Friday, June 9, 2023

Bitcoin 2024 halving will be its ‘most important’ — Interview with Charles Edwards

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Bitcoin (BTC) stands at the start of a “new regime” after its early 2023 price gains, and next year will prove pivotal.

That is the opinion of Charles Edwards, founder of quantitative Bitcoin and digital asset fund, Capriole Investments.

As investment behavior around Bitcoin recovers in line with network fundamentals and price action, Edwards, perhaps like many other institutional professionals, is gearing up for an explosive period of growth.

The jury may still be out on whether the bottom is in for BTC price, but for long-term investors, the time to allocate is just beginning, he argues.

In an extensive interview with Cointelegraph, Edwards reflects on the prospects for Bitcoin and the crypto industry in the coming years and whether the 2023 rebound really has legs.

Looking ahead, next year’s block subsidy halving will be especially important, as Bitcoin becomes, in his words, the “hardest asset in the world with certainty.”

Cointelegraph (CT): Bitcoin’s NVT metric is now at two-year highs. You said this is “showing indications of value normalization and the start of a new market regime.” What is NVT and why is this a big deal?

Charles Edwards (CE): NVT is often referred to as the Bitcoin version of a “PE Ratio” – a simple yardstick for relative value of the network. NVT = Network Value to Transaction Value. It is the ratio of Bitcoin’s USD market capitalization to the 90-day average USD transaction volume that flows through on-chain Bitcoin transactions.

The reasoning is simple. If Bitcoin’s network is used to settle a lot of transaction value, then the network should be worth more. So, when NVT is relatively low, it means the market is undervaluing Bitcoin versus the value of transactions it is securely settling.

One way to identify the relative value of NVT is using Dynamic Range NVT; this applies two-year Bollinger Bands to the NVT ratio. When NVT hits the lower band, Bitcoin has historically been very cheap (a better value buy); when it hits the top band, it has been relatively expensive (a time to manage risk).

Bitcoin spent most of the second half of 2022 in the $16-20,000 region, and during this time it was trading at the lower NVT band — a signal for great long-term value. As of February 2023, NVT has broken out above fair value. This can be a signal that we are in a new regime, the early stages of a new bull market. However, as of writing, NVT is fast approaching the overvaluation band. We are not there yet, but we could be in for some near-term volatility.

CT: How confident are you that Bitcoin is now in a “new regime” or bull cycle?

CE: There is a very good chance this is the start of a new regime, the early stages of a Bitcoin bull market. We have all the signs of a typical turning point on value and sentiment. This is not to say I expect price to dramatically rally upwards from here like it did in January; the early stages of Bitcoin bull markets typically involve a 6-12 month period of volatility and an overall slow trend and grind up. My base case is a positive 2023, with the more significant cyclical growth and returns coming in 2024.

Here are some of the reasons why I see a new regime forming today. As of January 2023 we have:

  • Just exited a period of deep value as defined by many on-chain metrics including Bitcoin trading at its Electrical Cost for 2 months ending this January. Historically this is the global price floor for Bitcoin and this was the second-longest period spent at the Electrical Cost in Bitcoin’s history (the first was 2016).
  • Completely eclipsed the price collapse of the third-biggest fraud of all time in just two months. Despite the industry’s great loss of wealth to millions of people, Bitcoin has demonstrated that there are very few marginal sellers left and the level of deep value is too much to maintain prices this cheap for long, regardless of such negative news.
  • A major technical price confirmation and confirmed fakeout at the most important price level on the Bitcoin chart — the old $20,000 all-time high and the point of the FTX collapse.
  • Witnessed a 40% short squeeze with identical characteristics to the 2021 China mining ban Bitcoin price bottom.
  • Entered a new regime of upward momentum, confirmed across multiple long-term moving averages commonly referenced in major markets.
  • Are having an optimal halving cycle timing where Bitcoin typically bottoms (Q4 2022 and Q1 2023).
  • The Bitcoin cycle drawdown hit typical -80% levels in late 2022.
  • In November/ December, sentiment was at its worst, and market hedging at its highest on record.
  • A likely Fed rate pause and change of policy is due in 2023.

CT: What was the significance of the $20,000 breakout in January?

