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The 2022-2023 bear market for Bitcoin (BTC) was a tough one to weather. As someone who had already experienced the previous bear market of 2018-2019, I can attest that this latest one was no less agonizing, even though it lasted slightly less time and had a less drastic maximum drawdown.
Maybe the reason for my current difficulty lies in my heightened financial exposure. Alternatively, it could be attributed to my disappointment with the mainstream media's inadequate coverage on important issues, which has left me grappling with the same old concerns as before, such as the impacts of prohibition, quantum computing, and the environment.
Despite the uncertainty, I am relieved to witness the end of this bear market. Unless there are any unexpected negative events similar to the bitcoin liquidation caused by COVID-19 on March 13, 2020, it is probable that the 2022-2023 bitcoin bear market has concluded. The following are the reasons why:
The halving is nigh. The Bitcoin halving occurs approximately every four years, resulting in a reduction in the rate at which new bitcoins are issued. The two previous halvings were instrumental in triggering significant bull markets for bitcoin. The reasoning behind this is quite simple. Assuming a constant holding demand, a decrease in the supply of bitcoins creates an upward adjustment in price. The fundamentals of supply and demand always hold true, and any reduction in supply leads to a price surge. As it stands, the next halving is less than a year away.
No more tourists. Whenever the halving event triggers a bull market, it tends to attract the momentum crowd. These traders notice the upward trend of bitcoin's price and quickly join in, leading to a bubble that eventually bursts and causes them to exit the market in the months following its peak. However, we seem to have surpassed the washout stage today, indicated by the average age of unspent transaction outputs (UTXO) in the bitcoin network. This indicates that the tourists have left and only the HODLers - those who hold on to their bitcoin for the long term - remain.
More bad news can't cause new lows. The previous year was fraught with negative developments in the world of cryptocurrencies, which adversely affected the value of bitcoin. Terra, Three Arrows Capital, Celsius Network, BlockFi, Voyager Digital, FTX, and several other players in the industry all faced significant challenges. However, this year, despite concerns surrounding the potential insolvency of Genesis and anxieties regarding DCG, Grayscale, and Binance, bitcoin managed to avoid reaching new lows. It appears that the last of the sellers have already been weeded out. (It's worth noting that DCG, Genesis, and Grayscale all have ownership ties to CoinDesk.)
The cycle repeats: At some point in the future, Bitcoin will likely outgrow its current pattern of four-year price cycles. However, until that time comes, we can expect to see a repetition of past trends. In previous Bitcoin bear markets, such as the one in 2014-2015, the price steadily declined to approximately $350 before finally plummeting to $200 and remaining at that level for several months. Similarly, during the bear market of 2018-2019, the price gradually decreased to around $6,000 before ultimately crashing to $3,200 and remaining at that level for an extended period. In the most recent bear market of 2022-2023, we saw a similar pattern, with the price hovering around $28,000 before ultimately dropping to $16,000 and remaining there for an extended period. In all of these cases, the price followed a predictable pattern of reaching a peak, experiencing a series of lower price highs over several months, and ultimately experiencing a final capitulation of over 40% that persisted for an extended period.
How can we anticipate the future? While I avoid making immediate forecasts regarding prices, there are a few certainties if bitcoin's four-year cycle follows its historical pattern, which I believe it will.
We will probably never see $16K bitcoin again. Bitcoin's price history has shown distinct patterns in the last two cycles. Two cycles ago, the price managed to recover from its previous lows and never revisited them. On the other hand, one cycle ago, the price came close to the previous low, but only after a major market liquidation triggered by the COVID-19 pandemic.
Looking ahead, the next bitcoin halving is less than a year away, and unless a significant liquidation event occurs, it's likely that bitcoin's price has already reached its bottom.
Bitcoin remains regulatory teflon. Bitcoin has demonstrated a remarkable resilience to regulatory pressures. Its classification as a commodity rather than a security has been well-established for several years. Even Gary Gensler, the current chair of the Securities and Exchange Commission who has been the most active and forceful chairman in my professional experience, acknowledges that only one cryptocurrency asset is unambiguously a commodity and not a security. It is widely understood that he is referring to bitcoin. Despite the SEC's likely continuation of actions that treat the majority of digital assets as securities, bitcoin remains unaffected by such risks.
Financial advisors and institutions are severely under-allocated to bitcoin. Based on my experience with Swan Advisor Services, I can confirm that financial advisors and their clients have allocated significantly less to bitcoin than they should. In previous cycles, there were justifiable reasons for this stance, such as the absence of suitable products and substantial regulatory risks. While these concerns still plague the wider digital asset market, they have been largely addressed with regards to bitcoin. Consequently, I anticipate that financial advisors will increasingly adopt bitcoin during the next bullish market.
What lies ahead? The present moment offers an opportune time for financial advisors to initiate discussions with their clients regarding the advantages of incorporating bitcoin into their investment plans and assist them in implementing bitcoin allocations into their portfolios. Bitcoin downturns provide ideal occasions for accumulating this asset, but the conclusion of a bear market presents an excellent opportunity to add a genuinely distinctive asset to a diversified portfolio. It is highly probable that the next bitcoin bull market has already commenced.