NYDIG: From a cyclical perspective, what will happen next to Bitcoin?

NYDIG is an institution specializing in Bitcoin financial services, including savings accounts, transaction brokerage, 401(k) and more. The latest funding brings its valuation to nearly $7 billion.

A quick overview of highlights

●Bitcoin prices have been relatively depressed since the second quarter, and this article looks back at past cycles to understand what may happen next for Bitcoin.

●Regulatory activity has been a hot topic, but this does not involve Bitcoin, and the outcome of the latest case may take several years to know.

● In looking for catalysts to drive future prices, past cycles have shown that issues such as unresolved stress on the banking system need to calm down for markets to stabilize.

The road ahead

A lot has changed in the crypto asset space since the first quarter ended. While Bitcoin posted solid returns in the first quarter on the back of falling confidence in the U.S. banking system, the opposite was true in the second quarter. The main reason for the poor performance of the market is the actions taken by financial regulators against the crypto asset industry. Although Bitcoin is up 53.6% year-to-date, 2023 has been arguably a mixed bag so far. To the dismay of some bitcoin investors, unlike its stellar performance in the first quarter, bitcoin underperformed other risky assets such as stocks in the second quarter. Against this backdrop, we thought it might be helpful to look back at past cycles and how they affected our view of Bitcoin’s future performance. Past performance is no guarantee of future results, but unlike other technological revolutions we have studied or experienced, this one seems to exhibit clearer repeating patterns.

Regulatory Shadow

Undoubtedly, the most significant events of the second quarter revolved around actions by U.S. financial regulators against some of the industry's largest service providers. In our view, the SEC case against Coinbase, and the CFTC and SEC case against Binance are the most important, even though these cases do not involve Bitcoin and do not challenge its regulatory status. And these cases underscore the fact that Bitcoin is the cryptoasset with the greatest regulatory clarity, while the classification of many other cryptoassets remains in doubt. These cases could take years to resolve, and barring new legislation, we won't know their impact on the industry anytime soon. For example, Ripple's lawsuit with the SEC has been going on for two and a half years and is still unresolved. While there may be some announcements about the case, appeals could continue to stretch the final definitive outcome. We don't know what else regulators or law enforcement might do, so our advice is to watch the price reaction to the news to see what the market is already anticipating. For example, after the news of the SEC's lawsuit against Coinbase was released, the price of Bitcoin initially fell slightly, then recovered the entire decline and moved higher, which is a signal to us that investors' positioning has factored in the news. An old marketing adage "climb the wall of worry" may well apply here.

Shades of 2019

The two-sided performance so far in 2023 is reminiscent of 2019. For those new to the industry, 2018 has played out very much like 2022, with a sharp pullback following the bull market peaks of 2017 and 2021. Prices bottomed out in December 2018 at around $3,200, then rose rapidly in the first half of 2019, approaching $14,000 by the end of June. From its lows to its high in June, Bitcoin is up 328%. At first, there was no underlying reason for Bitcoin’s rise, but then a narrative emerged that revolved around the depreciation of the yuan and Chinese investors’ desire to store their value in Bitcoin. But the second half of 2019 was very different from the first half, with bitcoin falling nearly 50% to $7,100. Even though Bitcoin is still up 90.9% in 2019, the journey to this point has not been smooth. The most important thing about 2019, though, and what we think holds true for Bitcoin today, is that it marks the first year of a new bull market that will last until 2021.

Reassess Bitcoin

After retracements in 2014 and 2018, cryptoasset investors are beginning to rally around Bitcoin, seeing it as the cryptoasset that best fits the market. Ethereum did not exist in 2014 and is suffering from the ICO fallout in 2018, while many other altcoins still have questionable utility in 2014 and 2018. As a result, Bitcoin’s dominance, or its share of the overall industry’s market capitalization, rose during retracements of further declines in altcoins and in the early and mid-stages of subsequent bull cycles. It wasn’t until the later stages of the bull market, the most speculative part, that Bitcoin began to cede dominance to higher beta altcoins. We're seeing this phenomenon again in this cycle, but things could be different. With many altcoins facing regulatory uncertainty (Bitcoin does not have this issue), Bitcoin may take a bigger share of the industry this time around.

Quiet on the search and social media fronts

The cryptocurrency community is a very social group, with many conversations taking place on social media platforms such as Twitter. Mentions of the word “Bitcoin” on these platforms are often an indicator of market sentiment, with mentions positively correlated with price. The same is true for Google searches, where search volume is positively correlated with price. Google Trends, not an absolute measure of search volume but an index where 100 represents the highest number in history, currently shows a significant drop in "bitcoin" searches. The fact that search volume hasn't dropped to where it was last cycle could mean that things may still need to calm down, or that we may have reached a higher floor than before. The highs in search volume never reached the peaks of the previous cycle, but that may just mean that there is more general public awareness of the asset. Regardless, if we were to develop an aggressive strategy based on this information, it would be to sell Bitcoin when it is a hotly discussed and searched topic, and buy when it is not.

Banking crisis on hold, but may not be over

It's been a month and a half since the last major event of the regional banking crisis -- the closure of First Republic Bank and its acquisition by JPMorgan Chase & Co. That event, which occurred on May 1, coincided with a sharp drop in total withdrawals from the Federal Reserve System (Fed) backed credit facilities, largely through discount window credit and the newly created Bank Term Funding Program, but banks continued to increase Withdrawals of support measures provided by the Federal Reserve. The chatter about the health of the various regional banks seems to have died down for now, but comments this week from Federal Reserve Chairman Jerome Powell suggest we also face future increases in interest rates that have been the root cause of the regional banking crisis.

FINAL THOUGHTS

Both the regulatory and social fronts may need to calm down before markets stabilize. Market bottoms are usually formed in apathy rather than aversion, and given some of the indicators we've highlighted, the market appears to be headed in that direction. The situation in 2023 is becoming very similar to 2019, which was the first year of a three-year bull market that peaked in 2021. While the events of the most recent cycle look very different from previous ones, the shape and duration of the cycles continue to share strikingly similar features. Again, there is no guarantee that this will necessarily happen in the future.