2021 Bitcoin Market Outlook - $40,000 is Only the Beginning
Abstract
As Bitcoin price continues to make new highs in 2021, it is imperative to understand that the current Bull Cycle (March 2020 - Present) has been, and continues to be, disproportionately driven by institutional investment, while retail investors have remained slow to participate. This is a powerful signal that the present Bitcoin Bull market is still in its early stages. A key characteristic of early Bull Market’s is heavy institutional accumulation during the early stages of the Bull Market. We are presently witnessing this unfold in Bitcoin through the data below:
Record demand for mining rigs:
Institutional Miners are absorbing the supply of mining rigs.
Price vs Network Hashrate advancing similarly to 2017.
Google searches for Bitcoin are half the levels that were seen at then end of 2017 - the retail frenzy has not yet begun.
Bitcoin Exchange Activity:
Institutional trading volume continues to outpace retail exchange volumes.
Percentage of Bitcoin held on exchanges is steadily declining (2020 - present).
The number of “Whale Wallets” is at all time high and growing.
Bitcoin’s growing Crypto Market Dominance vs Alt coins – Institutions do NOT buy Alts.
Central Bank Monetary Policy continues driving Wall Street & Large Corporations to Bitcoin as an alternative store of value and inflation hedge.
Comparing the current Bitcoin Market to Previous Cycles (2017 vs 2021):
Historical performance in the year following a Halving event.
Active Address data is signaling a lack of retail participation.
Lack of significant price corrections since the March 2020 lows suggests this Bitcoin Bull Market is still in its early stages.
Background:
Blockware Solutions is one of the largest brokers of ASIC mining rigs in North America, assisting clients with the acquisition and sale of mining rigs directly from manufacturers and through trusted Peer-to-Peer channels. This sales volume and community engagement has established an extensive network that ranges from America’s largest Bitcoin Miners to the retail part-time hobbyist. The transactions, behavior, and sentiment of this network has provided insightful signals into the future trend of the Bitcoin Spot Market.
The Gartner Hype Cycle: a graphical and conceptual presentation of the maturity of emerging technologies through five phases
Markets are dictated by human psychology, which is why similar patterns and characteristics are repeated across distinct markets, regardless of the asset. In traditional markets, institutional sponsorship is seen as a positive indicator for the future of an investment. Institutional sponsorship simply refers to the ownership of an asset by reputable mutual funds, banks, pension funds, venture capital firms, hedge funds, and other large institutions. These professional investors have teams of analysts researching thousands of the best products and they typically deploy capital with long time horizons (2 to 4+ years). It is great confirmation to see these institutions deploying capital to the same investments as you. This is also referred to as “following the Smart Money,” because they are the largest accumulators during the early stages of a bull market. Regardless of the asset class, retail investors are typically late to the trade. At market tops, when euphoria is at its highest, outflows (selling of the asset being traded) tend to accelerate for institutional investors while inflows (buying of the asset being traded) are at their peak for retail investors. The inverse is true at market bottoms.
During the March 2020 crash, we witnessed retail capitulation in the Bitcoin spot and Bitcoin Mining markets. In the 9 months that have passed since those ~$3,850 lows were made, we have witnessed massive capital inflows from institutional “Smart Money” gaining exposure to Bitcoin. The institutional sponsorship has continued to accelerate in 2021 while retail interest has remained relatively mild despite the new all-time-highs. The demand for Bitcoin Mining Rigs specifically, continues to be disproportionately driven by institutions.
Record Demand for ASICs - Institutional Miners Absorbing the Supply of Mining Rigs
In our previous research report published in March 2019, The Mining Market is Not Immune to Human Psychology, we correctly identified the bottom of the Bitcoin Mining Market by identifying the institutional accumulation of mining rigs while retail miners capitulated. Beginning in late Q2, 2020, after the Halving forced many retail miners to capitulate, we witnessed a similar dynamic. Since the Halving occurred there has been a massive expansion of institutional Bitcoin Mining activity which continues to accelerate in 2021. We are witnessing unprecedented demand for next-gen mining rigs which is creating lead times of 9+ months for the newest models like the Bitmain Antminer S19 Pro. The market caps of publicly traded Bitcoin Mining companies have skyrocketed as they continue to increase their hash power in 2021. At present valuations, each PH/s of hash power is worth approximately $2.48 million based on the respective hashrate and market cap of the below public companies.
Although this activity is making the Bitcoin Mining landscape much more competitive, it is also providing a positive signal for the Market. Growing institutional investment in Bitcoin Mining indicates growing conviction in the future of Bitcoin. Institutions are not deploying hundreds of millions of dollars on mining rigs to make a quick trade in Bitcoin. They are investing in assets (mining rigs and mining facilities) with long-term life cycles (3-5 years) that cannot be repurposed nor quickly liquidated at fair market value. They have conviction in the long-term future of the network and are putting their money where their mouth is. Below is a list of some of the recent, notable institutional investments in Bitcoin Mining since the Halving occurred in May 2020:
Foundry - Digital Currency Group invests $100 million in Bitcoin Mining through its newest subsidiary, Foundry.
