Summary Bitcoin is now up over 200% since my first article in January 2023. Late 2022 to 2023 was the time to stack sats. Retail investor sentiment remains muted. Altcoins continue to get annihilated, and Hodlers are just now starting to take profits. Chances are we are not in a mania phase similar to 2017 and 2021, but in a now topping mid-cycle bull run similar to 2019. I provide implications for investor portfolio management in the current circumstances. A recap of my bitcoin articles In February this year, I wrote about the likelihood of a mid-cycle correction of Bitcoin (BTC-USD) in 2024, as liquidity conditions, the yield curve and price action prior to the halving showed similarities to the last mid-cycle bull run in 2019-2020. For these reasons, I downgraded Bitcoin from “strong buy” to “buy” from a risk/reward perspective. Data by YCharts After the most recent article was published, Bitcoin continued to surge ~41% from $52,000 to its current all-time high of ~$73,000 in a matter of weeks. The initial surge was driven by Bitcoin and Altcoins significantly underperformed. During the topping process, the altcoin market continued to get crushed. Bitcoin is now trading at ~$63,000, down ~13% from its recent all-time high. The size of the price correction is not relevant given the recent and general volatility in crypto. However, as I will point out in this article, several key factors have changed in recent weeks, and the similarities to the 2019 mid-cycle bull run seem even more striking than before. I won't go into detail about Bitcoin fundamentals or crypto itself, as I've covered those topics in previous articles. If you believe that Bitcoin is a pyramid scheme, a tulip mania, has no intrinsic value, etc., I'm not here to convince you otherwise. Sentiment remains muted despite the Halving Anyone expecting retail investors to return after bitcoin hit new all-time highs and/or because of the halving event that just happened has been disappointed. While crypto investor sentiment has remained positive throughout this bull run, I believe we are not even close to the mania of 2021 and 2017. The mainstream media has not picked up on bitcoin's recent surge. In the last 30 days, Seeking Alpha has published only 4 articles on bitcoin. During the mania phase in 2021, there were several articles a day on the topic. The subjective feeling about Bitcoin sentiment matches the objective data. The number of unique addresses that have been active as either a sender or receiver of bitcoin remains on the same uptrend since inception. However, the mania phases of 2018 and 2021 are markedly different from the current bull run, as unique active addresses remain ~30% below the last cycle high in 2021. Active Addresses (blue) & BTCUSD (orange) (TradingView.com) On-chain activity (blue) began to decline in December 2023, even as the bitcoin price (orange) began to rebound in early 2024. The bitcoin ETFs could not have been the catalyst for less active addresses, as some argued because they were launched on January 11, just after activity had reached a local bottom. With the current tight monetary policy of the world's central banks and the increased financial pressure on the economy due to higher interest rates, it is not surprising that a similar speculative mania as in 2018 and 2021 has not yet occurred. When money is tight, the chances of a broad-based retail speculative mania are low. I believe that the demand side, which is affected by monetary debasement, is much more important to the investment case for bitcoin than the supply side, which is affected by the four-year cycle of the halving. The halving is a known event that is efficiently priced in by the market. Furthermore, each subsequent halving has 50% less impact on the inflation rate of bitcoin, i.e., half the effect on the restriction of supply. Previous halving events have not led to immediate price rallies, but easy monetary policy and rising asset prices have. Altcoin annihilation When money is tight, investors become risk-averse and flee to large-cap stocks. This is one way to explain the recent magnificent 7 rally. It's a typical late-cycle dynamic. Overall, the S&P 500 ( SP500 , SPX ) has outperformed the Russell 2000 ( IWM ) over the past two years. Data by YCharts Since crypto is just as exposed to macroeconomic realities as any other asset, the same dynamics apply. The relatively risk-free asset bitcoin, similar to the S&P 500 on average, outperformed the riskier altcoins. As a result, the bitcoin dominance recently broke out of its temporary consolidation phase and broke through the 55% mark. Bitcoin Dominance (blue) & BTCUSD (orange) (TradingView.com) In 2019, during the mid-cycle bull-run, the bitcoin dominance rose sharply along with