Bitcoin's explosion in value and the supercycle: will it be any different this time
By: Bharggavi Ssayee
August 11, 2021 2:04 AM
The price of bitcoin is in a long-term uptrend, punctuated by market cycles that last about 4 years, the halving period of money creation. The current economic circumstances of the world lead some people to think that we could be in a supercycle, that is, a cycle potentially much more powerful than the previous ones. What can we think of it?
Bitcoin price cycles
Since 2009, bitcoin has been the subject of all kinds of speculation. Some predicted it a blatant failure, others an unprecedented success, which must necessarily have repercussions on its price. The first of them, the legendary Hal Finney, estimated as early as January 2009 that bitcoin could one day reach "a value of around $ 10 million".
The main reason for this enthusiasm is based on the singular monetary policy of bitcoin. Unlike the euro or the dollar, it must be issued in decreasing quantity over time, never to exceed 21 million units. The creation of new bitcoins is scheduled to be halved every 4 years or so during an event called halving (or "halvening"). In reality this resulted in the following show:
50 bitcoins / block for the first 210,000 blocks (January 2009 - November 2012);
25 bitcoins / block for the next 210,000 blocks (November 2012 - July 2016);
12.5 bitcoins / block for the next 210,000 blocks (July 2016 - May 2020);
6.25 bitcoins / block for the next 210,000 blocks (May 2020 -?).
Once bitcoin acquired a price, speculation was able to fully express itself: people began to buy and sell depending on whether they thought the price was doomed to go up or down. This caused violent movements, upward (bubbles) as well as downward (crashes) and above all the emergence of cycles in the increase in the price of this new kind of currency.
Since money creation was halved every 4 years, these cycles followed a similar pace. In this way, we could see the price of bitcoin reaching a first local high of $ 30 in June 2011 before falling back to $ 2 in November of the same year. Then, in 2013, a phenomenal bullish move caused the price to surpass $ 1000 only to fall back below $ 200 in early 2015. Finally, the speculative bubble of 2017 saw the price of bitcoin reach a peak of $ 20,000 before. to drop (slowly then suddenly) to $ 3,000 in December 2018.
Evolution of the price of BTC between 2010 and 2021 and periods of money creation (source: Buy Bitcoin Worldwide)
In May 2020, Bitcoin's third halving occurred as price was barely recovering from the great March crash, linked to the covid-19 outbreak and corresponding state measures. Less than a year later, the price had jumped to hit $ 64,000. Then it stabilized between $ 30,000 and $ 40,000 to see its level today.
This structure in four-year cycles prompts many to draw certain conclusions, including that the current cycle may be over and the price of bitcoin may not rise again higher until 2024.
But have we really seen the end of this cycle? After all, we're 15 months away from halving, and the previous peaks of 2013 and 2017 came 12 and 17 months after their halving, respectively, which doesn't rule out a bullish rally in our case. Moreover, the fact that the movement of 2013 took place in two stages (spring then autumn) does not prevent such a structure from resurfacing. Better: the price could explode upwards thanks to the exceptional politico-economic context that we know and give birth to a cycle much more powerful than the previous cycles: a supercycle.
What is the supercycle?
Supercycle theory is the idea that the bitcoin price cycle we are in right now would be different from the cycles that preceded it and should outperform them in strength due to the particular macroeconomic situation of the world. The term was coined in October 2019 by Dan Held, Kraken's director of business development, who later explained it in more detail in December 2020, and then in April 2021. In this potential supercycle, the price of bitcoin could not be satisfied with staying under $ 64,000 or touching “only” the $ 300,000, but would have the possibility of reaching the million or even two million dollars!
Let’s see how such a cycle could arise.
The behavior of financial players is mimetic, which produces what are called trends: if I have the impression that everyone is buying an asset and that its price increases over time (“bull run”), then I am more tempted to buy this asset and is reluctant to sell it; otherwise, if I think that a majority of people are selling the asset in question and that its price is falling over time (“bear market”), then I want to do the same and I hesitate to buy some. In the case of Bitcoin, this is all the more true as the issuance of new bitcoins is known and limited, something that was identified by Satoshi Nakamoto from the start:
“As the number of users increases, the value per part increases. This has the potential to become a positive feedback loop; As users increase in number, the value increases, which could attract more users keen to take advantage of the increasing value. "
Satoshi Nakamoto
It is on this mechanism that the microcycles of four years are based. Money creation is halved, which abruptly upsets the balance between buyers and sellers. The price increases slightly at the beginning, so that the first buyers end up winning. New buyers who see a new movement seize the opportunity to buy, which exacerbates the upside and attracts other buyers, etc. Finally, after a sufficiently long time and a sufficiently high rise, the most contrarians start selling (generally the institutional ones who are the most cautious) and the movement turns downwards.
The cycle in which we find ourselves does not escape this mechanism. Except this time around, according to Dan Held, he could be a lot more powerful.
Bitcoin is now considered "digital gold" by many, that is, a store of value like gold. This narrative, which admittedly is not the original Bitcoin narrative, could propel the price beyond what is imaginable today.
Visions of Bitcoin Over the Years (Nic Carter and Hasu)
This is particularly felt in the United States, where “investing” in bitcoin is taken more and more seriously in the financial media, and where many financial institutions are taking the first step like Fidelity Investments, JP Morgan, Citibank or BlackRock.
Today, the macroeconomic circumstances are more serious than they were during previous cycles, which suggests that we could know a macrocycle that would be grafted to the microcycle linked strictly to Bitcoin.
In terms of money creation, the covid crisis has made matters considerably worse by increasing central bank liquidity injections to finance the record debt of states. In the United States in particular, the support measures and stimulus plans decreed by Donald Trump, and then especially by Joe Biden, have consumed trillions (trillions) of dollars.