RIOT Blockchain (RIOT) - Increased their hashrate to 842 PH/s in January 2021, upgrading to 9,540 next-generation Bitmain mining rigs and are expecting to add an additional 28,100 S19 mining rigs in 2021 to bring their total hash rate to over 3.8 EH/s by October 2021.
Marathon Patent Group (MARA) - Purchased an additional 70,000 S19 mining rigs from Bitmain to be delivered between July and December 2021.
Hut 8 (HUTMF) – Hut 8 secured a $6.1 million investment from Fidelity, who now owns 10.6% of Hut 8. Hut 8 has announced that they will be adding over 275 PH/s of New MicroBT mining rigs between July and November 2020.
Core Scientific - Purchased an additional 59,000 S19 & S19 Pro miners from Bitmain to be delivered throughout 2021.
Bitfarms (BFARF) - Purchased an additional 3,000 M31s miners from Whatsminer with an estimated delivery of February 2021, which will increase their total output to over 1.2 EH/s.
If the 2021 Bitcoin Bull Market was in its later stages, lead times for manufacturer direct orders would be much shorter as institutional interest would have subsided and demand will be driven by retail miners paying significantly higher premiums. This is precisely the dynamic we witnessed in 2017 with the demand for Antminer S9’s at the market top.
Bitcoin Price vs Network Hashrate is Advancing Similarly to Early 2017
Network Hashrate is a lagging indicator for Bitcoin price. However, examining how price is developing in relation to network hashrate can provide useful insight into what stage of the Bitcoin Market Cycle we are presently in. During the early stages of the previous Bitcoin Bull Market, Network Hashrate advanced steadily from 2015-2017, outpacing the rate of Bitcoin price appreciation until Bitcoin entered price discovery mode. After Bitcoin began making new all-time-highs, price rallied much faster than hashrate.
Source: BitInfoCharts
The current Bitcoin Price vs. Hashrate chart (below) looks strikingly similar to the Price vs. Hashrate chart from January 2017 (above). Price has once again caught up to the steadily advancing network hashrate just as Bitcoin enters price discovery mode.
Source: BitInfoCharts
Google Searches for Bitcoin are only Half the Levels Witnessed during the 2017 Mania
The lag in retail participation is evident upon examining Google Trends relating to the search term “Bitcoin.” Although Bitcoin has surged this year and been prominently featured on CNBC and other mainstream financial news outlets, general retail interest remains relatively low. The price of Bitcoin is up nearly 100% from its 2017 all-time-highs, yet Google searches for Bitcoin are only ~50% the 2017 levels. This is a clear indication that retail investors are less interested in Bitcoin now than they were in late 2017, despite the fact that institutional participation in Bitcoin is significantly greater now than ever. This underscores that the current Bitcoin Bull Market is still in its early stages as the retail frenzy has not yet begun.
Google Trends results for search term “Bitcoin”
Towards the end of bull markets, retail investors become over-enthusiastic as they are late to the party and experience FOMO (Fear of Missing Out), while a majority of institutions (a bulk of the capital) have already established their positions. The retail investor is the last buyer, therefore, all buying power is now exhausted creating an imbalance in favor of sellers. This imbalance establishes market tops. This is far from the case for the current Bitcoin Market, as institutions continue to increase their exposure.
Institutional Trading Volume Continues to Grow, Steadily Outpacing Retail Exchange Volumes
Throughout 2020, CME Bitcoin Futures volume grew steadily and continued to dwarf volumes on retail exchanges like Coinbase & Bitfinex, again illustrating that the Current Bitcoin rally has been disproportionately driven by institutions. CME Bitcoin Futures are solely traded by institutional investors. Each CME Bitcoin Future Contract is equal to 5 Bitcoins: to trade the minimum 1 Contract it will cost approximately $175,000. The product is designed specifically for institutions. Therefore, examining the trading volume on the CME Bitcoin Futures can provide valuable information regarding institutional participation in Bitcoin.
Volume data sourced from TradingView
In December, the CME published a report, Bitcoin Futures Turn Three: The Recap, to examine the first 3 years of CME Bitcoin Futures trading. The data depicts steadily rising demand for Bitcoin among institutional investors since the product launched in December 2017.
Retail volumes are highest at the market peak (late 2017 and early 2018). This is a common characteristic of a market top. Conversely, we see that CME volumes (institutional participation) have been steadily increasing since late 2018. Grayscale Bitcoin Trust is also experiencing disproportionate demand from institutions. At the end of 2020, institutional investors accounted for 93% of Grayscale client profiles. This massive divergence between institutional and retail interest provides a strong that it is still early in the Bull Market Cycle.
