Will $BTC Outperform Altcoins This Cycle?
The Bull Case For Bitcoin
March 30, 2024
GM Milk Road PRO! 😎
The king has returned. 👑
Earlier this month, Bitcoin surpassed its previous all time highs from 2021.
$ETH, $SOL and many other assets are still lagging Bitcoin, yet to reach their own all time highs.
In fact, the Bitcoin Dominance (Bitcoin’s % market cap vs the total crypto market cap) continues to hold strong.
After hitting its cycle low in September 2022 at 38%, it has been on a steady incline ever since, reaching as high as 55%.
At 55%, many, including our team, called the top of Bitcoin dominance and shared that it’s time for $ETH and other assets to start to outperform.
However, $BTC has held strong as of late and remains near its local high, sitting at 54%. This has got plenty of folks thinking we're heading into a Bitcoin-led cycle.
A lot of the speculation points towards the Bitcoin ETF as the turning point that really sets Bitcoin apart from the rest, making this cycle all about Bitcoin.
As we’ve expressed many times in our PRO reports, crypto cycles generally work in phases, where money flows first to Bitcoin, then to Ethereum, then to other assets farther down the risk curve.
$BTC → $ETH → Altcoins → NFTs.
Will this cycle be different? Will Bitcoin continue to outperform this entire cycle for the first time?
Maybe! There is a serious supply shock happening right now with Bitcoin that could send $BTC to levels that most people aren’t prepared for.
In today’s PRO report we’re going to dive into the bull case for Bitcoin and look into what’s brewing in crypto’s largest asset.
We’re going to get clear on the economics and tokenomics of Bitcoin and understand the demand factors that may influence the price of Bitcoin this cycle.
At the end of this report we’ll share our thoughts around a Bitcoin-led crypto cycle so you can understand where to allocate your capital to get the most bang for your buck! 💰
Let’s get into it. ⏬
Bitcoin Tokenomics (Supply Side)
Bitcoin's total supply is of course capped at 21 million $BTC, and so far, 19,667,056 have been minted…
Bitcoin has an inflation rate of 1.63% APY currently…
Which equates to about 900 new Bitcoin being mined every day…
In mid-April (less than a month from now), the Bitcoin Halving will occur, which will reduce Bitcoin’s inflation rate by 50%, meaning that only around 450 Bitcoin will be mined daily.
On this alone, if you do the simple math, assuming that demand stays the same and the new supply is cut in half, technically the price of Bitcoin should double.
Based on Bitcoin’s current price, this would assume a fair value of $140k/Bitcoin after the halving.
Of course, markets are never that simple. It’s not all about the new supply and demand.
We also need to understand the dynamics around who is holding the current supply and what they are doing with their assets. If the current holders begin selling at the same time, then the assumed number would no longer hold true.
So let’s look onchain to see what we can learn about the existing holders…
Dynamics of Current Bitcoin Holders
To start, as we can see in the chart below, we can track the likely lost supply of Bitcoin, which equates to almost 1.5 million $BTC or 7% of the total Bitcoin supply.
This is people who have lost their seed phrases or sent $BTC to the wrong addresses, effectively burning that $BTC. This means that 7% of the supply simply can’t be sold.
We can also look at how active the Bitcoin supply is through various charts. The chart below shows us that the Bitcoin supply, which hasn’t been active for 3+ years and 5+ years, continues to grow, while more active supply (1 & 2 years) is decreasing.
Fundamentally, this means that long term holders are continuing to hold strong even as the price has recently surpassed ATHs.
Another way to look at this is through HODL waves, which breaks down the % of Bitcoin that hasn’t moved in different time frames.
As we can see below, long term holders (purple, blue and green) continue to grow.
You can see that at the top of bull markets (early 2014, end of 2017 and mid 2021), active supply and short term holders become a larger part of the Bitcoin supply.
