Why history says the Bitcoin bull market won’t last beyond October 2021 — and why we don’t really care

Fund’s & Cryptocurrency Market Report / Oct-Nov 2020

Benchmark performance

In the last couple of months, the crypto market’s attention been focused on the price of Bitcoin, which has returned to a range very close to its all-time high. Still, there’s much more to the crypto industry than the BTC price, and 2020 was a truly breakthrough year, giving rise to new products — in DeFi, Non-fungible Tokens (NFTs) and elsewhere. As we’ll see later in this report, it has been in these non-bitcoin areas that BR Capital has chosen to be most active with its investments.

How to track all the activity in DeFi, and separate the reality from the hype? Following the explosion of activity in the summer, we naturally started using DeFi token indexes as key benchmarks, in addition to BTC, ETH and S&P. There are a few indexes tracking the DeFi market, but for this report we have picked the most diversified one. It is calculated by the FTX exchange and consisted of 25 tokens:

Figure 1. Dynamics of cryptocurrency market prices and S&P 500 index Source:https://www.tradingview.com/x/TC1jMCQw/

The first half of October looked like a continuation of the September price correction. Then, perhaps because there were no fresh signs of fear or panic among investors, the market retraced its decline and started on a new bull trend. In the second half of the month, confidence prevailed as Bitcoin tested its ATH, Ethereum surpassed the $600 mark and the DeFi sector began recovering after its September woes.

It is important to note that despite a significant correction in DeFi token market caps, the total value of assets locked in decentralized protocols has continued to grow. In November, it reached an unprecedented $14.4 billion.

Traditional markets remained relatively strong, with the S&P 500 up almost 9% over the past 2 months. As often happens, crypto prices demonstrated a very low correlation with the stock market in October and November.

News and events

Before we move on to on-chain data and other health indicators in the next section, let’s take a moment to recap key market events. (If you ‘ve already been following the recent news, feel free to navigate to the next section)

Many believe that this year’s impressive growth in the crypto market was caused more by the entry of institutional players and by the industry’s increasing maturity, rather than by the return of retail investors. Some of the most high-profile recent events seem to bear out this idea:

  • US companies Microstrategy and Square invested $475M in Bitcoin. “Other private and public companies will likely get into Bitcoin in the next three to six months,” Michael Saylor (CEO of Microstrategy) predicted. Here you can find aggregated information on corporate BTC holdings.
  • Payment giant PayPal now allows its US customers to buy, sell and hold Bitcoin. Starting in early 2021, the company plans to let users pay in BTC when shopping with the 26 million merchants in the PayPal network. According to this Bloomberg article, “PayPal Holdings Inc. is exploring acquisitions of cryptocurrency companies including Bitcoin custodian BitGo Inc., according to people familiar with the matter, a move that would expand its embrace of digital coins”.
  • DBS, the largest retail and commercial bank in Singapore, launched its own crypto/fiat exchange that so far supports BTC, ETH, BCH, and XRP. Meanwhile, United Overseas Bank — Singapore’s third-largest bank by total assets — appears to be developing a crypto custody solution.
  • It was announced that the Central Bank of Germany plans to work with the Ocean Protocol project. This news came as V3 of the project went live, allowing users to trade datasets in a decentralized manner using Balancer pool contracts.
  • Billionaire investor Mike Novogratz considers Bitcoin ‘digital gold’. Novogratz called the news of PayPal embracing Bitcoin ‘the biggest news of the year’ and forecasted that companies like E*Trade Financial, Visa Inc., MasterCard Inc. and American Express Co. will follow suit “within a year”, enabling merchants to transact in stablecoins and cryptocurrencies.
  • ConsenSys Software is developing a turnkey CBDC solution. This can speed up the ongoing digital transformation of money, bringing us closer to a time when digital currency wallets will be installed on every smartphone.
  • Grayscale wrote in its new investor study that the Covid-19 pandemic has been good for Bitcoin: more than half (55%) of U.S. investors are now interested in buying BTC, up from 36% a year ago. 40% are likely to invest in Bitcoin if it gets recommended to them by a financial advisor. The study also mentions that the number of BTC investors in the U.S. rose to 32 million — 11m more than in 2019.
  • An interesting survey by Cointelegraph shows that 61% of the high-net-worth investors in Europe have already bought, or plan to buy, digital assets. These investors have a total AUM of circa €719 billion, with €6bn already allocated in crypto.

In addition to new engagement from the establishment, there was also big news (good and bad) from among existing key crypto players, including:

Increasing regulatory control over the crypto sphere is another recent trend. For instance, four of BitMEX’s top executives have been charged with violating US anti-money laundering regulations by the CFTC (Commodity Futures Trading Commission). Meanwhile, one of the private key holders of OKex (one of the biggest crypto exchanges) is apparently being investigated by the Chinese police, forcing the exchange to halt all withdrawals in October.

