January 27, 2023
Cryptocurrencies: Weekly Update
If you’ve been following our weekly CryptoPulse commentary and monthly coaching sessions for a while, you may remember when we discussed the topic of Bitcoin’s 4-year market cycle last May.
By now we’re sure that many of you are at least familiar with Bitcoin’s historical 4-year cycle that is directly tied to ‘Halving’ events. Bitcoin is designed to undergo a ‘Halving’ once 210,000 new blocks (roughly 4 years) of data are validated or mined, which cuts the individual reward that miners can earn for completing a single block in half. When the BTC blockchain was initially launched miners were able to make 50 BTC for each completed block, which has now been cut down to 6.25 BTC after 3 halving events in 2012, 2016, and 2020.
The purpose of these halvings is to reduce the rate at which new coins are put into circulation, potentially supporting Bitcoin’s ability to retain its value as time goes on. The amount of fiat currencies, on the other hand, is subject to the policies of governments, banks, and regulators.
As a result, a safer comparison for Bitcoin would be to Gold, as there is only so much Gold that can be physically mined around the world each year which limits the volatility of its price since there is no way to flood the market with a massive new amount of the precious metal at any given time.
It is understood that there is a historical trend in which a new Bull market begins for Bitcoin within a span of only a couple of months around the chain’s actual halving dates. What is more difficult to rationalize is the behavior of Bitcoin’s price action within each of its 4-year cycles in between halving events. We had originally developed a framework in which we broke Bitcoin’s 4-year cycles into 5 sub-phases that included Bull, Bear, Accumulation, Expansion, and Re-Accumulation. Here is what that looked like on the chart:
With the benefit of hindsight as well as several more months of market data to work with, we decided to revisit this concept and ended up with a handful of observations that we believe have made this framework far more actionable for both recognizing the beginning/end of each market phase, as well as hopefully recognizing when a new Bull market is likely to begin.
The main thing that we’ve revised in the breakdown of Bitcoin’s 4-year cycle is that rather than having 5 independent market phases, each cycle actually appears to have 4 more concise and identifiable phases which still include Bull, Bear, Accumulation, and Expansion phases.
Here is what that looks like:
Based on our observations and the fact that the next halving date is anticipated for late March of 2024, we believe that we are likely now in the accumulation phase of the broader Bitcoin cycle.
If you would like to learn more about how we have identified the current phase and what signs we’re looking for in order to confirm that Bitcoin’s price has begun its Expansion phase, please go ahead and check out our Monthly coaching session for this month here (members only).
While the entire Crypto market remains in a relatively healthy spot after a solid run-up to start the year, it is important to recognize some of the underlying trends taking place within the cryptocurrency market that may see certain coins continue to outperform the rest. As we typically only care to focus on the best of the best large-cap tokens, we will look at our Trend Strength Indicator (TSI) ranking table within the CryptoPulse Quant product in order to recognize one important trend taking place thus far this year.
The first thing that should jump out when looking at our TSI rankings of the top 10 tradable tokens is that there are two Layer 1 coins that have been strongly outperforming the rest of the market, Solana, and Avalanche.
Over the past 30-days and since the beginning of 2023, both Solana and Avalanche have steadily outperformed every other top cryptocurrency. We recently discussed how one of the big influences behind this trend is likely to be the institutional adoption of these two chains, with Amazon partnering with Avalanche and Google with Solana within the past month.
The goal of any Layer 1 blockchain is to develop an easy and enjoyable Web3 landscape that attracts both users and developers who will fill the platform with useful financial services, applications, and even games or NFTs. All of these services are based on transactions and payments with that chain's native token, boosting the allocation of external capital into that token and raising the value of each individual token for its investors.
While Ethereum has never been unseated as the top Layer 1 blockchain which is still hovering around a $200 billion market cap, it is widely understood that one chain will not have a monopoly on the space forever and that there are several competitors vying for a chunk of Ethereum’s market share. Based on this idea of healthy competition, we’re seeing SOL and AVAX continue their hot streak as they appear to have been hand-selected as some of the front-runners to rise in the ranks and compete with ETH.
Since the beginning of 2023 Bitcoin has in fact rallied more than Ethereum on a relative basis, as Bitcoin’s market cap dominance is up nearly 5.5% YTD compared to Ethereum’s market cap dominance remaining relatively unchanged.
What is far more interesting than either Ethereum or Bitcoin’s recovery thus far is the continued breakdown in stablecoin dominance of the overall crypto market cap, with the top two stablecoins USDT and USDC losing 23.5% and 26% of their respective dominance levels since the beginning of 2023. Rather than the larger value-plays like BTC and ETH, it appears that those stablecoins are being spent to buy more speculative layer 1s which is just another reason for continued confidence in coins like SOL and AVAX right now.
One last thing to note regarding the overall well-being of the cryptocurrency market is the relationship that it has with stocks. We’re sure that everyone has seen the chart of the S&P 500 this week where it looks like the index may finally break above its year-long downtrend that has remained intact since it put in new all-time highs in January of 2022. What you may not have seen is the extremely similar chart for Bitcoin in which that downtrend has now been invalidated since October:
Although there is the daunting possibility that next week’s FOMC could spook the current rally in stocks, a close this week above the long-term downtrend as well as the 50-week moving average for the S&P 500 would be an extremely promising sign for a continuation of the rally in both stocks and the crypto market. If the S&P 500 closes this Friday above that 50-wma, it would also be a strong influence on Bitcoin making a weekend run up to its own 50 and 200-week moving averages which are currently sitting right around the $25,000 level, or about +8% from the current price of BTC.