Source: Grayscale 2020 Q4 Digital Asset Investment Report
Bitcoin’s Growing Market Dominance vs. Alt’s – Institutional Investors do not buy Alts
Bitcoin’s market dominance as a percent of the total Crypto Market has increased by ~19% since March 2020 and continues to grow. Bitcoin’s market dominance steadily declined during the late stages of the 2017 Cycle while Alt tokens captured greater market share. Heavy retail speculation driven by the ICO craze caused Bitcoin market dominance to fall to ~35% of the total Crypto Market even though Bitcoin Price was still appreciating at the time.
Source: CoinMarketCap
Bitcoin price is rapidly increasing and Bitcoin’s percentage of the total Crypto Market Cap is rising as well. This is because the current Bull Market is being driven by institutional investors, and most institutions do not buy Alt’s. Many Alt tokens lack the liquidity, proven track record, and the fundamental “Digital Gold” narrative that applies to Bitcoin. When this Bull Cycle enters its later stages, we expect Alt tokens to increase their market share as more retail investors enter the market looking for cheaper alternatives to Bitcoin.
The number of “Whale Wallets” Continues to Increase
During early stage Bull Markets, institutional investors accumulate large positions, a dynamic we are currently witnessing in Bitcoin. Sizeable single-address Bitcoin holders are increasing rapidly. As of December 2020, Bitcoin addresses holding 5+ Bitcoin grew by 8,842 and addresses holding 1,000+ Bitcoin grew by 302.
During late stage Bull Cycles, we see the inverse dynamic - the number of wallets holding small amounts of Bitcoin grows rapidly while the number of wallets holding large quantities of Bitcoin decreases significantly. This is a classic characteristic of market tops as early institutional investors sell their positions to late-arriving retail participants. Fortunately, we are witnessing the exact opposite in 2021, again indicating that this Bitcoin Bull Cycle is in its early stages.
Source: Chainalysis via CoinDesk
The Percentage of Bitcoin Held on Exchanges is Steadily Declining
Exchange outflows have typically been a bullish signal for Bitcoin. This is because the supply of Bitcoin becomes even more constrained as demand continues to grow. Even more bullish is the fact that such massive outflows are occurring presently while Bitcoin is at all-time-highs. It appears the broader market has truly begun to utilize Bitcoin as a store of value and inflation hedge instead of just a vehicle for speculation.
Monetary Policy Driving Wall Street to Bitcoin as an Alternative Store of Value
In December 2019, we published a newsletter titled The Global Maco is Brewing a Perfect Storm for Bitcoin, where we outlined the Macroeconomic themes that we believed would fuel the next parabolic Bitcoin Bull Market. Specifically, we discussed how the reckless monetary policy (money printing) implemented by the FOMC and other central banks would continue to drive traditional investors to Bitcoin as an alternative store of value or “digital gold.” The response to the COVID pandemic by governments and central banks around the world has made this theme more relevant than ever.
The digital gold narrative for Bitcoin became increasingly accepted among traditional investors in 2020, as we witnessed the total supply of US dollars in circulation increase by 23.6% over the course of the year. 75% of all USD inexistence was produced in the past 12 years. 2020 proved, once again, that Central Bank Monetary Policy is the dominant force driving Equity Markets higher. The most recent round of stimulus launched in response to the COVID-19 outbreak helped fuel a Perfect Storm for Bitcoin. Seemingly, infinite QE and negative interest rates gave institutions the push they needed to explore alternative stores of value outside of the US Dollar. Legendary money managers, billion dollar corporations, insurance companies and many legacy institutions have already embraced Bitcoin because its monetary policy is dictated by code, not the whim of central bankers.
MicroStrategy opened the floodgates in August when they announced they had shifted $250 million of their company treasury out of USD and into Bitcoin. That original $250mln is now worth ~$751 million. Many other legacy institutions have also begun to embrace Bitcoin. The list below contains just a few of the recent bullish Bitcoin announcements:
Citi Bank - published a report calling Bitcoin “21st Century Gold” and predicted a $318,000 Bitcoin Price by the end of 2021.
Morgan Stanley - acquired 10.9% of MicroStrategy in order to gain exposure to Bitcoin.
Guggenheim - Macro Opportunities Fund seeks investment exposure to Bitcoin indirectly through investing up to 10% of its net asset value in Grayscale Bitcoin Trust," allowing them to allocate up to $530M to bitcoin. Stating that, “...Bitcoin is worth $400,000 / BTC based on scarcity & relative valuation of Gold”.
JP Morgan - sets $146,000 price target for Bitcoin.
Goldman Sachs - entering Crypto Market “soon” with custody services.
