The four-year cycle is dead. Long live bitcoin.
Bitcoin is mellowing post adolescence.
Bitcoin’s halvings give it cyclicality. We’re all familiar with the parabolic moves of 2013 and 2017, followed by the deep bear markets that followed. And hopefully by now, we’re all aware that halvings are the main driver of this approximately four-year cycle. When bitcoin’s block reward halves every 210,000 blocks, the economics of the underlying commodity fundamentally change. Bitcoin’s rate of supply introduction falls, putting an upward pressure on price as demand persists due to continued global adoption.
The halvings in 2012 and 2016 indeed sparked wild bull runs in 2013 and 2017, but 2020’s is ending with somewhat of a dud—bitcoin is only up 150% from the peak of December 2017 four years ago. Compare that to over 1,500% for the previous four-year cycle (11/2013 to 12/2017). Bitcoin’s cyclicality isn’t going anywhere, but the four-year cycle as we know it, with astronomical peaks and valleys, is over.
A new, first-layer money
Amidst price volatility, one must seek solace in logic and reasoning. Trying to process bitcoin price movements without some sort of anchor will leave you grasping for life. In Layered Money, I made the argument that over the next several years, gold’s total market capitalization is a sensible anchor for bitcoin’s potential valuation. Currently at about $10 trillion in above-ground gold, this would equate to a $500,000 bitcoin price. Historically, the argument is sound: gold achieved global consensus as a first-layer money with paper claims and credit money built using gold as the ultimate asset in balance-sheet hierarchy, and bitcoin is following a similar pathway by eliciting an entire asset class of either bitcoin claims or digital assets junior to bitcoin both in terms of liquidity and safety. But gold is merely a benchmark that uses history as a guide. It is useless in assigning a fair value to bitcoin today. Thankfully, we have on-chain analysis to provide that peace of mind.
Market-value-to-realized-value (MVRV) ratio
There are infinite ways to slice and dice data from bitcoin’s blockchain, but my favorite metric that can stabilize your emotions when headlines flash is the collective work during 2018 of Pierre Rochard, Nic Carter, David Puell, and Murad Mahmudov—MVRV, or market-value-to-realized value, ratio.
For those that want a deeper dive, I welcome readers to click on the analysts’ names for more. For the rest, MVRV measures bitcoin’s price against something less volatile: the realized price of bitcoin which only changes when bitcoin is transacted on its blockchain, not traded on an exchange. In the following graphic, the green line is bitcoin’s market capitalization (based on market prices), currently $900 billion. The red line is bitcoin’s realized market capitalization, a measurement that is more stable, and currently at under $500 billion. The easiest way to think of market cap versus realized cap is like this: market cap measures the trader’s price, while realized cap measures when people actually use bitcoin.
What does the MVRV ratio tell us?
Now, let’s visualize the market cap and realized cap into one ratio, MVRV: