Second week of 2023, and here we go for the Bitcoin races

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2022 review

2022 has been an unprecedented year of demand and wealth destruction across all financial asset classes. Bitcoin was down 75% from its all-time high. However, this is its fourth worst drop and continues to make lower highs with each cycle.

ATH price reduction: (Source: Glassnode)

For many decades, the 60/40 portfolio of stocks and bonds has shielded investors in the worst of times, as Treasuries have been able to hedge against equity’s downside volatility. However, Treasuries performed even worse than stocks, a feat that hadn’t happened until the 1960s.

Treasury and equity levy: (Source: Bloomberg)

Also, US stock returns relative to bonds were as bad as they were in 1931 and 1969. Subsequently, two years after 1931 and 1969, was Executive Order 6102, the confiscation of gold (this is also where the difficulty of adjustment in terms of the blocks of 2016 came), and 1971 when the United States abandoned the gold standard. So, by that nature, all eyes are on 2024.

For more on this, please see our recent episode BitTalk

US stocks and bonds: (Source: Bloomberg) 2% inflation target

Since 1977, the Federal Reserve has operated under the mandate of Congress to “effectively promote the goals of maximum employment, stable prices, and moderate long-term interest rates,” now known as the dual mandate.

We can confidently say that this has not been achieved, as interest rates have been at the lower bound of 0 for more than a decade. CPI inflation came in at 6.5% this week, down from 7.1% previously, with peak employment the lagging indicator. However, notable layoffs have begun, particularly in the technology and banking sectors.

As a result, central banks around the world have tightened over the past year, some more aggressively than others, with an ever-increasing likelihood of stagflation, a repeat of the 1970s. Stagflation is a combination of a high inflation and economic stagnation, especially high unemployment, which has yet to occur.

Due to the exponential debt problem in Western economies, with debt to GDP of 120% in the United States, raising interest rates above CPI inflation would destroy the economy, governments will choose to take the austerity route, but that is not the method citizens are advocating for.

CPI, federal funds and Debt to GDP: (Source: FRED)

The funny part of this is that Bitcoin’s current inflation rate is below 2%, 1.78% to be exact, at this time below the central bank’s target. Bitcoin’s inflation rate is the percentage of new coins issued divided by the current supply. Bitcoin has a predictable monetary schedule, which sees 6.25 Bitcoins being mined approximately every 10 minutes.

Bitcoin inflation rate: (Source: Wicked SB) It wasn’t all bleak for Bitcoin in 2022

2022 saw the highest amount of Bitcoin removed from exchanges, over 20%, which previously beat 2020 which saw over 10% exit exchanges.

Currently, 2.26 million Bitcoin sits on exchanges, which leaves about 11-12% of Bitcoin supply on exchanges. Many events triggered the exodus, such as the collapse of Luna and FTX.

Bitcoin Exchange Balance: (Source: Glassnode)

As Bitcoin continues to exit exchanges in 2022, the number of addresses holding Bitcoin has increased. We are approaching 1,000,000 unique addresses holding at least 1 Bitcoin.

A 19% increase in 2022, recorded the strongest year-over-year growth in % since 2017.

Bitcoin, number of addresses with balance 1 or less: (Source: Glassnode) Bitcoin has broken through the short-term cost basis for the holder

The realized price reflects the overall price when each coin was last spent on the channel.

By using cohorts of short-term and long-term holders, we can calculate the realized price to reflect the overall cost basis for each group.

The LTH-STH cost base ratio is then calculated as the ratio between the realized price LTH and STH.

As STHs are making losses at a higher rate than LTHs, this is a typical example of bear market accumulation.

Bitcoin has had 4 periods in history where STH, LTH and the realized price have crossed, which is 829 days. Currently at day 110, and the shortest of the 4 timeframes, we would need to break $22.5000 to exit the crossover.

Base cost cohorts: (Source: Glassnode)

During the depths of bear markets Bitcoin has only entered the region of being below the realized price, STH and LTH realized price a few times and they all occur during late stage bear markets which seems be the same this cycle.

STH cost vs market cost (Source: Glassnode) Relentless miners

The hash rate reached a new all-time high in early January at over 300 TH/s, which is quite a spectacular feat in a bear market.

Due to the cheap debt acquired in 2021, miners are plugging in and companies that have filed for Chapter 11 bankruptcy have not been unplugging the machines, which could be a reason the hash rate has fallen less on other bear markets.

Subsequently, the hash rate jumped 20% in one day, one of the biggest % change in one day in recent years.

% change in hash rate: (Source: Glassnode)

Due to the skyrocketing hash rate, the hash ribbon reversal is about to end, signaling the end of a miner’s capitulation. Bitcoin tends to bottom when miners capitulate because bitcoin becomes too expensive to mine, the price tends to rise after miners capitulate, which we see again.

Hash Ribbon: (Source: Glassnode)

Finally, the difficulty regression model shows that we are on the periphery of Bitcoin mining, on the verge of becoming profitable again.

The difficulty regression model is an estimate of the all-inclusive cost of production for Bitcoin. Current estimated cost is based on difficulty and market capitalization. BTC will need to get over $19,000 for miners to become profitable on average.

As you can see, during bear markets, Bitcoin becomes unprofitable as the price drops below the all-in cost of production, which is why the hash rate drops when miners have to unplug. As we stated above, this bear market is different from all the others.

Difficulty regression model: (Source: Glassnode)

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