In a new article, Nick Carter, partner at Castle Island Ventures and co-founder of Coin Metrics, offers an analysis of key Bitcoin indicators and analyzes how the current bull rally is fundamentally different from the 2017 rally.
Bitcoin is getting closer to its previous record high (English "all-time high" / ATH), established in December 2017. It is likely that the dizzying $ 20,000 level will return within the next few weeks or months.
This time everything happens without much fanfare and withthe absence of such a phenomenon as an initial coin offering (ICO), which had a strong impact on price quotes (investors bought BTC to participate in the ICO, which led to a price increase).
If we evaluate the indicators of interest of retailinvestors to the asset, be it tweets or Google searches, bitcoin is still below its highs. Which, by the way, causes considerable bewilderment.
Many are wondering what is the reason for Bitcoin's renewed energy for a fresh leap. I saw fit to present several charts related to bitcoin that are already approaching new all-time highs (ATH)to clarify this phenomenon a little bit.
Number of addresses with a balance of $ 10 or more
This first chart represents the fundamental driver of Bitcoin's price - adoption. Simply put, more people own bitcoin today than in 2017, and a lot more.
: Coin Metrics
This chart shows the number of addresses inBitcoin ledger with $ 10 or more of assets in the account. This significantly exceeds the level of the end of 2017. It follows that the Bitcoin supply is now becoming more and more diversified, mainly in smaller batches, the size of which is appropriate for retail investors. The chart looks much the same - at all-time highs - for other thresholds, be it $ 1, $ 100, or $ 1,000. At all these levels, there are simply more addresses containing bitcoins in the ledger.
Of course, one address in the chain is not at allnecessarily matches one person. Major exchanges store bitcoins in multi-account accounts on behalf of many users, and regular users can control many addresses, so there are bugs in both directions. But as long as the relationship between people and the number of addresses in the chain that represent them is somewhat consistent, it is a useful directional metric for assessing user growth.
Bitcoin Futures Open Obligations from CME
Open obligations in futures representis the total value of outstanding contracts that have yet to be settled. This CME futures product is notable for the fact that it is a liquid bitcoin product on the world's largest derivatives exchange, to which investors of all stripes have access. Unlike many bitcoin exchanges, CME is connected to a well-established clearing infrastructure - essentially a pipeline system capable of passing trillions of dollars through it.
Indeed, when Renaissance Technologies,one of the most profitable hedge funds in the world, announced that they will include bitcoin in their line of traded assets, their preferred instrument has become a cash-settled bitcoin futures product from CME. CMEs are a natural choice for many large and highly regulated distributors because they don't want to deal with the operational complexities that involve storing bitcoin, and they can also actively trade on the exchange right away, and their regulators are likely , this state of affairs is quite satisfactory. There is no need to assess the risks associated with the emergence of a completely new platform.
This product was originally introduced to the marketDecember 17, 2017, at the very moment when the price was at the very top of the last bullish rally in Bitcoin. There is no data on the chart until mid-2019, but if you look at the CME overview of the historical data of the bitcoin product, it becomes obvious that the amount of open positions is indeed at the level of the historical high (well, in fact, only slightly lower than the ATH value established in August 2020).
Another important point to note isis that the CME is a highly regulated American domiciled exchange under the auspices of the Commodity Futures Trading Commission. Unlike some offshore bitcoin exchanges, it has an efficient trade monitoring system and is considered extremely reliable. And although this does not make this trading platform immune to market manipulation, nevertheless, there is every reason to believe that the manipulators will be caught. This is important for bitcoin because the lack of controlled and orderly markets for asset trading is the main reason the SEC has repeatedly rejected the creation of a bitcoin ETF in the past. As some offshore exchanges face coercive measures and find themselves marginalized, the rise of onshore, orderly markets that regulators are happy with means that the outlook for a Bitcoin ETF is much more optimistic.
Simply put, the development of a Bitcoin ETF would becomea powerful catalyst for this asset. The creation and operation of a Bitcoin Exchange Traded Investment Fund (ETF) would provide effective and convenient access to the asset for all categories of market participants who previously simply did not have any opportunity to access it.
Over the past five years, the industry haslooking forward to the ETF. I vividly remember how frustrated I was with the Securities and Exchange Commission's refusal to grant permission to open the Winklevoss $ COIN Bitcoin ETF in March 2017. A huge path has been covered since then. The market structure has developed in such a way that new ETF programs are highly credible, with the growing position of onshore markets such as CME becoming critical.
