Welcome back to another weekly update!
As you may have known, recent economic events have affected the crypto markets — like the government shutdown.
Today, I will talk about the effects of those events, as well as outline the narratives in the crypto markets and potential catalysts for bitcoin (BTC) in the future. But first, let’s turn to the most important webinar of the first quarter.
In it, I discuss:
- An update on what’s moving in the crypto markets.
- The four-year bitcoin cycles.
- Where we are headed next in the cycle.
From the webinar, we know where we are in the long-term bitcoin trend cycle. Now let’s dive into how we got there — or the economical side.
The Cause of the Market Drop
The government shutdown that ended last week was the longest in U.S. history.
This halted Securities and Exchange Commission (SEC) activity for the past month. It also resulted in a delayed approval for the VanEck-SolidX Bitcoin exchange-traded fund (ETF) application in the first quarter of 2019.
Toward the end of 2018, the bitcoin ETF narrative kept the market afloat.
It was going to open floodgates for investors, because trading it would be as easy as buying popular ETFs like the SPY or QQQ.
In late November, SEC Chairman Jay Clayton expressed his concern over a lack of investor protections and suggested it was unlikely that his agency would approve a bitcoin ETF anytime soon.
This sparked almost a 50% sell-off in bitcoin from $6,500 all the way down to $3,200. The rest of the crypto markets fared even worse.
Because the markets had already heeded Clayton’s statement, the VanEck news should not be much of a surprise.
I believe we will eventually get a bitcoin ETF. But will that news be the catalyst that brings us out of a bear market?
From my humble perch, I don’t view the bitcoin ETF as the event that drives crypto markets higher for a few reasons:
- Bitcoin is now just as easy to buy as stocks.
All you need is a bank account and a Coinbase account. You can exchange fiat currency for cryptocurrency with a few clicks.
Moreover, there are mobile apps, such as the Square Cash App and Robinhood, that allow users to exchange fiat for bitcoin.
- The bitcoin ETF would permit investments in retirement accounts.
Most retirement accounts are looking for income-producing investments or safe, steady growers. Bitcoin, in its current state, is too volatile for most of these.
- The spread between the bitcoin exchange-traded note, GBTC, and bitcoin has narrowed to 15%. It once traded as wide as 80%.
This suggests investors aren’t willing to pay a premium to hold bitcoin exposure in a stock account. It’s likely due to reasons No. 1 and No. 2 above.
Without the bitcoin ETF, there are still catalysts on the horizon that could potentially drive demand into the sector.
2 Major Catalysts to Boost Bitcoin
No. 1 — One of the main drivers of bitcoin’s price is scarcity.
Due to the rules outlined in Satoshi’s white paper, only 21 million bitcoins can be created. Because of this, bitcoin should increase in value over time as the network and demand grows. But supply is limited.
This isn’t the case for fiat currency, where money can be added to the system.
Like gold, bitcoin is a noncorrelated asset. It’s an investment that doesn’t rely on the price of bonds or stocks. In fact, due to its decentralized nature, it should move higher when the rest of the investment world is moving lower.
Yet at a $60 billion market cap, bitcoin is still less than 1% of gold’s $8 trillion market cap.
No. 2 — There are looming macro drivers on the horizon that argue for bitcoin as a part of every portfolio.
- Global debt to GDP is at 317%. This is higher than a decade ago. The cure for excessive government debt is to print money. Typically, this lowers the value of money, and investors look for safer assets, such as gold, to store their wealth.
- The Chinese economy is slowing for the first time in almost 40 years.
China is home to hundreds of vacant cities where the debt raised to build these cities will not be paid back. This is another situation where the government will need to inflate away the debt, and Chinese investors will look for a safer store of value.
- Governments around the world are shifting to a future of higher taxes and wealth confiscation.
In the U.S., freshman Democratic Representative Alexandria Ocasio-Cortez has gained support for a 70% marginal income tax rate for the top 1%.
What’s more, presidential candidate Elizabeth Warren released plans for a “wealth tax” — 2% on wealth over $50 million and 3% on wealth over $1 billion.
To be clear, I am not advocating either economic plan. However, I would like to point out that high levels of government debt and possible redistribution will leave investors looking for a safer store of value.
And the next generation of investors will see bitcoin as that store of value.
As these macro catalysts get closer, investors will reach for safe assets. With bitcoin, they now have an alternative to gold.
Macro events tend to happen very slowly at first, then all at once. And you can see how that happens through previous bitcoin cycles, as I outlined in the webinar.
Bitcoin has gone through two four-year cycles. In the first cycle, economic events drove the price up 38,000% from 2011 to 2014. This initial mania was followed by a 59-week bear market.
The 2014 bear market laid the groundwork for bitcoin’s next cycle. A bull run started in 2015 and ended in late 2017, taking the price up 9,035%.
But this cycle was even more important than the first. Bitcoin emerged as a new asset class — the futures market was created, new companies facilitated easy access to the crypto markets and institutional custody solutions launched.
The second mania ended just like the first: with another bust. The current bear market has lasted for 59 weeks, with an 82% price drop.
Like the changing of the seasons, the end of one cycle brings about a new market phase. The crypto winter has been terrible, but there are signs emerging that spring is just around the corner.
We’ve seen signs of capitulation, as volume surged with December’s sell-off. We’ve also stopped going down on bad news.
These are signs that the bear market is ending.
You see, it might take time for the sprouts to spring, but one thing is certain — the seeds of the next bitcoin rally have been firmly planted.
It’s only a matter of time before the next bull run is upon us.
The best thing to do right now is wait. We’ve positioned ourselves in the best crypto assets that will lead the next bull charge.
I’ve mentioned before that it’s not wise to trade just to trade. I will continue to watch our portfolio and the markets and alert you if anything changes.
If you have any questions on recent market changes or new tokens, send them over to email@example.com.
Have a great rest of the week!
Editor, Crypto Profit Trader