Stanley Drunkenmiller - disclosed his long-Bitcoin (and long-Gold) positions as inflationary hedges, stating that, "... if the Gold bet works, the Bitcoin bet will probably work much better because it has a lot more beta to it.”
Paul Tudor Jones - $22 Billion Tudor BVI Fund is holding a single digit percentage of its assets in Bitcoin as a hedge against inflation.
MassMutual - announced that they have allocated $100 million to Bitcoin. 0.04% of their total investment assets.
Square’s Cash App - reported Bitcoin Quarterly Revenue Exceeded Fiat Revenue - Soaring 367% to $306 million. In Q3, Square’s CashApp Bitcoin Revenue soars 1,000% to $1.63 Billion.
PayPal - added Bitcoin and saw enough interest following its October 21st Bitcoin announcement that the company has increased weekly crypto purchase limits from $10,000 to $20,000.
Halving Supply Shock - Current Similarities to Historical Price Action
Historically, Bitcoin Market Cycles tend to follow a similar 4 year evolution catalyzed by Reward Halving events. Halvings are significant because they remove potential sell pressure from the Market. It is crucial to understand that Miners are the primary source of capital outflows in Bitcoin. They receive all of the newly issued Bitcoin and they must sell Bitcoin in order to fund their mining operations. This is why Bitcoin has performed well in Halving years, and even better in the years immediately following a Halving event. The average return in Bitcoin the year a Halving event occurs is 206%, the average return for the year following a Halving event is 3,382.5%. The most recent halving event occurred in 2020. If history repeats itself, 2021 is set to be a major year for Bitcoin price discovery. The historical average return of 3,382.5% would see the price of Bitcoin reach nearly $700,000 by the end of 2021.
Data sourced from TradingView
Active Address Data is Signaling a Lack of Retail Participation
Examining the number of Active Addresses on the network - those who either send or receive Bitcoin - also provides a bullish signal for 2021. During the late stages of the previous Bitcoin Bull Market, we witnessed a significant increase in the number active addresses as Bitcoin rallied and more retail participants entered the market chasing gains. From September through December 2017, when Bitcoin made its previous ATH, price appreciated by approximately 300% while active addresses increased by 59.49% as retail investors flooded the market. This type of retail frenzy is a common characteristic of market tops. Fortunately, this has not been the case in 2021. Despite Bitcoin price appreciating by over 208% since September 2020, Active Addresses have only increased by 17.65% - signaling a lack of retail interest despite Bitcoin’s rapid appreciation. This further signals that the current Bitcoin Bull Cycle is still in its early stages as Bitcoin Price continues to be disproportionately driven by institutional investors.
Data sourced from CoinMetrics
Lack of Significant Corrections Signaling this Bull Market is Still in Its Early Stages
In any asset, you can not expect to capture parabolic gains without enduring some corrective volatility. This is especially true for Bitcoin. Last Bull Cycle (2015-2017), Bitcoin price roared from $162 to a high of $19,981. Bitcoin experienced 10 significant corrections averaging 30.53% along its way to that 12,234% gain in 2017.
Upon examining Bitcoin’s price action since the March 2020 lows, you will notice that there have been only 2 significant corrections over 20%. With a maximum drawdown of 26.6%, this underscores how steady the demand is for Bitcoin with each dip getting bought so quickly. It also provides further evidence that the current Bull Market is still in its early stages.
Data sourced from TradingView
As previously mentioned, Bitcoin has performed best in the years immediately following a Halving event. Despite an incredible 304.71% return in 2020 (Halving year), Bitcoin is poised to perform even better in 2021. The Bitcoin Market has matured significantly since the 2017 mania, so the magnitude & frequency of corrections this cycle may not be as drastic, but if history repeats itself (or at least rhymes), then larger corrections will occur as price discovery continues. It is important to remember that corrections are healthy for Bitcoin.
Conclusion
In 2020, Bitcoin emerged as its own asset class on Wall Street. Even though it has rallied over 700% from the March 2020 lows, there is significant evidence that signals this Bitcoin Bull Market is still in its early stages. Retail participation has been minimal, while institutional adoption is accelerating as the Macro Economic environment continues to brew a “Perfect Storm for Bitcoin”. Reckless central bank monetary policy continues to drive Wall Street to the “Digital Gold” narrative. Each day more institutions are publicly gaining exposure to Bitcoin, but in our opinion the true frenzy has yet to begin. Present data from the Bitcoin mining market, exchanges, and wallets all suggest that this Bull Cycle is still in its infancy. This is further supported by historical Bitcoin price and hashrate trends in years following a Halving event. There will only ever be 21 million Bitcoin in existence. Presently, there are ~46 million millionaires in the world, if each millionaire wanted one Bitcoin it would not be possible. As Satoshi Nakamoto said, "...it might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self fulfilling prophecy.”
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Co-Authored by: Sam Chwarzynski, Mason Jappa, and Tanner Davis
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