bitcoin's price. The topping process of Bitcoin during the mid-cycle bull-run in 2019 was volatile, and the dominance peaked during this period as altcoins underperformed sharply. After the peak of the mid-cycle bull run in 2019, bitcoin dominance also peaked. From there, the average Altcoin began to outperform Bitcoin again for an extended period through 2023. FEDFUNDS (blue) & BTCUSD (orange) (TradingView.com) However, the price bottomed out only after monetary policy began to ease and interest rates (blue) fell significantly in March 2020. From there, the price of bitcoin rose again, but the average price of altcoins rose even more, as riskier assets tend to outperform in times of easy money. Interest rate cuts are usually accompanied by a market correction and a recession, and crypto is as exposed to such macroeconomic events as any other asset. Since 2023, bitcoin dominance has been on a continuous rise, meaning that when bitcoin rises, altcoins rally and when bitcoin falls, altcoins crash. The recent bitcoin volatility in April 2024 had the dominance break out. In my opinion, the similarities between the current topping process of the last month and the topping process of 2019 are striking. To me, the likelihood of Bitcoin entering its mid-cycle correction in 2024 has increased during the last two months due to the recent volatility of the topping pattern, the breakout of the Bitcoin dominance, and the positive outlook for rate cuts, which should be negative for assets. Hodlers are taking profits Another major shift in the last two months occurred in the positioning of long-term holders of bitcoin. Long-term Holder Coins have not moved wallets for more than one year. These coins are similar to the smart money in other financial markets, as they tend to sell into strength and sell heavily into mania bull runs such as 2018 and 2021. In times of low interest, they tend to accumulate and buy heavily into bear markets such as 2018 and 2022. Balance of BTC by Hodlers (blue) & BTCUSD (orange) (TradingView.com) Throughout the bottoming process in 2023, long-term holders increased even as prices soared from $15,000 to $52,000. However, it was not until March 2024, when prices began to reach new all-time highs, that long-term holders began to aggressively sell their bitcoin to other market participants. A similar dynamic occurred for a short period of time during the mid-cycle topping process in 2019. Balance of BTC by Hodlers (blue) & BTCUSD (orange) (TradingView.com) Portfolio Management The time to stack Sats was during the time of boredom , starting in late 2022 until late 2023. Back then, prices were low, sentiment was terrible, and the market capitulated. Now, the situation is different: For a few weeks now, the price of bitcoin has been very volatile, bitcoin's dominance is likely to be topped soon, and there is a high probability of interest rate cuts in 2024, which is bad news for a late-cycle, highly compressed stock market and therefore also for the crypto market. If investors are following an active or semi-active strategy for their Crypto position, I do not think it makes sense to heavily Dollar-Cost-Average during the above-described circumstances. If investors took the opportunity to stack sats over the past two years and held on until now, they should have an outsized portfolio allocation to crypto. I believe it can make sense to reallocate assets if investors are in the situation described above. Of course, the passive part of the portfolio should not be touched. I concluded my last article on bitcoin two months ago with the following: My base case is at least a mid-cycle correction for Bitcoin during 2024. However, the history of Bitcoin cycles has limited utility since the asset hasn’t been around for a long time. While the comparisons may seem striking at first, every cycle is inherently different. I acknowledge the uncertainty by refraining from acting on my biases about the market. Since I have a significant cash position, I won't take any profits and plan to continue Dollar-Cost Averaging if prices fall from here. I still stand by my view of the limited comparability of bitcoin cycles. However, my personal exposure to bitcoin has become too large relative to the overall portfolio. Following my semi-active approach to this part of my portfolio, I used the catalyst of long-term holders starting to take profits to do the same. About three weeks ago, I took profits by selling ~20% of my bitcoin position that I had accumulated over a year ago. At that time, my position was up ~140% and the portfolio allocation to bitcoin was over 25%. Therefore, I still have a significant long-term passive position in bitcoin and plan to return to dollar-cost averaging if prices fall from here.