Capitalization realized is an alternativemarket capitalization, designed to take into account the real state of the price at the moment when bitcoins changed hands, changing owners. Instead of setting the price of each bitcoin unit at the latest market price, the technique calculates the price of each bitcoin unit according to that price. when the given BTC unit was last moved along the chain... Pricing is straightforward thanks to the transparency of Bitcoin's ledger and the ability to get a complete and accurate history of the movement of each coin.
This takes into account the liquid supplybitcoins in a practical sense. The realized capitalization ignores the market value of bitcoins, which have not changed owners since 2009 (when bitcoin did not have a market price yet). This can be thought of as a rough estimate of the combined value of all current Bitcoin holders.
: Coin Metrics
The realized capitalization today is$ 129 billion, well above its $ 90 billion peak in early 2018. This tells us that Bitcoin is significantly more liquid at these levels and that investors are less motivated to sell. Bitcoin was higher in late 2017 / early 2018 (Coin Metrics' reference rate points to the highest daily close at 00:00 UTC at $ 19,640 as of December 16, 2017), but no active trading was seen at such dizzyingly high levels. This also explains the rapid decline in Bitcoin from those levels. It simply could not be sustainable, because the aggregate cost basis for investors was well below this threshold and they were looking to make a profit. The bullish rally in 2017 was more of a melt-up, which was triggered by ICOs, press coverage and the hype of retail investors. This time, Bitcoin's bullish rally is more like a sustained slow burning.
Today we see a completely different picture. The supply dropped significantly and many early investors cashed in, giving way to new players ("young blood"). Those investors who have bought their coins in the last couple of years appear not to be as eager to lock in a $ 20K profit as those who have held Bitcoin since the price was $ 1. Thus, a higher realized capitalization is an indicator of greater maturity and patience in the current investor mix.
Total Unrealized Bitcoin Options Contracts
Open interest in an option contractsums up the value of outstanding, unused options. (Option traders will grumble about this methodology only because it can be prone to bias when trading options on meaningless strike prices like $ 32,000). While the numbers are still quite low in absolute terms, the nascent but maturing options market tells us something about the state of Bitcoin today.
Just like derivatives first appearedfor farmers to hedge the risks associated with growing crops and fix a specific price for the harvested crop (providing liquidity for future crops so that seeds and fertilizers can bebuy today), and options are also useful for bitcoin producers - miners. Miners can roughly estimate how much bitcoin they will mine based on the hardware they have, with reasonable assumptions about the hashrate. If they want to get an “advance” for the coins they expect to mine, they can sell call options. This means that they promise to deliver the coins at a certain price on a certain day - but they will be paid for that promised delivery today. And with this advance payment, they can continue their activities and finance them more efficiently.
From this diagram, it becomes apparent thatBitcoin producers can now use more sophisticated financial products to hedge their risks. In theory, this should mean the mining industry is more stable and less prone to boom and bust periods. This allows miners to focus on efficiently conducting operations and frees them from having to worry about the uninsured risks associated with their equipment.
Moreover, the rise in options means that those whotraders on the other hand have a more creative approach to expressing their opinion regarding bitcoin coins. For example, using these tools, you can now bet not on the rise or fall of bitcoin, but on the expectation of future volatility (or lack thereof). In 2017, such tools simply did not exist. As a matter of fact, due to the wider use of tools provided by experienced investors, the capital inflow to Bitcoin can increase.
Bitcoin value in Turkish lira
Investors tend to track dynamicsindicators of bitcoin in US dollars, however, in fact, many people around the world prefer to assess the condition of financial assets in their national currencies. After all, they may not have access to the US dollar-based banking system. The further you are from New York, and the more “jumps” the correspondent banks have to make to get to your local banks, the correspondingly more expensive access to the dollar is for you. American banks do not like doing business with individuals abroad. Their maintenance is fraught with risks, and the risk turns into a hefty cost. Thus, these US banks tend to “mitigate risk” towards clients outside the US.
Therefore, billions of depositors around the world musttake into account inflation or foreign exchange restrictions, a state of affairs in which they cannot freely move assets. The latter phenomenon is usually practiced by central banks fearing capital flight and subsequent devaluation. This happens at the expense of depriving investors of freedom of expression.
