Bitcoin has been consolidating around the $1 trillion market capitalization threshold for almost three months, which is a very healthy development during a bitcoin bull market. So, what’s happening behind the scenes, and how should investors be thinking about the recent price action of bitcoin?
Let’s dig in.
Long-Term Trend Still Clear: Bull Market Far From Over
While it is true that at the time of writing BTC is trading at a price it first saw 75 days ago, there is absolutely nothing to be concerned about in terms of the fundamentals and long-term outlook of the monetary asset. Many market spectators have been quick to call it a “top” because of the speculation occurring in the illiquid altcoin markets, but this is a shortsighted take that does not take into account the empirical data. New entrants and capital are entering the market every single day, and the fixed monetary policy of Bitcoin remains consistent.
Long-Term HODLers Are Accumulating
Long-term HODLer net position change in 2021
The long-term HODLer net position change, which measures the 30-day change in supply held by long-term bitcoin holders, recently flipped positive, and the data from Glassnode shows that over the last 30 days, HODLers have accumulated 93,638 BTC more than they have sold. This shows that the conviction of bitcoiners is not the least bit shaken in regards to the choppy price action, and they are viewing the period of consolidation as a buying opportunity.
Miners Are Accumulating
Not only have long-term HODLers been net accumulating over the last month, but miners are as well. Over the last 30-day period, miners have accumulated a net position of 5,459 BTC, a bullish development as miners are the only natural sellers in the market, since capital expenditure and operational expenses force operations to occasionally liquidate a proportion of their treasuries.
With hash rate lagging far behind price action over the past year, and a global semiconductor shortage occurring simultaneously, expect miners to continue to be net accumulators of BTC, as profit margins remain wide across the industry.
Miner net position change since the May 2020 Halving
Another fascinating metric to look at is the Puell Multiple, which measures the dollar value of bitcoin issued to miners in relation to its 365-day moving average. The Puell Multiple measures when the market has run too far, too fast.
Obviously, the market value of new bitcoin issued greatly increases in a bull market, and this can be seen not only during the recent run up but also past bull market cycles following the halving. Currently, the Puell Multiple is at 2.5, following the healthy 75-day consolidation. When compared to previous bull markets, a similar pattern occurred around the $100 mark in 2012 and the $3,000 to $4,000 level during 2017.
Puell Multiple over the history of Bitcoin
Another promising metric which puts into context the exponential growth occurring around bitcoin and the Bitcoin network is realized market capitalization. Realized market capitalization shows the total market cap of bitcoin, but accounts for the time each UTXO was last moved in the calculation.
This measure can be thought of as a more reliable way to measure the true economic value of the Bitcoin network. Realized cap at the time of writing is sitting at $370 billion, increasing approximately $250 billion since November. To put this move into context, the realized capitalization of bitcoin at the height of the previous bull market was $90 billion. The recent parabolic rise in realized capitalization can be seen as an immense amount of capital flowing onto the network.
Realized capitalization of bitcoin
A very telling metric when determining how “overheated” the bitcoin price is, MVRV is the ratio between the market capitalization to the realized capitalization. Short-term price fluctuations occur on bitcoin as price is set on the margin, and especially with the growing prevalence of derivatives and leverage in the ecosystem, total market capitalization can see explosive growth when actual capital inflows and economic activity remain somewhat muted. This is not what we are seeing, at all and is a key reason to be bullish at this moment in time.
MVRV Z-Score (market cap minus realized cap) divided by std. (market cap).
MVRV Z-Score, five-month view
The recent pullback in MVRV, or rather the rise in realized cap as market cap consolidates, is a very bullish sign, and should give investors confidence that this bull market has a long way to run.
The Macroeconomic Backdrop Remains Extremely Favorable For Bitcoin
Total assets of major central banks
Total assets of major central banks (stacked)
One of the primary reasons for the surge in interest in Bitcoin over the past 12 months, the macroeconomic backdrop remains extremely favorable, and you shouldn’t expect that to change anytime soon.
Debt loads across the global economic system are at all-time highs, and central banks have painted themselves into a corner in terms of policy optionality. The only thing that markets know is ever-increasing liquidity injections, in what has become almost a competition between nation states and their respective central banks as to which can devalue against all of the others at a faster pace.
While it is true that rates being raised is not out of the question, it would be crippling for a global economy that has become accustomed to negative real rates over the past decade. In a very basic sense, investors should have two distinct intentions in regards to growing and preserving their capital in this macroeconomic environment:
- How do I protect against debasement/dilution risk?
- How do I protect against counterparty/contagion risk?
The market outcomes that can occur at this point is somewhat binary. Either central banks continue to inject liquidity into financial markets and the risk on everything rally continues, as debt continues to become cheaper in real terms, and the discounted valuations of every asset class skyrocket, or they collectively take away the punchbowl, credit contracts and markets witness a deflationary event similar to what was witnessed in March 2020. While this second possibility may not happen immediately, it is just reality that collectively, the domestic economy (in the U.S.) and the global economy are far too indebted.
In this deflationary scenario, anything with counterparty risk (any asset in the extremely leveraged banking system) is something you should hold with extreme caution. The interconnectedness of financial markets ensures that contagion spreads fast, and the default/credit risk of one market participant is something that should worry everyone.
Without going too much deeper on this matter, bitcoin is the solution to both of these market outcomes. With bitcoin, you are insulated from the record monetary debasement that is occurring in legacy financial markets, but you are also protected from a deflationary scenario in which systematic risk in the banking system does not affect you because of the network’s native self-custody attributes.
Conclusion: Stay Bullish
The fundamentals of bitcoin and the Bitcoin network remain as strong as ever, and in hindsight the shortsightedness of many prominent bitcoin skeptics will prove to again be pure folly. The reasons to be bullish are greater than ever, and one should expect that once bitcoin breaks out of the recent range, the monetary asset will once again be off to the races as global FOMO picks up in ways that have never been witnessed before.