2021-12-28 Bitcoin and the possibility of a super cycle

Original article at TrendingTopics in German HERE

Bitcoin fans are excited. Three years passed before Bitcoin reached a new all-time-high at 28,000 US dollars again. The last massive rise happened in 2017, when the digital cryptocurrency made a fabulous run from US$1,000 at the beginning of the year to US$19,655. In a super cycle, price jumps beyond a million euros for a bitcoin are mathematically conceivable due to network effects, the fixed bitcoin money supply, the increasing sluggishness of gold. Purely hypothetical, but possible.

Much seems similar now at first glance. but this time much is different:

Bitcoin’s super cycleBut something else could be happening: The cryptocurrency could also defy classic thought models of a bull/bear cycle, break all conventions and experience a massive price increase through a “super cycle”. Bitcoin’s market cycle is typically around four years, and some experts hypothesize that the supercycle could be triggered by the “halving” written into the blockchain code, the pre-programmed halving of Bitcoin’s new supply.

Bitcoin inventor Satoshi Nakamoto had the idea that reducing the supply of digital coins by halving them over time while increasing demand would create more value. An accepted explanatory model among experts for Bitcoin’s viral market loops is gradual scarcity. Specifically, Satoshi Nakamoto explains in the Bitcoin white paper:

Satoshi is thus addressing network effects, postulating them at a time when Bitcoin had a value of 50 cents. In the chart below we have the bitcoin price and halves, which are the dashed lines. It is clear to see that there has been a bull run after each halving:

The difference this time is that Bitcoin has strong fundamentals and there are additional substantive reasons for the price rise: Bitcoin is now needed to hedge against impending inflation. This narrative makes 2020 unique for the largest cryptocurrency.

Bitcoin was launched during the 2008 financial crisis and is a counter-model to what Nakamoto saw as an ailing financial and banking system at the time. The global economy has grown steadily since then, with no significant recessions in traditional financial markets since 2008. This changed with Corona: a veritable health crisis developed as an accelerant to a monstrous economic crisis, the most severe recession since the world wars, far more dramatic than 2008.

And this is the first litmus test for Bitcoin. Will all the Bitcoin disciples and crypto fans lose their nerve and sell? Will the Bitcoin price plummet as the global economy staggers? Is Bitcoin not a “safe haven” in times of crisis after all and cannot hold its own against gold and real estate as a valuable asset class?

At first, everything pointed to this: Bitcoin crashed dramatically along with the stock markets on 13 March 2020, Black Friday, to 4,121 US dollars. But the much-criticised cryptocurrency experienced a resurrection and emerged from this crisis strengthened, as we stand today at a price of 28,000 US dollars.

While Bitcoin was recovering, governments were outbidding each other with bailout programmes that they funded by printing money. And this cranking up of the money printing presses is unprecedented in financial history: Never before has the money supply been increased so massively in such a short time. But central banks are also moving with the times: they are not printing money, but buying bonds from financial institutions and banks and transferring fresh fiat money created out of thin air. Commercial banks put the fresh funds into circulation in the form of loans.

This means that governments are currently actively devaluing their currency. And this is exactly the scenario against which Bitcoin is one of the remedies: an inflation-proof currency that is not controlled by a state, whose money supply cannot be expanded at will. On the contrary, through halving, a smaller amount of Bitcoins is gradually issued, or more precisely only half of them at a time, until all 21 million Bitcoins have been distributed among the people.

Bitcoin was created as a store of value in a world where you cannot trust your government or bank. Such moments do not come often in life, world financial crises are rare, but the current financial crisis is a key event that could help Bitcoin to super-cycle and thereby dramatically increase in value.

In addition to the Corona crisis, there is another aspect: in contrast to 2017, institutional investors are adding this new digital asset class to their portfolios and buying Bitcoin in large quantities. Whereas in 2017 it was mainly retail investors and computer geeks who caused the bull run, now FOMO, the “Fear Of Missing Out”, is being felt by large investors: when COVID brought turmoil to the markets, financial service providers, pension funds and asset managers were looking for safe asset classes. Bitcoin offered itself as a store of value, as it proved to be better than gold, with a lot of imagination, carried by the tailwinds of digitalisation and with high upside potential.

Who are the main banks and financial services providers that have stocked up on Bitcoins, the “digital gold”, in the last three months:

When Bitcoin had to contend with many serious competitors during the bull market of 2017, there are now no opponents left in the field. We remember the ICOs of 2016 to 2018, Initial Coin Offerings, with which blockchain startups tried to raise money and develop similar applications to Bitcoin and Ethereum, the second largest cryptocurrency. This was done by issuing coins and tokens that were in direct competition with Bitcoin. What followed was a bloodbath: almost all ICOs failed, the cryptocurrencies, often called shitcoins, lost value, only a few blockchain startups survived.

Another opponent was the Bitcoin family itself. For the once sworn Bitcoin community of the years 2013 – 2015 was joined by the desire for technical further development of Bitcoin, added to this was the greed of some involved and high criminal energy of a get-rich-quick mania. As a result, the Bitcoin blockchain, loosely translated as a chain of data blocks, was often split and forked in fierce trench warfare, and Bitcoin spin-offs were created. The most important Bitcoin fork and competitor was Bitcoin Cash, which saw itself as a means of payment with which small amounts could have been settled quickly at the cash register. But the Bitcoin-Cash narrative did not catch on. Another important fork was Litecoin, which had already split off in 2011. However, Litecoin did not make the breakthrough either, the reason being that Litecoin founder Charlie Lee sold all his Litecoins at the last all-time high in December 2017 and left the project, the background of the exit is still not completely clear. Other Bitcoin competitors are Bitcoin SV (Satoshi version), Bitcoin Gold, Bitcoin Diamond, Bitcoin Zeo, Bitcoin Private, Super Bitcoin, all of no significance today.

In 2020, Bitcoin clearly led the cryptocurrencies, the narrative of digital “Gold 2.0” bringing the coin a crucial unique selling point.

In the early years of Bitcoin, it was difficult for many people to buy Bitcoin and keep it safe. You often had to make a transfer in advance and then trust that the cryptocurrency exchange would actually buy the Bitcoins for you. Today, crypto exchanges are controlled by state supervisory authorities, in Austria by the Financial Market Authority. Numerous cryptocurrency exchanges with excellent user experience and impeccable services are now available to buyers. In addition, PayPal offer Bitcoin as a means of payment, and the Stuttgart stock exchange operates its own app Bison, which can be used to buy Bitcoin.

If and when there will be a Bitcoin super-cycle cannot be predicted. However, compared to currencies, bonds, stocks and gold, a super cycle is more likely. This is because one should ask what will happen when part of the world’s managed wealth flows into Bitcoin. World financial assets are estimated at around €100 trillion. Even if only 0.01% of this is invested in Bitcoin, this could bring an almost unbelievable price increase to unimagined heights.

Here we are no longer talking about a rise from 20,000 US dollars to 100,000 US dollars, which is the result of the Fibonacci chart technique used many times.

In a super cycle, price jumps beyond a million euros for a bitcoin are mathematically conceivable due to network effects, the fixed bitcoin money supply, the increasing sluggishness of gold. Purely hypothetical. The super-cycle is where Bitcoin’s imagination lies, which other asset classes usually lack. That makes Bitcoin unique.

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