No one ever said the crypto markets were boring and whooooa….. has this year lived up to expectations. So far in 2024, we have Larry Fink of BlackRock leading the charge, the SEC do a couple about-faces, a changing “crypto friendly” political climate and now, the macro-economic climate is really coming front and center. Through all of this, we have had many new participants in the marketplace, but these players are not use to the volatility, which can be scary. Crypto volatility is unlike any other market, but it is precisely this volatility which translates into outsized performance. Let’s jump in and unpack this further.
Views on Volatility
Bitcoin, ether and the crypto market in general are a roller coaster. We’ve already had a couple of large pullbacks this cycle even as we are in this new bull market, which began in earnest at the end of 2023. For those that have been here awhile, these are expected. However, it’s also true that when they occur there are inevitable concerns that the sky is falling, and the air is rife with fear and panic. I get it. Everyone loves 300%.. 400%.. 500% gains. That’s why we’re here. But no one (nobody, not one person) enjoys drawdowns.
Yet, volatility is a natural part of these cycles – nothing goes up in a straight line, unfortunately. Sure enough, we hit a doozy this week on Sunday the 4th, resulting in a pullback of approximately 26% in bitcoin with ether and other crypto assets following in kind.
With the Fed’s “higher for longer” policy”, is a future rate cut already too late? What about the Japanese market which melted down? Whatever the initial driver, the downward pressure triggered a massive futures liquidation to the tune of $1B+ in a 24-hour period, which resulted in a huge plunge. Of course there are always macro issues that will arise. That’s the market. And in some cases, like this one, it can start a cascade that is… uncomfortable. What’s important to know is that EVERY bull market has had major pullbacks. It’s just a natural part of it.
Let’s look at the last bull cycle, from 2019 through 2021. The chart below points to the fact that we have an average of five (5!) drawdowns every bull cycle. In this case of the most recent this week, it was reminiscent of March 12, 2020, when we had a similarly scary drawdown. Thirty days after, however, the crypto market added more than 40%, and 45 days out it was almost 100%. Simply, crypto recovered faster than any other asset class. In our case this time, already the markets already recovered over half of the losses from Sunday.
Bitcoin’s Bull Market Drawdowns
My point here is that drawdowns are a part of it and are something we should simply expect and accept. Case in point, Noted economist Raoul Pal noted that even in the midst of this violent shakedown he is not selling anything. Moreover, this is where long-biased asset managers like us take advantage of the opportunity to “buy the dip”.
Supercycle Me
Which leads me to the important part of this blog. In the crypto markets we see the bull cycles start before the Bitcoin Halving then continue approximately 18 months after. This has been incredibly consistent since the first Halving event.
This current bull run may be longer than this and, frankly, we expect it to be. Let me explain. The first driver everyone typically looks at is the halving cycles, which (as you probably know) results in the daily supply of new bitcoin being cut in half. This happens every four years and is generally accepted as a major catalyst that drives price higher. For more detail, please see my post from March 21, 2024.
But what if that wasn’t the only driver? What if, in fact, there was a direct correlation with monetary policy. As it turns out we can see that we do have such a correlation. Looking back, we can see that the markets have experienced monetary expansion – that is more fiat currency pumped into the system – every four years on a remarkably consistent cadence. This has gone on behind the scenes and has seemingly taken second fiddle to the very well-known halving events it has been consistent and parallel with each of the four halving cycles.
In fact, worldwide monetary expansion (which is often but not always led by the US) has timed almost perfectly with the Bitcoin Halving cycle and, when mapped together, we see a very clear picture. When money is printed, bitcoin runs. When it’s pulled out of the system, it falls. And as bitcoin goes, so do the crypto markets.
Global Money Supply v Bitcoin Growth
We see this in the graph above, which shows growth in global monetary supply after the halving every 4 years and occurring within a few months of the actual halving.
Until now of course. This cycle, we’ve not had QE yet or any type overt balance sheet expansion. In fact, we’re still wrapping up Quantitative Tightening (QT) here in the US. But that’s about to change. First, we’ll start the more accommodative policy with the cutting of interest rates. That’s just the beginning though, as ultimately fiscal problems and annual public deficits will force the Fed to act just like it has every time in the past. We estimate QT to end in Q1 of 2025. Then, some issue will “force” the Fed to act with some form of balance sheet expansion just as they did as early as last year when the Fed bailed out Silicon Valley Bank and Signature Bank to the tune of ~$500B.
This time around, we expect massive expansion, pushing it north of $18T, estimated here in the US alone. (For reference, in 2020 it ballooned from $7T to $12T, so we’re at least in the same ballpark as last time. And that drove markets mightily.)
Back to the point. What we have seen is every time the global money supply increases crypto goes through the roof. It happened in 2008, 2010, 2012, 2016, 2020 and even the “small” version in the US with the bank bailout in 2023. It’ll be the same this cycle and when that happens, traditionally investors turn to gold, the “go to” safe-haven asset.
Now, bitcoin is regarded as a safe-haven asset that does the job better than gold, according to BlackRock, Fidelity, AllianceBernstein and many other major asset managers. In fact, Larry Fink recently noted that the entire crypto market was a “flight to quality”. This is where the big players are going now.
Since the Fed’s policy change is expected to start nine+ months later than in previous cycles, this leads us to conclude we’ll see a longer bull run this time.
Of course, supply constraint (we just had the Halving event in April) and demand shock via the Bitcoin and Ethereum ETFs will play a part. But the impact of money printing is a much bigger deal and since it’s starting later this cycle. As such our base case is that we’re going to see this bull run through Q1 2026. And quite possibly beyond.
This is really good news for investors, and could very well result in a super cycle, which would drive prices way beyond our current expectations.
In Closing
That was pretty dense so let me sum it up. We’re at the best time in history to invest in digital assets. We have a supply shortage, demand shock, and soon the biggest driver of all, some future Fed solution to some monetary/fiscal problem that makes the “Money Printer Go, Brrrr…”
In the past, QE/money supply expansion started around the Halving and drove markets to all-time highs. This time we’ve already seen all-time highs and the Fed’s move to more accommodative policy just around the corner.
When it does, there are many who will be surprised to see crypto prices skyrocket (you won’t be of course.) And, while we expect bitcoin move first, if the past is any guide to the future the high-quality blockchain innovation assets will follow with greater multiples, which is what we are all looking forward to (more on that next blog.) It’s all just a part of the cycle. And this one my friends, is Super.
That’s it for now. Until next time be well, stay safe, and I’ll keep Decrypting Crypto for you!