Bitcoin: Focus on the Halving Cycle

May 14, 2021

Diego Tremiterra


Key Takeaways

  • Bitcoin’s still up +320% in the last 12 months.
  • Bitcoin’s share of total crypto market cap has shrunk to 44% from 70% in early January.
  • Altcoins (other than Ethereum) have continued growing market cap at a faster pace than BTC and ETH.


Bitcoin in the Short Term

Since our initiation of Crypto coverage in March, Bitcoin hasn’t done much (price-wise) besides moving violently sideways (the last 24h have been strong evidence of that). This has led to some frustration for short-term-oriented holders, especially given Bitcoin’s track record of 213% CAGR over the last decade (this implies, on average, tripling every three years).

The big announcements of companies swapping cash reserves for Bitcoin reserves eased in recent months and well-known investors became less enthusiastic about speaking bullishly of Bitcoin on CNBC. Is the big move done?

Forgive us for the setup question, as we have no idea… What we do know is that, despite making fewer headlines than altcoins (more on this in a bit), Bitcoin has slowly continued to accrue important intellectual capital and institutional interest – this is, to us, one of the most important indicators to follow, as we see it as a proxy for how people much more knowledgeable than us are thinking about the space. Consider the following:

  • Michael Daffey, a long-time Partner at Goldman Sachs (held the role of Chairman of Global Markets at GS) and one of London’s most well-connected finance professionals, joined Galaxy Digital in a testament that he believes, at least currently, Crypto > Traditional Finance.
  • John Dalby, the CFO of Bridgewater (world’s largest hedge fund with $140 billion under management), left Ray Dalio’s firm to join NYDIG, the Bitcoin subsidiary of Stone Ridge (a $10bn Asset Manager). Why would someone leave the world’s largest hedge fund to join a significantly smaller fund, with no reputation and unproven investment track record? The answer is that NYDIG has partnered with Fidelity Information Services, which processes 75 billion transactions around the globe per year, to enable US banks to offer Bitcoin to their clients in the next couple of months. Between the lines, this means that around 300 million US bank accounts could soon be enabled to buy, sell or hold bitcoin. That’s 3x the estimated number of holders today.
  • Morgan Stanley began offering to clients (who hold north of $2 million in assets at the bank) access to three funds that enable exposure to Bitcoin with limit exposure of 2.5% of their total net worth
  • Goldman Sachs started its own crypto trading desk
  • Ebay CEO came out saying that they’re exploring cryptocurrency payment options
  • Norway’s Minister of Climate and the Environment (one of the most energy-focused nations in the world) owns Bitcoin
  • Mark Zuckerberg has been rumored to be buying BTC (personal investment rather than through Facebook).

This is all since March of this year.

To be fair, the only real major companies with disclosed allocations to Bitcoin so far are Microstrategy, Tesla (which has stopped accepting Bitcoin for payment), and Square (only a small allocation to it). Whilst this would have been labeled as a “Blue Sky” scenario just a year ago, given the momentum into 2020 year-end and early 2021, it’s not overly dramatic to feel a bit nostalgic due to the lack of new companies moving their cash reserves over.

Bitcoin in the Long Term

Maybe this is where we should take a step back. Bitcoin is still +320% above its level one year ago, significantly above its average annualized rate of return in the last decade.

As a reminder, we explained in our “Bitcoin Foundations without Tribalism” how the most prevalent argument in favor of Bitcoin is for its widespread adoption as a vehicle to prevent currency debasement; said differently, to protect your purchasing power from inflation.

This narrative is based as much on Bitcoin’s technical characteristics (go read the foundations piece) as it’s reflexivity (i.e. if the arguments supporting a narrative are sufficiently powerful, then the narrative itself becomes a driver of reality). In other words, the more people believe the Bitcoin narrative, the more adoption there is, making the bull case for Bitcoin even stronger.

Consider this:

  • Adoption has steadily and dispassionately continued to grind higher.

  • Supply has continued to move off exchanges, which in Bitcoin’s world is synonymous with people not wanting to trade the asset, but rather store it in a secure and safe place (i.e. cold storage) and off the exchanges.

  • As mandated by the protocol, the inflation rate for Bitcoin continues to be stable below 2%, and will only continue to decrease going forward. With the last CPI print coming in at the highest level since 2008 at 4.2%, this will surely serve those who like to point to Bitcoin as a superior inflation hedge (we still think that this inflation will mainly be transitory based on year-on-year low base effects).


  • We know that Bitcoin is currently in the middle of its post halving rally, a cycle that lasts, on average, for 446 days (the last halving was May last year) and would imply the rally to last until August 2021. Pantera Capital finds that there seems to be a relationship between the magnitude of the halving and the price performance of the post-halving rally. If this relationship is to hold true throughout this cycle (a big if), then Bitcoin should be around $115,000 by this August.
  • Additionally, as flagged by Pedro de Noronha at Noster Capital, if we plot this current rally against the other two post-halving rallies, we can see that the current price appreciation is gently following the interval set by prior events (better than 2016 and worse than 2012).

All of this is to say that the best way we have found to digest the thousands of new daily developments is to focus on long-term analysis across cycles, adoption updates and to put price appreciation and volatility in perspective. This isn’t by any means a way to assess if Bitcoin is a valid investment or not, but simply a way to get some directional sense of where we might be going, and why (or, at least, to make the price swings a little more digestible).

