Looking at past bitcoin cycles, we come up with some scenarios as to where bitcoin’s price might go this cycle.
Bitcoin ETF options began trading this week, highlighting how traders are playing the current environment.
We look at what 13F holder reports say about who was buying spot bitcoin ETFs in Q3.
Where Could Bitcoin Go in the Cycle
The Trump-driven rally for bitcoin continued this week, setting multiple new all-time highs. With Bitcoin nearing the $100K mark - a milestone that seemed unimaginable just two years ago following the FTX collapse - many are now asking where Bitcoin's peak might ultimately be. While the honest answer is that no one knows, certain markers help us think about cycles and where prices might go.
A caveat: this analysis is based on past price cycles and there is no guarantee these cycles will repeat. The fact these cycles exist is interesting enough, but we could very well be off-script at this point. Never before has bitcoin been a political imperative for a country like the US. Even in the previous cycle, certain cycle “rules” were violated (bitcoin fell through its previous cycle high) so things could easily break pattern again this cycle.
Historically, halvings have bisected cyclical tops, with peaks coming about 1/3rd of the way through a halving and troughs coming about 2/3rds of the way to the halving (except for the first cycle). This is of course a violation of even the weakest form of the efficient market hypothesis, that past prices cannot predict future prices. Our best explanation is that absent fundamental economic drivers of the asset price, other than supply and demand, investors continue to rely on historical price patterns to inform investment decisions, retracing the same chart repeatedly.
We also think there’s an element of human psychology involved here, fear and greed that accompanies a new technology like crypto. Analyzing technical revolutions over history (pick your framework – Gartner Hype Cycle, Carlotta Perez, etc.), they typically go through a boom, bust, and then gradual growth phase, if the technology ends up becoming a thing. But we are hard-pressed to find a technological revolution other than crypto that repeats this cycle, each time allowing investors to re-underwrite their investment thesis in the asset class.
MVRV Ratio Target
The MVRV ratio, bitcoin’s market value (cap) to realized value (cap), is the ratio of all the existing bitcoins priced at today’s price divided by the value of each bitcoin the last time it moved. In a sense, it is a measure of investors’ profitability, assuming the last time each coin was moved was when they were last bought. It is, in our opinion, the best measure of price cycles.
Two observations about the ratio though. First, the amplitude of the ratio has declined with each successive cycle and may continue to do so. Second, last cycle the peak in the price of bitcoin at $69K in November 2021 did not coincide with a peak in the MVRV ratio. The peak in MVRV happened in February 2021, ahead of the April $64K intermediate peak and again, well ahead of the $69K ultimate peak in November. The November peak was notable in that it coincided with the launch of the BITO futures ETF and resulted in a less noticeable on-chain footprint than we would normally expect at a cycle high.
The following table shows prices that bitcoin could go to if the MVRV hits prior cycle highs. The MVRV ratio today is sitting at 2.7, well below prior peaks. One important observation about these peaks, however, is the amplitude has declined over time and may continue in the current cycle.
Market Cap/Thermo Cap Target
The other cyclical measure that has been instructive in the past, albeit less reliable than the MVRV ratio, is bitcoin’s market cap to thermo cap ratio. Whereas realized cap is a measure of the price at the time the coins last moved, thermocap is a measure of the price of each coin when it was originally mined. In that sense, market cap/thermo cap is more like a price/book value ratio where the book value is the value of each coin when it was created. The ratio peaks are less structured over time, varying in amplitude while the MVRV peaks show a downward trend over time. Still, we think it’s a helpful guide to think about where the price might go.
Trough to Peak Returns
A final way one might think of where bitcoin could go this cycle is by looking at the returns from cycle trough. Part of bitcoin’s repeating cycles is a steep and protracted drawdown, one that usually measures over 70%. Bitcoin underwent such a drawdown in 2022 with the collapses of LUNA/UST and FTX. Bitcoin’s price (intraday) bottomed 2 years ago, on November 21, 2022, at $15,460. It has since risen 6.4x since the bottom, nearly hitting $100K this week. The following chart highlights how similar this rally has been with the 2 prior rallies (this chart uses close prices, so the 6.0x trough to current return is less than the 6.4x return based on intraday prices).
The following table more precisely lays out bitcoin returns from trough to eventual peak (again, using intraday prices which differ slightly from the prior graph). One thing to note is the trough-to-peak amplitude, like the MVRV ratio, has declined with each successive cycle. However, using some round trough-to-peak multiples as shown on the bottom table, all less than the prior cycle return, implies that bitcoin still has room to run in the current cycle.
The preceding analysis laid out some possible scenarios of where bitcoin might go in the next cycle using some of the best, albeit imperfect, cyclical indicators. Where bitcoin ultimately goes will be subject to many factors - a strategic US reserve, access to bitcoin ETFs through wirehouse platforms, growing corporate adoption, and individuals and institutions still getting off zero. It’s hard to imagine that 2 years after the FTX collapse bitcoin is knocking on the door of $100K, but then again looking at the repeating cycles, for bitcoin it’s just the same as it ever was.