Since hitting the peak in 2021, the trend has been mostly downward. However, it looks like we're beginning to see some growth in active supply and short-term holders (the red and orange segments), although it's not yet clearly confirmed by the charts.
Additionally, we can see that the number of whales holding $BTC is continuing to grow. This is common during early stages of a bull market as these wallets can be considered “smart money”.
You’ll notice that they tend to sell before or near the top of each cycle too.
When holders start selling their Bitcoin, whether that be for Fiat or other assets, they typically do so on centralized exchanges.
By tracking the flow of $BTC on exchanges, we can understand if people are still accumulating (moving their $BTC off exchanges) or selling and getting out (moving $BTC onto exchanges).
Currently, we are still in the phase where holders are moving their $BTC off exchanges.
In terms of the current supply of Bitcoin, it’s very apparent when looking onchain that even at new all time highs, smart money, whales and long-term holders are continuing to hold and accumulate Bitcoin.
We are not yet at the stage where the strong-handed holders start to sell their Bitcoin. This gives us a strong holder base heading into the Bitcoin Halving.
New Demand For Bitcoin
So, heading into the Bitcoin Halving, we’re sitting at ATHs, long-term holders and whales are still accumulating with little signs of selling and the amount of new Bitcoin being put into circulation will be cut in half.
This is a great setup in and of itself, but there’s something much bigger at play for Bitcoin that I will discuss below. Something that could take Bitcoin well above $130k this cycle…
Of course, in any crypto cycle, new entrants or old entrants from the last cycle come in and buy Bitcoin. This is what drives the price of Bitcoin past ATHs in every cycle.
We’re beginning to see this now, with various indicators showing that retail is making their way back into crypto.
However, Bitcoin is already a $1.25 trillion asset, which means it needs A LOT of capital to significantly appreciate in price.
If Bitcoin is to truly set itself apart from the rest of the industry and lead this entire cycle, it needs some serious capital investment, outside of just retail investors.
That’s where the institutions come in. And in this cycle, they are undoubtedly here with the launch of 10 Bitcoin spot ETFs in the USA in January of this year.
Already, the ETFs hold more than 831,488 Bitcoins, about 4% of the entire Bitcoin supply.
That’s more than $58 billion of Bitcoin! 🤯
While Grayscale had already accumulated a large part of those assets in their trust before the ETFs were approved, the other 9 have accumulated $35 billion worth of Bitcoin in ~2.5 months.
If we take a look at the average daily inflows across all of the ETFs in their first 2.5 months, we get $218,000,000/day. That translates into about 3,826 Bitcoins being bought every day from the ETFs.
Remember, there are only 450 new Bitcoin mined everyday come April. This means that the ETFs alone are buying more than 10x the amount of new Bitcoin mined every single day!
There simply isn’t enough Bitcoin to supply this much demand.
Of course, the demand from ETFs could and likely will go down at some point, but it’s important to note that the marketing and sales teams of these ETFs are only just getting started – some ETF companies have suggested they’re only running at about 20% capacity right now.
It takes months for them to really rev things up and also for these ETFs to make their way into other funds, portfolios or ETF allocations.
It’s therefore likely that inflows of 1,000’s of $BTC/day in ETFs will continue for months or years to come!
But of course, it’s not just the ETFs accumulating $BTC.
Most notably, Michael Saylor and Microstrategy have been on a tear lately, selling shares of Microstrategy to buy Bitcoin.
Microstrategy now holds more than 214,000 Bitcoin – or a little more than 1% of the entire Bitcoin supply and has no plans of ever selling.
If we look at MicroStrategy's purchases over the last year, they are averaging $14,333,545 of inflows/day.
This equates to Microstrategy buying 224 Bitcoin every single day and the frequency of their purchases is only increasing.
After the halving, if Microstrategy continues to ramp up its purchases, it will be close to buying up the entire supply of new Bitcoins on a daily basis… and that’s just from one company!