CE: The $20,000 breakout was the most important price movement we have seen since the all-time high in 2021. $20,000 is important for many reasons:

  • It is the 2017 (prior Bitcoin cycle) all-time high.
  • It is the price level that the FTX fraud was exposed at and the third-biggest exchange (and top three fraud in human history) collapsed at in 2021.
  • It is perhaps the most important price order block level on the Bitcoin chart.
  • It has significance as major round number support.
  • It is at the intersection of Bitcoin’s Electrical Cost and production cost; the region where Bitcoin miners become unprofitable and the level which historically represents a price floor.

When Bitcoin collapsed below $20,000 in November last year it signified a failing of major technical support. It made most Bitcoin miners unprofitable and was the climax of fraud, collapse, bankruptcies, and negative sentiment in the industry. We spent two months below $20,000 before a 40% short squeeze took us back above $21,000. From a technical perspective this represented a clean deviation below major support and is a technical movement that often represents the start of a new trend in the opposite direction.

When an asset price moves suddenly in one direction, then shortly after moves suddenly in the opposite direction, it’s the second move which tends to “stick” and generate a higher probability of a new trend. The probability of the second move being the correct move is significantly higher than that of the first move. That’s what makes deviation fakeout signals like this one so powerful — especially at such an important level like $20,000.

CT: Scrutiny of exchange solvency appears to be fading compared to previous months. Is the FTX debacle behind us?

CE: I believe so. The FTX situation was a massive outlier. It’s not often that you get a Bernie Madoff situation, a top three fraud of all time, occurring. People panicked and generally took the FTX situation out of perspective for what it was – the exceptional greed and immoral activities of one man, SBF.

A lot of work has to be done in our industry as it scales; the SBF saga was a sad and unnecessary development, but should not be taken out of context.

We are in a young burgeoning industry that is moving at lightning pace and things tend to get broken along the way as we scale. Just like all new industries before it, and any tech start up stock price, it’s a rollercoaster ride. We can’t expect Bitcoin and crypto to take over the world of finance in a smooth straight line; volatility happens in price and it also happens in broader operations with scale. Best practices take time to be learnt in a new industry, and regulation takes even longer to catch up.

A lot of fear, uncertainty and doubt (FUD) has been spread across the industry regarding various other platforms. In late 2022 this caused a bank run on most exchanges which was unwarranted and ultimately not an issue for these platforms which had full backing. Exchange risk can be monitored in real-time using on-chain data and this is one of the reasons Capriole saw the FTX collapse coming and avoided it. There simply were not anywhere near the same levels of obvious risk on other crypto platforms in late 2022.

Nonetheless, it is so important to prioritize risk management in everything you do in the crypto space. Risk management must come above all else. Distribution of assets across trusted sources is important. Learning about self-custody is important. Security is important. On-chain monitoring and reporting is important. If you can’t actively manage risk in this 24/7 industry, then there are professional, regulated hedge fund structures that can do that for you. Be sure to always do your due diligence in crypto.

CT: Did the FTX episode strengthen or weaken Bitcoin or specific altcoins, if any?

CE: The FTX episode weakened the institutional reputation of Bitcoin and crypto. Many institutions were burned. Large U.S. pension funds also lost money on FTX. It takes a long time for these types of entities to get into a new asset class like Bitcoin and crypto, and an event like this caused them to pull the hand brake on their investment activities as they wait for the seas to calm and regulators to respond.

It is a shame that it has temporarily slowed the movements of these larger players, which rely on quarterly board meetings to make such big decisions — but it is a great opportunity for the smaller investors and the more innovative and agile family offices.

In the wake of the FTX collapse, incredibly rare value was opened up for long-term investments in Bitcoin in particular.

For anyone with a multi-year investment horizon, $16,000 should represent a great opportunity to allocate to this asset class based on the on-chain data we analyze. At Capriole we were particularly excited by this, and doubled our own investment in our fund during this period. For the reasons noted above, $16-20,000 was a one-in-four-year valuation opportunity for Bitcoin, an incredibly rare opportunity to allocate into this asset class at great discounts across most on-chain valuation metrics.

The FTX collapse cleansed the market of leverage, bad actors, and an array of entities with poor risk management and operations. The market now has a clean slate to start the new halving cycle fresh and ready for organic growth. The institutions will come back; it’s only a matter of time when an industry is 10Xing its number of users every three years. We are seeing a strong uptick in savvy investors taking advantage of today’s opportunity.

CT: What kind of impact will a ban of crypto staking service providers have on Bitcoin and Ethereum price?

CE: It’s hard to say for sure and would depend on the extent of any ban. If there is a major sweeping regulatory action against staking, there will be a short-term price impact. But this fear, like most in crypto, is overweighted. There may be some regulations or restrictions in the area, but I expect the long-term impact will be negligible.