ETF Options Launch to Overwhelming Demand
Options on bitcoin ETFs launched this week, first with IBIT options on Tuesday followed by the rest of the pack (ARKB, GBTC, BITB, FBTC, BTC) on Wednesday (not all spot ETFs have options trading). While we had expected approval by year-end, the process came together rather quickly, with the CFTC giving the green light on Friday and the OCC on Monday before IBIT options began trading on Tuesday.
IBIT was the clear winner from the options volume trading side, cementing its position as the premier bitcoin ETF. On Wednesday, notional options volumes on IBIT were 58x that of GBTC, the second largest options market. Most of the options buying was out-of-the-money call buying, highlighting trader preference to play for the upside, rather than hedging downside risks.
Q3 ETF Holder Analysis
Third-quarter 13F institutional holdings reports were due last Friday, giving investors an updated look at the holders of the bitcoin ETFs. This is, of course, backward looking, as holdings reports were dated as of September 30th, which given all that has transpired since the election, seems like ages ago. Still, there’s a wealth of information contained in these reports. The following are our biggest takeaways:
Hedge Funds Still the Biggest Institutional Holders, Preferring IBIT and FBTC
There’s been a lot of discussion regarding hedge funds’ impact on ETF fund flows and bitcoin price (see last week’s analysis). Hedge funds are having an impact on fund flows as they contributed $485.2M during the quarter, most likely related to basis trades in a quarter where the basis trade wasn’t that appealing compared to historical levels. Given what has transpired in Q4 so far, we would expect to see even greater hedge fund ownership in Q4 – annualized 1-month basis was high single digits in Q3 vs mid-teen percentages today. Looking at the dollar size of their investments it’s clear that hedge funds prefer IBIT and FBTC, which makes sense given these are the two most liquid ETFs. GBTC has attracted very little hedge fund interest despite its liquidity, probably due to the 6x fee differential compared to IBIT and FBTC.
Wirehouse/Bank Wealth Management Platforms Still Absent
One of the biggest potential demand drivers for the ETFs is from wirehouses and the wealth management arms of the big banks – Morgan Stanley, BofA (Merrill Lynch), UBS, Wells Fargo, JP Morgan, and Goldman Sachs to name a few. Aside from Morgan Stanley, whose clients own IBIT, ownership through this channel is largely absent (we delineate between shares owned at the brokerage arm for market-making purposes and shares owned through the investment advisory platform).
What will it take for these platforms to more broadly engage bitcoin ETFs? Time and client demand. These platforms usually require investment products to have performance track records before approving them and even though the bitcoin asset has a long trading history, the ETFs themselves are still less than a year old. We hope is that client demand spurs these platforms to hasten the approval process for these products and that these can be a new source of demand for the ETFs.
Retail (Non-Filers) Still Dominate Ownership and Were Buying During the Quarter
While much ink has been spilled about various categories of institutional owners, retail (non-filers) is still by far and away the biggest owner of the bitcoin ETFs. Not only do they own nearly 80% of the ETFs, but they were the biggest buyers during the quarter, not institutions. Retail investors contributed $3.5B in fund flows during the quarter, 4.8x that of all institutional holders COMBINED. While crypto pundits like to talk about institutional ownership of bitcoin through the lens of ETFs, the actual story is that financial institutions put the ETF wrapper around bitcoin, but the biggest buyers have and continue to be retail, not institutions.
Market Update
Bitcoin rocketed up again this week, nearly breaking $100K, and setting a new all-time high in the process. With the conversation shifting to when, not if bitcoin will break $100K, the question that has naturally emerged is how high could bitcoin go this cycle? We’ve done our best to take a stab at that in this piece, but many important questions remain unanswered. We know Gensler is out at the SEC, but his successor has yet to be named. We also don’t know if Trump’s US bitcoin reserve will become a reality, but recent reporting from Reuters indicates that is still very much on the table for the incoming administration.
Ironically, even with the rally in spot, many positioning metrics aren’t overheated. The open interest weighted funding rate on offshore perps is only an annualized 16.1% (it has gone well over 100%) and the annualized basis on CME futures is in the low to mid-teens percentages (it was over 35% at the 2021 high). With money continuing to come into the ecosystem through stablecoins, the rally shows no signs of slowing down.
Equity markets were mixed on the week while gold bounced back after falling in the wake of the election. Both equities and gold are having another banner year, which could be more pronounced had they not been overshadowed by bitcoin. Ironically, bitcoin’s recent rally has come despite strength in the US dollar index (DXY), which has also rallied following the election. The US dollar’s strength had been seen by some as an obstacle to bitcoin’s price appreciation but that is not at play right now.
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