Among other news and events that can’t be covered in detail in this report:

  • Australian fundraising platform Stax has announced that its client West Coast Aquaculture Group (WCA) will be the first in the country to accept crypto as payment during its upcoming IPO
  • FTX exchange has launched trading in tokenized stocks, including AMZN, AAPL, and TSLA. FTX users can now trade over 12 equity and crypto pairs using so-called fractionalized stocks — a product that FTX calls “first of its kind”.

We should also mention the important progress made by Ethereum, now firmly on its way to becoming a functional store of value. The genesis of the Ethereum 2.0 beacon chain on December 1 was the first in a series of upgrades that will make Ethereum more scalable, secure, and sustainable. We believe that Ether’s monetary power and investment potential will grow, too, though it’s a complex subject worthy of its own article. To learn more, visit Ethereum.org.

On-chain metrics

With the key price-influencing news stories out of the way, let’s take a healthcheck via some core on-chain metrics. For the most part, these paint a picture of an increasingly busy and energetic ecosystem:

Figure 2. Bitcoin Network Hashrate, Dec 2019 — Nov 2020 (As optimistic miners bring in more computational power, the network becomes more secure). Source: https://studio.glassnode.com/
Figure 3. Total Gas used in the Ethereum Network, Dec 2019 — Nov 2020 (Network usage has stabilized following the“DeFi summer”). Source: https://studio.glassnode.com/
Figure 4. Total value locked in DeFi products, in USD. Source: https://defipulse.com/
Figure 5. Stablecoins’ overall market cap nears $25B. Source: https://stablecoinindex.com
Figure 6. Ethereum beats Bitcoin in collected mining fees. Source: https://coinmetrics.io/
Figure 7. Ethereum surpasses Bitcoin in the number of network nodes (11256 vs 11079). Source: https://www.ethernodes.org/

The curious pattern of Bitcoin halving

Figure 8. Historical Bitcoin prices and cycles around halving events. Source: https://tradingview.com/

Among all the charts presented above, Figure 8 stands out as one of the most cyclical. This is because, up until now at least, Bitcoin’s regular block reward halving has particularly affected the supply and demand ratio and, as a consequence, the price.

The third halving took place in May 2020 after a fairly long bear market. Even though a lot of time had passed since the price lows of December 2018, it was still early for truly confident growth, as shown by the collapse in March 2020.

An interesting feature of the Bitcoin market is how price dynamics before and after a halving mirror each other. The graph clearly shows that the number of days between the price minimum and the first halving is the same as between the first halving and the new maximum (371 days). The same goes for the second halving event: it divides the cycle between the price minimum and maximum into two equal periods of 532 days.

The third halving occurred 518 days after the local price minimum. Projecting this logic into the future, the date we get is October 11, 2021. Thus, in theory (!), BTC will reach its next price maximum in about 10 months, possibly followed by a new bear market.

Of course, plenty can happen between now and then and we wouldn’t necessarily trust this pattern any more than we would the Mayan calendar, but we’d be interested to know the opinions of any other halving watchers out there! Meanwhile, it’s nice to be part of an industry that is now less dependent on the ups and downs of bitcoin than it ever has been before.

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Pipeline Update and Portfolio Structure

Reflecting all the activity above, the number of projects in the Fund’s pipeline has continues to grow. In October and November, the BR Capital team analyzed more than 50 potential investment opportunities. More than 20 of these projects were presented for consideration to the investment committee; the Fund went on to sign funding agreements with 4 of those, and a few more will be signed soon.

The new assets in the Fund’s portfolio include Transak, Archer DAO, Idle Finance, and Persistence. You are welcome to visit the portfolio section on our website to see the full list of Fund’s investments.

Figure 9. BR Capital holdings of Class A (structured in segments)

Our quantitative trading fund is also showing impressive growth in trading volume, both in the Bitcoin and USD equivalents.

Figure 10. BR Capital HFT volume, BTC
Figure 11. BR Capital HFT volume, USD
Figure 12. BR Capital holdings of Class B

Trading activity tends to spike in fall relative to summer, and with less than a month left before the Christmas break, we expect trading volumes to remain high in the near future. Projects that attract investment in this period can get an advantage over to those that will sign investment deals from February onwards. Taking into account the ‘one year to the new price maximum’ theory outlined in the previous section, this can impact the Fund’s investment activity in H2 2021.

BR Capital continues to be optimistic about the future of blockchain technology and digital assets. We are constantly expanding our investment outreach and strengthening our position as an authority in the industry, all the while following the development of the global financial system in these difficult but exciting times.

Investment fund focused on blockchain and the crypto economy.