Likely there will be more requirements on staking entities, including regulator data sharing, which in the short-term could reduce market size, but in the mid to long term this just moves the decision to stake to the individual user for that platform.

As we saw with the China ban on Bitcoin mining in 2021, Bitcoin (and crypto) is too big now for any one country to stop adoption. Bitcoin’s hash rate recovered from a 50% collapse in just one year. A staking ban would be harder to implement, would likely be less severe and much less impactful than the China ban.

CT: What’s the possibility of this happening? Do you expect a general crackdown on crypto on-ramps on the horizon?

CE: Exchanges are under the microscope. There will be more regulation and more reporting and communication requirements for exchanges globally. Many small exchanges won’t be able to meet these requirements and it will further consolidate the industry.

I expect all of the large players will ultimately comply.

In November, we saw how every major exchange implemented proof-of-reserves using on-chain data to verify Bitcoin holdings of customer assets in a matter of weeks. Sure there are limitations in this reporting, but for so much of the industry to implement that globally and so fast shows just how quickly this industry moves, how most of us are here to do good and do the right thing. More needs to be done, and it will be. It’s just a matter of time and it’s part of the natural growth and adoption of an exponential age industry.

CT: What are the biggest dangers to Bitcoin’s potential bull cycle?

CE: The most obvious risk is if interest rates rise further, and substantially more, than expected. That would squeeze the relative value of Bitcoin. Assuming all else equal, higher interest rates increase the relative value of the dollar to a long-term investor, and arguably lessen the value of hard assets like gold and Bitcoin.

However, we have been predicting for some time that rate rises will stop in 2023, and the broader market is pricing this in today too. The Fed is also now signaling to the market that the top for interest rates is in this year. The significant decline in inflation we are currently seeing has also historically marked the top for interest rates.

Related: Bitcoin eyes 25% of world’s wealth in new $10M BTC price prediction

Given we are late in the economic cycle, unemployment is at multi-decade lows and debt-to-GDP is extraordinarily high; it simply isn’t sustainable to keep interest rates at aggressively high levels today.

All of this skews the probability towards policy easing to support economic growth. Which means Bitcoin is positioned to be the perfect investment against easing, a world with high debt and inflation. Much like the 1970s, but even more so today.

CT: What are the biggest tailwinds for Bitcoin’s potential bull cycle?

CE: In 2024, Bitcoin will become the hardest asset in the world with certainty. The inflation rate of Bitcoin will drop to half that of gold, overtaking gold as the best store of value. Not to mention the improved portability, speed and fungibility of Bitcoin in a digital world.

Every Bitcoin halving drives a narrative shift and heightened adoption curve for Bitcoin, and the 2024 cycle is probably the most important halving we will ever see. A transition point.

It is worth mentioning that none of the prior halvings have ever been priced in, so I am expecting multi-hundred-percent returns to continue here as well.

Further, this decade we are entering the period where most technology adoption “S-curves” go vertical. That is, it takes roughly 10 years for new technologies to go from 0-10% adoption (where Bitcoin is today) and then another 10 years to go to full adoption.

Given Bitcoin usage is growing faster than the internet did in the late 90s, all signs point to the next decade being incredible for Bitcoin. The global macroeconomic backdrop also looks set to only support that adoption curve.

CT: What are your favorite metrics to keep an eye on right now to anticipate the next market move?

CE: Predicting short-term moves is a full-time job; we approach that with fully automated quant strategies at Capriole. For investors looking to allocate for multi-year periods, the best bet is to try and allocate at or near cyclical lows and reduce some exposure at cyclical highs.

Bitcoin still very much operates on a four-year cycle, driven by the four-year halvings. Therefore, you usually get roughly 12 months of great value to allocate into the market, and 6-12 months to reduce risk.

It’s not about timing exact bottoms and tops — unless you are monitoring the market full time, don’t bother!

When you get a confluence of multiple long-term metrics, only metrics that have proven themselves to be reliable through years of usage (without modification); that is, when you have something useful to act on. Some I like are:

  • Hash Ribbons (recently signaled a buy at $20K)
  • NVT
  • Market Value to Realized Value (MVRV)
  • Bitcoin Production Cost and Electrical Cost
  • Bitcoin Energy Value
  • SLRV Ribbons
  • Dormancy Flow
  • Hold waves
  • Net Unrealized Profit and Loss (NUPL)

You can read more about each here.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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