While the majority of those reading this articlecan afford the opportunity to accumulate in dollars or euros, it is important to remember that inflationary currencies are a reality for a large part of the world's population. We measure bitcoin in dollar terms, but the US dollar is one of the least inflationary currencies in the world. Because Bitcoin is such a great non-sovereign store of wealth due to its qualities, being very portable, secretive and resistant to withdrawal, when government currencies start to collapse, it becomes very attractive. This year, Turkish cryptocurrency exchanges have received a massive boost from the continued depreciation of the lira. In absolute terms, Turkey ranks 12th among the countries most popular when visiting exchange markets online.
At the same time, in relation to the Turkish lira, the price chartBitcoin looks pretty much the same as the BTCUSD chart, except for the difference that the denominator continues to depreciate, which is expected to be followed by an explosion in the Bitcoin price to new ATH values in 2020.
The lyre is not the only sovereign currencyagainst which bitcoin is already trading well above its previous highs. Other currencies where Bitcoin has already reached new highs since 2017 are Argentine peso, Russian ruble, Venezuelan bolívar, Brazilian real, Colombian peso, Lebanese pound, Sudanese pound and a few others. The population of these countries alone is 523 million people.
The distributionincreasing interest in bitcoin exchanges around the world. Other top-ranking countries in terms of cryptocurrency adoption include countries that are heavily burdened by restrictive capital controls (China, Ukraine) and countries with high inflation or volatile currencies (Venezuela, Nigeria, Colombia , Argentina). All of these factors are the true catalysts for cryptocurrency adoption, prompting the general public to ditch their local currency in favor of bitcoins, stablecoins and other crypto assets.
Three years ago, not only the infrastructure itselfThe bitcoin exchange was, in fact, not so well developed, but in the whole world there were not many people with accounts on exchanges. Over the past three years since the last major bull rally, there has been a significant increase in the ability of depositors to exit fiat and move into cryptoassets. This is evidenced by the available data. For example, the 2nd Cambridge Cryptoasset Benchmarking Study, published in December 2018, identified 35 million cryptoasset users with verified identities on exchanges around the world, while the 3rd study in this series, published in September 2020, has already identified 101 million cryptocurrency users with verified personal accounts. Simply put, the exchange infrastructure has matured and grown to the point where ditching local fiat in favor of digital assets is a viable option for a significant portion of the world's population.
Bitcoins Managed by Grayscale Investment
One of the most important indicators indicatingabout the enthusiasm for bitcoin is the number of units of this cryptocurrency held by the asset manager company Grayscale Investment. At the time of this writing, this figure was in excess of 500,000 BTC, making GBTC the most popular financialized version of Bitcoin.
: The Block
Since GBTC is a trust product tradedin the OTCQX market and the maturity of newly created shares is six months, there is usually a mismatch between the market value and the net worth (NAV) of the shares. This difference is expressed as a premium. As of today, the commission rate is 15.8%, which means that if you had placed $ 100 in GBTC stock, you would have received only $ 84.2 in bitcoin value.
Some trading companies borrowbitcoins, create new GBTC units at the net asset price (NAV), wait six months for them to reach maturity, and then liquidate them at the market price, taking on a premium (minus interest on the loan). Despite the constant slow arbitration, the commission has persisted for almost the entire history of GBTC. The consistent premium to net worth is a testament to the continuing enthusiasm of investors for this product. GBTC is popular because it is available from major brokerage firms such as Fidelity and Schwab, and can be held with tax benefits in an IRA or 401k.
The tremendous growth of GBTC in 2020 indicatesthat there is a whole class of allocators who are fine with getting such inefficient access to bitcoin. GBTC buyers are not your typical technical cryptocurrency investor who is more likely to create an account on one of the cryptocurrency exchanges and become the owners of spot bitcoins (and avoid costly fees). The continued growth of GBTC confirms the fact that the older and less crypto-oriented cohort of investors maintains a significant appetite for the asset, despite the inefficient way of accessing it.
Free circulation of stablecoins
There are now a lot of critical reviews aboutthe current rally in bitcoin by people insisting that stablecoins like Tether are somehow involved in bitcoin's price formation. I suggest you ask these critics if they are active participants in the cryptocurrency markets. If not, you can safely ignore their opinion. Only people with experience in creating and redeeming stablecoins, as well as experience in placing capital in the cryptoasset space, can be considered credible sources on this matter. Otherwise, it is simply very difficult to understand the dynamics at work.
Indeed, much of this criticalThe analysis is based on a subsequently debunked article by Griffin and Shams, which relies on a narrow sample period and questionable methodology to confirm the relationship between the release of Tether and the price of a BTC unit in 2017. Recent studies, including Viswanath-Natraj and Lyons, using a wider sample period, found no causal relationship between the release of Tether and the price of Bitcoin. Additional research by Wang Chun Wei confirms that there is no correlation between the creation of Tether and bitcoin profitability.
In addition, this is confirmed by practicalreality: from February 2018 to July 2019, the price of bitcoin remained practically unchanged (the period began and ended at $ 11,000), while the supply of stablecoins increased from $ 2.3 billion to $ 11.5 billion. If the creation of stablecoins somehow stimulated the price of bitcoin, why then did its price remain unchanged when the supply of stablecoins increased by 400%? The critics obsessed with Tether have no answer to this question.
The truth is that the creation of Tether and othersstablecoins (the supply of stablecoins other than Tether today exceeds $ 5 billion) should be understood not as buying and selling deals or capital inflows, but simply as an exchange for similar assets. Stablecoins are created when an organization with a fiat currency on its balance sheet wants to access liquidity based on cryptoassets. In fact, there is a simple exchange of commercial bank dollars for their tokenized counterparts. Firms that designate their balances in stablecoins or use stablecoins as working capital include market makers, private trading firms, exchanges, venture capital firms and, generally speaking, any enterprise operating in the crypto industry with costs denominated in cryptocurrency. Following the panic in mid-March 2020, a number of firms converted their balance sheets from commercial bank dollars to tokenized dollars circulating on public blockchains so that they would be more responsive the next time the opportunity presented itself.
However, the rise in stablecoins isa positive factor for Bitcoin, not because of collusion around unsecured emissions, but because it means a significant improvement in the liquidity situation.
The diagram can be found here
At the time of the previous high of bitcointhere were only $ 1.5 billion worth of stablecoins. Today that figure is $ 22.7 billion. Stablecoins have created a pool of liquidity with a stable value that is not subject to volatility. An interesting fact is that while many exchanges have become "teterized" - for example, USDT is the main trading pair and settlement asset, replacing Bitcoin in this function, the price of Bitcoin remains stable. This is evidence of the evolution of Bitcoin as a product from a reserve asset for exchanges, dependent on the desires of traders to trade long-term assets on exchanges, to a stand-alone monetary asset loved by hedge fund managers and commodity traders.
Bitcoin has almost completely recovered its previous market capitalization highs, while Staples have taken the baton as reserve assets for the crypto industry, saysthat he had begun to live his own life.
Finally, capital, existing in a tokenized fiat format, has the intention to penetrate the crypto industry, but not to leave it.This is due to the fact that cryptocurrency rails are fundamentally more convenient, more globalized and less loaded than traditional channels for payments and calculations.Thus, a significant portion of the tokenized U.S. dollars worth $22.7 billion, which are traded on public blockchains, representreserves of cash that may well be placed in risky assets such as bitcoin.If there is a mass outflow of capital from any of these staples, or there will bedoubts about financial security, the natural direction to escape will becensorable assets such as bitcoin that can absorb such high liquidity in no time.It is assumed that if the free convertibility of a stapler isits holders will not be able to enter the fiat through one of the off-ramps - but they will be able toCrypto assets, including bitcoin, are by far the largest and most liquid.Thus, if the Staples do indeed be disadvantaged, the result is likely to besignificant capital inflows into bitcoin.
Silvergate settlement network
Another critical part of the financial market infrastructure that has been undervalued is banks such as Silvergate, which serveIn 2017, and even more so during the beginning of the crypto industry, it was extremely difficult to establish relations with banks, and only the largest and most reliable crypto corporations could access banking services.Currently, many banks in the United States are actively providingCrypto business services: First of all, it is worth noting Silvergate, Signature and Metropolitan.In addition, two new organizations, Avanti Bank and Kraken Financial, have received statutory documents under Wyoming's Special Purpose Depository Institutions Act, which means that they haveright to access the Federal Reserve (as well as to manage cryptocurrency assets on behalf of clients).