Since the Federal Reserve works hand in hand with the Treasury, the quantity of currency in circulation has therefore increased massively. Thus, the monetary aggregate M0 (central money) of the dollar has increased from $ 3.5 trillion at the start of 2020 to $ 6 trillion today, while the aggregate M2 has increased from 15 to 20.4 trillion on the same. period, which corresponds to respective increases of 71 and 36%. At the same time, GDP fell before recovering to its 2020 level, and did not increase enough to offset money creation. This, along with global economic restrictions, caused substantial inflation to return to the United States, with annualized consumer price hikes reaching 5.4% in June.
Thus, the global reserve currency that is the US dollar is now rapidly losing its purchasing power, just like most of the world's currencies, the euro included, with the exception of the Chinese yuan. and a few others. As a result, the inflationary spiral is now engaged, which has the effect of alarming all savers.
It is in this context that several companies present on the stock market have started to integrate bitcoin into their treasuries instead of the dollar. Microstrategy, headed by Michael Saylor, has thus accumulated more than 105,000 BTC since August 2020. Elon Musk's Tesla company now has more than 43,000. Other companies like Square and Marathon also have some. thousands.
It is also in this context that many investors, who had turned away from bitcoin until then, took a strong interest in it, such as Paul Tudor Jones or Ray Dalio. We also note the success of the firm Grayscale, which manages funds on behalf of its clients to bridge the gap between the institutional world and the world of cryptocurrency, and which today has 650,000 BTC.
It is finally in this context that States and central banks joined in the dance, by accumulating a little bitcoin in reserve. This is evidenced by the recent decision of the small state of El Salvador, which imposed the legal tender status of BTC on its territory, probably with a view to shedding the hold of the United States.
The old wish of the “arrival of institutions” so long dreamed of by many is therefore coming true. And it is possible that this sends the price of bitcoin "to the moon," as envisioned by the supercycle theory.
The supercycle: a fragile dream
All these considerations give us a glimpse of a “hyperbitcoinization” of the traditional financial world that would delight every bona fide crypto-enthusiast. Nevertheless, it is possible that all is not so rosy. If Dan Held has a good grasp of the financial dynamics of Bitcoin, he struggles to understand that Bitcoin is far from an indestructible system and that such a victory could constitute a Pyrrhic victory.
What sets Bitcoin apart is that it is an inflation-resistant and censorship-resistant monetary protocol. However, taking advantage of these properties requires using it under specific conditions.
Large corporations and financial institutions are not individuals who hide from states and resist their decisions: they strictly obey the law and often try to be as compliant as possible. Since these companies are well known, they have little interest in disobeying. If ever the states in which they operate sound the end of the game and make bitcoin possession illegal, they would be forced to sell.
They may well try to influence state decisions from within, to "lobby", but that would be a political defense, not an exploitation of resistance to the censorship of the protocol. And we know the fate of politically secure currencies.
Bitcoiners underestimate the possibility of strong legal action against Bitcoin and the effect it could have on him. The regulatory pressure that has grown over the years, which is currently embodied in the fiscal tightening around the cryptocurrency industry proposed as part of Joe Biden's infrastructure plan in the United States, only shows one thing: attempts to control Bitcoin will only multiply if its influence on the political-economic system grows, until open warfare if necessary.
In the West, Bitcoin is unlikely to be brutally banned overnight: what we see is integration into the traditional financial system, careful regulation of its use with the goal of total control. The assumption here is therefore the slow and inexorable assimilation of Bitcoin, where blacklisted bitcoins could gradually be banned from all financial intermediaries, where suspicious transactions could no longer be legally mined, and where two growing economic communities more distinct would share the same chain. This pressure could lead to a split that would create two Bitcoins: one approved by states and major financial institutions but subject to regulations, the other that would remain free, but would be declared illegal.
It goes without saying that the price of the first Bitcoin would remain the same, or even could increase due to its legal approval, while the price of the second would necessarily decline following the sale of institutions. After all over the years, this is what we have seen happen: The price has gone up as regulations have multiplied, allowing the bigger investors to enter the market.
It is in this context that the excessive emphasis on speculation by influencers and the media, including this idea of the supercycle, constitutes corruption: the upside potential promised by the entry of institutions seduces defenders. the most influential of Bitcoin, who start to defend the regulation to get there, even though this regulation is contrary to the founding principles of Bitcoin. This was very clearly explained by Raoul Pal, CEO of Real Vision Group and Global Macro Investor, on December 4, 2020:
“I understand that part of the crypto community doesn't like it, they feel like we are abusing the space, kind of like when I talked about regulation. People get upset when I say regulation is a good thing. If you want to get rich, people are going to have to come to this space. Talking about cyberbugs isn't going to bring a single corporate treasurer or a single institutional asset allocator into this game. And if you want to get rich, you need these guys to come in. ”
Raoul Pal
Once under control, Bitcoin would continue its slow and inexorable assimilation through protocol changes, again through lobbying-based “political consensus”. This would take away everything that makes him a Bitcoin, although the name would persist. Censorship would be instituted in the protocol itself, with transactions being authorized by a central authority. Light seigniorage could be put in place: new bitcoins would be created to fund central banks, while creating little enough that the narrative of a better-than-gold store of value vaguely remains. Institutional "Bitcoin" would then no longer be Bitcoin.
The supercycle, this idea that the current cycle would be different from others and that it could take the price of bitcoin to its final level, is therefore a fragile dream. Even in the event of an achievement, a supercycle might be just an illusory victory for Bitcoin and harm it more than anything else. The institutionalization of Bitcoin, its assimilation into the traditional financial world, does not benefit it if it becomes more sensitive to the careful regulation that characterizes the banking industry we oppose.