looks likely.