Simply put, the banking environment, for a long timepresenting a major challenge to the cryptocurrency business in the United States, it is significantly better today than it was three years ago during the last bull rally. Due to its public status, Silvergate's impressive popularity is rather translucent. One of the flagship instruments in their intrabank settlement product is the Silvergate Exchange Network (SEN). SEN enables Silvergate customers to make instant settlements. Since the bank serves so many cryptocurrency companies, transactions in SEN are a kind of indicator of the activity of American companies in this industry.
: Silvergate Q3 Earnings presentation.
In the third quarter of 2020, SEN processed$ 36 billion worth of transactions. While such financial infrastructure products are generally not considered mission-critical to bitcoin, they enable efficient fiat clearing and settlement between cryptocurrency firms in the United States. This is another product that simply didn't exist in 2017.
The growth of cryptocurrency lending
Another underestimated situation for todayday is the widespread availability of cryptocurrency lending. As with some of the other phenomena mentioned here, at the end of 2017 there was simply no professional intermediation in the lending space - although some p2p lending markets were already functioning, for example, on the Bitfinex exchange. Lending can improve investment efficiency for market makers, arbitrage firms and hedge funds in liquid markets. The fragmented liquidity environment in the crypto industry means that these firms must post liquidity to multiple exchanges at the same time. In this case, certain strategies can prove to be quite costly in terms of capital, and this is where credit providers like Genesis and BlockFi come to the rescue. The introduction of credit into blockchains has a practical effect of making spreads tighter and cross-exchange price fluctuations less common. In addition, any business (such as Bitcoin ATM companies) can benefit from the convenience of crypto lending if it spends in Bitcoin or stablecoins.
To illustrate the dynamics of credit growthThere are many charts on offer, but the outstanding loan portfolio of Genesis, the largest institutional lender, is clear on the situation.
: The Block
While some bitcoiners are performingAgainst the introduction of lending into the crypto industry, I am firmly of the opinion that abundant lending has dramatically improved the liquidity situation and tightened spreads.
Summing up, we can say that todaythe market is much more mature, more financialized, more controllable, more orderly, more restrained, less reflexive, more capital efficient and more liquid than the market that drove the previous bull run in 2017. Positive catalysts like Bitcoin ETFs seem to be quite possible in the not too distant future. The quiet and hard work that entrepreneurs have done over the past three years without drawing public attention has enabled the industry to tackle much bigger challenges.
In these nine charts, I have looked at many areas where there are clear improvements when comparing today's market conditions to the bullish rallies of the past.
I did not even mention the appearance of genuineinstitutional custodians such as Fidelity Digital Assets, which was created at the end of 2018, a milestone in industry history. I also did not talk about the emergence of high-tech order management services that facilitate the process of gaining access to large amounts of bitcoin. And I have not considered modern digital asset networks like Fireblocks, which rely on innovative cryptography and eliminate any risk in intrachain transactions. I also did not mention the division of exchange, brokerage and depository functions, as well as the specialization of firms within each segment. And I have not noticed an increase in the number of companies providing data on institutional capital markets and creating reliable information channels and reference rates for indices and other financial products. Over the past three years, we have witnessed a number of positive developments that cannot be enumerated.
However, ultimately, only one marketthere isn't enough infrastructure to spark the Bitcoin hype. Infrastructure is just a pipeline through which capital can flow into an asset. The true catalyst for Bitcoin this year has been the largest monetary expansion we've seen in the modern era - an experiment that doomed the existing fiat system to teetering on the brink of oblivion.
Money supply M1 in US dollars, change from year to year. : FRED
Perhaps more than any of the factorsmentioned here, the growth of the money supply is a fundamental catalyst for renewed interest in hard assets like bitcoin, especially among the more serious macro-oriented allocators. This rise is not characterized by an explosion of interest from retail investors, but by the fact that global macroeconomic hedge funds and commodity traders are taking a closer look at Bitcoin and rethinking its significance.
They are macroeconomic incidentalwinds stimulating a resurgent interest in the industry. While the outlook for inflation in the US dollar denominated CPI is not yet clear, real interest rates are expected to be negative for the foreseeable future. In light of this outlook, it should come as no surprise that zero-return assets such as gold and bitcoin have caught the attention of these allocators.
Bitcoin is ready this time.</p>