For those of you who like to think long term, keep this in mind when prices move heavily against you:

  • There is only one year since 2012 when bitcoin has had a lower low than the previous year.

  • Bitcoin, as an asset, is still quite small when compared to other asset classes, and a small allocation of overall global wealth could imply significant value for the asset.

  • There seems to be a relationship between the number of people using Bitcoin and price (#networkeffects), which implies that for every new million Bitcoin users, the price increases $200 (this has held true except for Feb 2016). This analysis has been done by Pantera Capital, and while we’re skeptical about its ability to accurately forecast price, we find it beneficial to understand, directionally, where the asset could be headed.


Beyond Bitcoin

As written by Dan Morehead at Pantera Capital:

“When an investor asks, “Should I buy Bitcoin?”, I answer YES. When they ask if they should buy other tokens, I say YES.  The critical first step is to get off zero – get exposure to something in blockchain. 

Bitcoin is a solid proxy for the blockchain disruption.  However, it’s not everything. Bitcoin is about half of the market cap of the industry – but possibly less than half of the future opportunity.”

Consider this:

  • Bitcoin dominance peaked in January 2021. This means that, whilst it has continued to do well this year (despite moving sideways for several months now), altcoins (i.e. cryptocurrencies other than Bitcoin) have been outperforming and rapidly gaining market share.

  • More interestingly is that not only altcoins have been taking market share, but that smaller cap projects have paved the way for this outperformance. Ethereum to Bitcoin market cap has doubled in the last year, but other altcoins have increased their ratio against Bitcoin even more significantly.

This is a result of the increased enthusiasm around Decentralized Finance (DeFi), which fundamentally supports the thesis that a new financial infrastructure is currently on the rise, enabled by blockchain technology and constructed in different layers, each of which will have several different projects (and tokens) competing for market share.

DeFi is a real thing (in terms of volumes, at least): there are now $50 billion locked into DeFi protocols and decentralized exchanges facilitate over $70 billion in monthly trading volume. Ethereum, the poster child of DeFi, is now worth more than every US Bank except for JP Morgan. As a consequence of the increased interest in DeFi, stablecoins have risen to prominence given the utility (i.e. liquidity) they provide in the decentralized finance system. The risk embedded with these stablecoins is the uncertainty about what really backs them up (Tether, for example, is supposed to be 100% backed by USD, but in reality, it’s significantly less than that – a real red flag).


A Matter of Energy

Bitcoin fell all the way down to $47,000 in the last trading hours before stabilizing around $50,000 at the moment of writing. Common knowledge attributes this to Elon Musk’s tweet about how Bitcoin is wasteful (in energy terms), which led TSLA to stop accepting Bitcoin payments (we’re not that sure how many Teslas were bought using Bitcoin, but our gut tells us that not that many…).

More interestingly, Tesla’s looking at other cryptos that “use <1% of Bitcoin’s energy/transaction”… we hope this is not another Dogecoin pump, but at this point, we surely have no certainty. *Editors note, this probably is another Dogecoin pump.

More important question – how much energy does Bitcoin consume? Currently, around 110 Terawatt Hours (0.55% of all electricity produced). That number becomes significant or not depending on one’s view of how important Bitcoin is for society overall.

That said, we also believe that to be the wrong question to ask. The right question is how much carbon does its adoption emit? That depends both on the energy consumption of the network as well as the sources used to generate that same energy.

Consider this:

  • We quote Nic Carter through HBR: “In December 2019, one report suggested that 73% of Bitcoin’s energy consumption was carbon neutral, largely due to the abundance of hydro power in major mining hubs such as Southwest China and Scandinavia. On the other hand, the CCAF estimated in September 2020 that the figure is closer to 39%. But even if the lower number is correct, that’s still almost twice as much as the U.S. grid, suggesting that looking at energy consumption alone is hardly a reliable method for determining Bitcoin’s carbon emissions.”
  • Michael Saylor has frequently referred to the fact that c. 30% of all energy produced in the world is wasted, and how, given Bitcoin’s ability to be mined everywhere, it can move mining activities close to these sources of energy that are currently going to waste. In simple words, he frequently makes the argument that 1.8% of the electricity already being produced and going to waste around the world could be allocated towards Bitcoin, making it a productive solution rather than a wasteful addition.

A lot has been written about Bitcoin’s energy debate. We recommend you visit this link to see a comprehensive list of articles that provide useful information on this.

And one last thought on this topic. The argument against Bitcoin as an environmental threat seems to always look at it on a standalone basis, and not in a relative context. In this situation, we propose looking at Bitcoin relative to its closest competitor in the ‘store of value’ camp, gold. Does burning fossil fuels to mine Bitcoin create carbon emissions? Absolutely. But remember, its competitor requires fossil fuels to run machinery that pulls raw materials out of the ground (steel, iron, etc.) to then create new machines (mining equipment) that are then shipped around the planet on low-grade fossil fuel supertankers to then rip up the earth to extract it (gold), which is then shipped around the planet on, again, those low-grade fossil fuel supertankers to then sit in a vault made out of more raw materials that were ripped out of the earth.

We’re just saying, everything in life is relative, and this debate should be no different. Have a read here for a slightly more informed look at the comparison.