Bitcoin: The Bullish and Bearish Thesis (BTC-USD)

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Kameleon007/E+ via Getty Images

Summary of the thesis

Bitcoin (BTC-USD) continues to trade within a tight range, giving bulls and bears plenty of time to build their business.

For the bulls, the fundamentals are still strong in terms of users and network activity. Additionally, Bitcoin and the broader crypto ecosystem are supported by the emergence of new spaces and marketplaces like the Metaverse and NFTs.

For bears, we can refer to the relationship between M1 and Bitcoin price as a bearish indicator. Fed tightening creates problems for Bitcoin. On the other hand, we are approaching the point in Bitcoin’s four-year cycle where the bear market or “crypto winter” begins.

Ultimately, I’m still bullish on Bitcoin over the long term, although I expect weakness in the short to even medium term. Still, no one knows the future for sure, and I always advise keeping a long position in Bitcoin.

The case of the bull

First of all, despite the recent drop in Bitcoin price, many on-chain metrics remain bullish. The “fundamentals”, so to speak, are still strong, and the best proof of that is Bitcoin’s hash rate:

Data by YCharts

Above we see the evolution of Bitcoin’s hash rate over the past three years. This metric has been on a steady upward trend, although it dropped significantly after China banned Bitcoin mining. However, Bitcoin’s hash rate is now back to an all-time high, only 6 months later. This is a testament to the resilience of the Bitcoin network and the incredible industry behind it. Within months, Chinese miners moved on and other miners expanded or entered the market to fill the void. The free market at its best, showing us that even China is not up to it.

Hash rate isn’t the only thing on the rise, and we’re still seeing strong activity in terms of Bitcoin transactions and active Bitcoin addresses.

Active addresses

bitinfocharts.com

Data by YCharts

On both indicators, we are seeing an upward trend in recent months. This is indeed a very simplistic analysis, but sometimes simplicity is good. Just look at the evidence around us.

Bitcoin price may be down, but interest and activity are at an all-time high. The NFT market continues to generate interest with trading volumes at record highs. This is also accompanied by a rise in the price of digital real estate in the metaverse, as well as the proliferation of play-to-earn games.

Finally, looking at more complex on-chain metrics, we can also highlight the potential for a near-term bullish reversal. One of these metrics is the bid percentage in profit. If we look at the most recent data, which was discussed in this Glassnode article, we can see that at today’s price, 70% of the total Bitcoin supply is in profit. This has acted as a form of support in the most recent breakout events and could be an indicator of an impending bullish reversal. Alternatively, if this level experiences a sustained breakout, it could signal the start of a longer bearish phase.

The bear case

While there is certainly a lot to like and hope for in Bitcoin, there are valid bearish arguments as well, although I would say they apply more in the short term.

First, a correlation can be drawn between the growth of the M1 money supply and the price of Bitcoin.

BTC and M1

TradingView

BTC and M1

TradingView

Above we can see M1 and Bitcoin over the past year and other zoomed out over the past 3 years. As we can see, the big rally of 2020 coincided with the Fed’s massive monetary expansion. As this money supply growth has stagnated, the price of Bitcoin has also stagnated. The relationship also holds up quite well over the shorter time frame.

It makes sense for Bitcoin to appreciate with monetary stimulus, as some consider it a “risky” asset. Does this mean Bitcoin will fall as the Fed tightens? It’s possible. Will the Fed tighten?

The current consensus is that the Federal Reserve will be forced to raise rates to stop runaway inflation. However, I am skeptical about the duration of this tightening, mainly because I don’t think inflation will be as strong as many suspect. It’s not a cycle of runaway inflation like in the 1970s. Inflation is caused by specific factors such as high energy prices and supply disruptions, and not so much monetary conditions. The proof is in the speed of the currency.

Money Velocity

St. Louis Fed

The velocity of money is still near all-time lows and has failed to recover in 2021. Although there is plenty of money in terms of M1, that money is not circulating, and without that circulation , inflation will not be sustainable. Once that realization sets in, it’s back to QE and rate cuts, and the party goes on!

This change in expectations and policy may take some time to materialize. In the meantime, Bitcoin could enter a bear market and fulfill the popular theory of 4-year up-down cycles.

Bitcoin mining rewards are halved approximately every 4 years, and it has been observed that the cryptocurrency tends to rally after the halving, for approximately 2 years, and then enters a bearish phase leading to the next halving. You can observe this relationship here.

Currently, we are just under 800 days away from the next halving. It’s still a little early, but we could say that the bull cycle is already over. However, it would make more sense to see at least one more, in my opinion.

Also, as I have expressed in previous articles, this cycle does not repeat itself. First of all, everyone expects it this time around, and there will be a lot more people interested in buying the dip this time around. Moreover, the market is much more robust and supported by institutions and businesses. I think this could lead to a more moderate market correction.

Final Thoughts

Overall, arguments can be made for either side. I think in the short term, Bitcoin could find a new low before hitting a new all-time high. Following this, we could indeed see a more prolonged bear market. Alternatively, if we are already in the bear market and indicators like the profit supply take a downward turn, Bitcoin could indeed move closer to $20,000. That doesn’t worry me, as I play the long game and average buy. Bitcoin’s long-term appeal has not changed.

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