In this month’s market report, we examine bitcoin’s current rally and assess what is in store for 2021.
After an eventful year, bitcoin’s price closed higher than the all-time high established in December 2017. The new year was kicked off with a swift advance to $42,000 by January 8, before BTC-USD reversed sharply and found support near $30,000.
With bitcoin now trading around $35,000-$36,000, we take a look at on-chain metrics to assess whether or not the cycle top was in fact $42,000.
The chart below shows the rapid ascension of the price of bitcoin in the past few months to fresh highs, so far outpacing the price performance witnessed after the third block subsidy halving in 2016/2017. Previous cycles topped out between 10–18 months into each epoch:
One bitcoin valuation metric that can be used to identify a possible top is the Market Cap to Thermocap ratio. As shown by the chart below, bitcoin is not considered overvalued yet compared to the thermocap. Notice that in the mania phase of the 2017 bubble, the Market Cap to Thermocap ratio entered the red zone and went above 45:
Similarly, the indicator signalled that the bitcoin market was overheated in December 2013, when the ratio entered the red zone and marked the top of that cycle, after which bitcoin fell from above $1,100 to an eventual bottom near $170.
The Puell Multiple, another on-chain metric related to miners, is detailed below and essentially gives a similar outlook, the bitcoin market is not yet overheated as the Multiple is still below 4.5, where moves above this value have historically marked cycle tops:
Looking at the technical indicators, the bitcoin price has moved further away from the 200-day moving average (MA) as shown by the Mayer Multiple. In recent weeks, the Mayer Multiple has hit the 2.4 threshold several times. For values below 2.4, it is known as the accumulation zone where it has been profitable buying and holding bitcoin. Once the Multiple moves above 2.4, it has historically been followed by sharp reversals:
Therefore, the Mayer Multiple clearly marks $42,000 as a top since the value moved above 2.4. However, it’s not as simple as that, as observing the 2017 bull run, we see that the 2.4 threshold was tested several times before the ~$19,700 peak.
Traders should keep an eye on the Mayer Multiple, as bitcoin could move lower, bringing the Multiple into the accumulation zone and then above it again, possibly several times, to confirm a cycle top. If $42,000 was the top, then bitcoin could potentially test the 200-day MA and the Mayer Multiple will trend towards 1.
Another technical indicator that has been useful for identifying tops in long-term market cycles is the Pi Cycle Top Indicator. Unlike the Mayer Multiple, this metric suggests that $42,000 was not the peak of the current run and that BTC-USD has room to go higher:
When the 111-day MA touches and starts to move above the (350-day MA)x2, then it will mark a cycle top. The indicator has previously highlighted peaks in three cycles within four days.
The Net Unrealised Profit/Loss (NUPL) indicator was just shy of reaching of the Euphoria zone as bitcoin reached $42,000 and we may see bitcoin remain in the Belief-Denial zone before the NUPL breaches 0.75 and marks a top. however, it could also be possible that the cycle top occurs as the NUPL is in the Belief-Denial zone, as it did in summer 2019:
Going forward, if the NUPL breaks below 0.50 then it will confirm $42,000 as the cycle top while if the NUPL remains above 0.50, then there is a chance that bitcoin can continue higher.
Despite the price of bitcoin currently being roughly double the previous all-time high from December 2017, coins that have not moved in the past 3 or 5 years have not reached the highs seen during the late stages of the 2016-2017 bull run.
The dormant circulation metric is illustrated above, and shows that the 5-year dormant circulation has so far only spiked as the price of bitcoin moved above $13,900, the 2019 high. Even since the price pierced the $40,000 handle, bitcoins that have remained dormant for more than 5 years were barely transacted compared to the 2016-2017 bull cycle.
Several fundamental factors favour a bullish outlook on bitcoin over the next 12 months.
Firstly, a highly anticipated network upgrade will likley go live in the first half of 2021: Schnorr-Taproot-Tapscript. Check out our blog series on the bundled upgrade, with the first part covering Schnorr signatures, the second covering Taproot, and the final part looking at Tapscript. Other promising Bitcoin-related projects to watch out for in 2021 include CoinSwap, Utreexo and Stratum v2.
Secondly, the fallout of Covid means that interest rates are likely to remain near the zero lower bound and there will be political pressure for more stimulus from policymakers. Fixed supply assets such as bitcoin and commodities are expected to outperform as inflation expectations start to grow. The USD’s M2 money stock grew around 20% in 2020, compared to the annualised growth of 1.8% in bitcoin’s supply:
Thirdly, insitutional adoption of bitcoin is set to continue, with the end of 2020 marking the entrance of a new type of institutional investors, those where committees make the decisions which will give bitcoin more legitimacy going forward. The chart below shows the bitcoin treasuries with more than 5,000 BTC:
We’ll be keeping an eye on the on-chain indicators outlined in our report to assess how the current cycle may play out. Follow us on Twitter and subscribe to our Medium publication for updates.
Read the full report here: https://speakerdeck.com/interdax/crypto-market-report-bitcoin-outlook-2021
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