While these are the most well known and largest buyers of Bitcoin on an ongoing basis, there are other public corporations, sovereign wealth funds and other financial and governmental institutions which are buying Bitcoin or could start buying Bitcoin in the near future too…
El Salvador for example purchased 500 Bitcoins in 2021 and has since committed to buying 1 $BTC every day moving forward. They currently hold close to 6,000 Bitcoins.
Tesla also purchased more than 40,000 Bitcoin in 2021, they have since sold some, but more recently have once again started accumulating Bitcoin in their treasury and currently hold 11,509 Bitcoin.
Last time around, Bitcoin's price needed to double from its previous all time highs ($17k) to hit $40k before big names like Tesla, El Salvador, and other institutions and countries jumped on the bandwagon, adding Bitcoin to their treasuries.
I don't see why we can't expect a repeat of this cycle, especially since the regulations are clearer and the infrastructure is way better now.
If things start moving in that direction again, there’s no reason why Bitcoin can’t hit astronomical prices this cycle ($300-500k+ per Bitcoin) and really stand out from the rest of the asset class.
If this scenario doesn’t occur, then all good. Bitcoin will most likely do well during this cycle, but will probably be meaningfully outperformed by $ETH, $SOL and many other crypto assets.
Where Are We In The Cycle?
The supply shock happening in Bitcoin is extremely significant, and something we haven’t really witnessed before at this stage.
But of course, we know that crypto moves in cycles and at some point, institutions and long term holders will sell their $BTC.
We will see the $BTC on exchanges go back up, active Bitcoin pick up significantly, and outflows exceed inflows in the ETFs.
Are we nearing that point in the cycle?
While there are plenty of ways to analyze the market, let’s look specifically at some onchain and crypto-specific indicators that have historically been accurate at timing the market tops of Bitcoin cycles.
First, NUPL (Net Unrealized Profit/Loss) has historically been a great indicator to call the macro top of Bitcoin – whenever it reaches the blue euphoric zone, which we are close to, but not quite there yet.
And the MVRV Z-score is still very far away from reaching its danger zone…
And finally, if we zoom out on a log scale, we can see that we haven’t even reached the fair value (gray line) on a regression channel yet, not to mention the 1 or 2 standard deviations overbought (blue lines) like we typically do in a bull market.
This tells me that there is still plenty of room for growth for Bitcoin this cycle, buying us more time before the whales and long-term holders begin to sell.
But does all of this mean that Bitcoin will outperform $ETH, $SOL and every other asset this cycle? Is it “Bitcoin and then everything else” like some Bitcoin maxis suggest?
Chances are most likely slim for that to happen. The same movement of flows always happens in crypto cycles (a similar trend occurs in other markets as well) via the wealth effect.
As Bitcoin holders become more wealthy in a cycle, they take profits and move it down the risk curve into $ETH and other assets.
You can see this exact phenomenon occurring in the chart below. Bitcoin always leads the cycle and then Ethereum and alts take over later on…
At this point, we’re probably still in the early days in the cycle and the rotation down the risk curve will occur soon, if it isn’t already happening.
Maybe Bitcoin dominance goes on to touch the blue trend line at 58%, further outperforming the rest of the market, but that’s not our base case.
Not only does this same thing happen every cycle but there’s also a lot more innovation happening across the rest of the crypto ecosystem outside of Bitcoin.
This is why during every cycle, Bitcoin’s dominance peaks lower and lower than the previous one.
The only opportunity we’re seeing for Bitcoin to extend its lead this cycle is if the $ETH ETFs are not approved this year and other institutions and countries start announcing that they are accumulating Bitcoin.
This scenario would set Bitcoin up to dominate the rest of the market for the foreseeable future.
We’ll have to wait and see how the cards fall! May 23rd is the first important date for the $ETH ETF, but there are still other opportunities later in the year if the approval doesn't occur then.
Watch out for a new PRO report coming soon about Ethereum's supply shock, which might be even bigger than Bitcoin's. 👀
Exciting times ahead for investors in crypto.
Good luck out there!
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