Ecoinometrics - March 31, 2021
Double it...
Thus far, for every halving cycle Bitcoin has been experiencing exponential growth. Nobody is complaining about that.
But the thing is, most people have a hard time wrapping their head around what exponential growth means.
So here is another way to look at it: how long does it take for Bitcoin’s value to double?
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Double it
Last year after the 3rd halving I looked at the following question: what if the 3rd halving played out the same way as the previous ones?
To answer that you simply take the value of Bitcoin at the time of the 3rd halving and apply to this value the growth trajectories of the previous cycles.
The result gives you the blue range below. The orange line is the actual trajectory of this new cycle.
I have added the average growth trajectory for reference. The highlighted points are from left to right:
The value of the average growth trajectory at the end of year 2020.
The first time the average growth trajectory crosses $100k.
The value of the average growth trajectory for the one year anniversary of the 3rd halving.
The value of the average growth trajectory at the bottleneck formed by the growth range.
Note that there is no particular reason to expect this cycle would be the average of the previous ones.
This line is added purely for illustrative purposes as it’s hard to visualize an arithmetic mean on a log scale graph.
Now that this is clarified let me address a common remark I read about this graph. It goes something like that:
“We are around $60k right now and your chart predicts $100k by April 18. There is no way BTC can double in only a few weeks.”
First this graph does not predict Bitcoin will hit $100k on April 18. It just shows that Bitcoin will do so if it follows the average growth trajectory.
Right now it looks more like we are following the middle of the range which is the log average. We’ll see.
Second, I still wouldn’t be surprised to see BTC rise from $60k to $100k in two weeks.
Why?
Because it has happened in the past.
Here is one way to look at it. Start at any of the previous halvings and look at the bull market that followed.
How long did it take for Bitcoin to go from its halving price to double that value? And how long to double again after that? And again?
After the first halving it took roughly: 77 days to double first, then 35 days to double again, followed by 15 days, 217 days, and finally 12 days.
Check it out.
So yes, when you are growing exponentially things can move pretty fast. When you take the halving as a reference point the price can double in a couple weeks to a few months.
During this cycle the first doubling took 6 months. The second doubling took less than 2 months.
Currently we have been waiting for less than 3 months to see the next doubling. Target: $74k.
But that’s what you get by starting at the time of the halving. To really understand what to expect there is a better question to ask.
Take the price on any given day. How long will you need to wait to see that price double?
One way of answering that is to look at the past and see:
How often did the price double after 1 day?
How often did the price double after 2 days?
…
How often did the price double after 100 days?
And so on.
We can visualize that as a density plot. The horizontal axis is how long do you need to wait for Bitcoin’s price to double. The higher it gets the more often it happens. The darker it gets the closer you are from the average time to doubling the price.
See for yourself.
On average you need to wait about a year to see Bitcoin’s price double. But during a bull market it can be much faster than that.
The large peak on the left side of the chart indicates that very often you only need to wait two months to double your money.
The big picture seems to be that there are two regimes.
The 10 days to a year range on the left of the chart is most likely what you can expect when you buy during the lows of the bear market or the first phase of the post halving bull market.
Waiting times of more than a year is what you get when buying during the later stage of the halving cycle.
Tl;dr if this cycle looks similar to the previous ones, so far it does , then at this stage we can still expect that Bitcoin’s value can double in a few weeks to a few months.
So don’t underestimate the likelihood we’ll hit $286k this fall.
CME Bitcoin Derivatives
The March contracts expired last Friday so it’s no big surprise the trading activity is down again.
According to the data from the Commitment of Traders from March 23 we can see that the smart money barely changed anything to their positions and the same goes for retail traders.
The most interesting part is the CME Bitcoin options market. Now that the March contracts are gone you can really see that the liquidity is drying up.
We are back to a number of positions last seen at the end of the first quarter 2020... which is when the CME launched those Bitcoin options.
At this point it looks like this market is slowly dying. We have seen the puts to calls ratio climbing in the past few months as more and more traders are buying protective puts. But that's about it.
I’d have to guess that this is a consequence of a number of things:
When you don’t know how high Bitcoin will go it can feel too risky to be selling calls.
The basis trade that dominates the futures has no need for hedging with options.
Maybe the miners prefer to use other venues (such as exchanges with physical settlement in BTC) to do their hedging.
The less liquidity there is the less likely it is new people will enter the market aka the death spiral...
All that contributes to the low trading activity in this market and I see no reason why it would get better.
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
Click on the subscribe button right below.
Done? That’s great!
GREAT content always. Thank you so much!