The Bitcoin Market Cycle

Market Recap

Tough Week For Crypto

The Bitcoin Market Cycle

Who Are The Players in The Bitcoin Market?

Miners - Miners provide work to the bitcoin network. They maintain consensus and earn transaction fees for processing, executing, and settling transactions for users and investors.

Investors – Investors help capitalise miner activities and provide liquidity to users.

Users – Users leverage the Bitcoin Network for payments.

In many of our pieces, we have referred to the evolution of money. This theme is core to how we understand and analyse the bitcoin market cycle. Currently, bitcoin finds itself in a speculative store of value phase, where individuals and institutions are choosing to store their wealth in the monetary asset, bitcoin.

The price of bitcoin right now is by no means driven by a function of usage in the real world. We have discussed the transition of money to a medium of exchange here. The utility that bitcoin can offer a user right now is different depending on that user's situation. However, the point is that currently, the opportunity costs and cost of completing a transaction using bitcoin is still greater than the cost of completing a transaction without it. Yet, there are fringe cases in certain jurisdictions where bitcoin is used as a medium of exchange. Venezuela is an excellent example. They have had both sanctions placed on them by countries like the US, and their own government has also put restrictions on using specific currencies within their own countries like the dollar (until recently). Coupled with high inflation, there was rapid acceptance and adoption of cryptoassets within the country on a peer-to-peer basis. So much so that currently, Venezuela is ranked third globally in terms of Bitcoin adoption, according to a report by Chainanalysis. The report also states that "data shows that Venezuelans use cryptocurrency more when the country's native fiat currency is losing value to inflation, suggesting that Venezuelans turn to cryptocurrency to preserve savings they may otherwise lose". Even with the dollar's recent introduction as a permissible medium of exchange within the country, we have seen a consistent demand for bitcoin and other cryptoassets that have so far protected citizens wealth better than the alternatives. Cryptoassets have also provided a more practical currency to use on a day-to-day basis. When your inflation is a couple of thousand percent, pricing your goods and services in that currency becomes problematic. As previously stated, the cost of using bitcoin often outweighs the benefits, but in these countries, the cost of not using and accepting it is detrimental to the citizens themselves.

This doesn't mean that user growth or new ways to use bitcoin doesn't change investors' perception; however, we will remind you that perception and reality are very different beasts. Yes, more users drive investors to be more confident in bitcoins future trajectory, but they don't necessarily directly influence the price.

Our view is that in this current stage of bitcoins evolution as a form of money, the main drivers of price are miners and investors. We believe that this will persist until bitcoin is adopted widely adopted to be used as a medium of exchange. Right now though, bitcoins price is predominately driven by supply and demand dynamics between miners and investors.

How Do We Monitor These Two Core Stakeholders?


Miners are simple to monitor. Mining as a business operates at a long-term equilibrium where the marginal cost of mining is equal to the market value of the bitcoin mined. However, there can be extended periods where miners, on average, can experience profitable and unprofitable conditions. We have identified that the most favourable buying opportunities occur when miners, on a net basis, transition from a state of unprofitable to profitable.

Because miners’ expenses are fiat denominated, they have a pro-cyclical impact on the market as profitable conditions mean they have to sell less bitcoin to cover costs; this results in a reduction in supply available to investors. Unprofitable conditions create a situation where miners need to sell bitcoin from their reserves to cover these costs, resulting in an increased supply.

A great way to monitor changes in miner profitability is by using the Puell Multiple. The Puell Multiple tracks daily bitcoin issuance ($) verse a 365-day moving average of bitcoin issuance ($). Significant deviations from the norm often signal that a change in profitability is approaching. When mining is highly unprofitable, the weak and inefficient miners capitulate, whilst strong miners become exceedingly profitable. When mining is highly profitable, more computational power enters the system to compete over the daily fixed issuance; weak and inefficient miners survive but become susceptible to price changes.

It's interesting to note that periods of growing profitability seem to occur after the halving in each cycle. The halving represents a change to the fixed issuance available as a reward to miners. Before May 2020, miners could earn 1800 bitcoin per day; after May 2020, the reward sits at 900 bitcoin per day. This event forces a reset, where inefficient miners become too unprofitable to continue supporting the network. This creates a short window where you have a lower or equal hash rate and makes the stronger miners profitable once again. This then reignites the miners' pro-cyclical impact on market prices.


Investors are a bit more complicated to monitor, as there are various tools you can use to understand current investors' state. Our personal favourite is Reserve Risk. Reserve Risk allows us to gauge the confidence of long-term holders at any given price. It is defined as Price/Hodl bank.

Hodl bank is defined as "the cumulative opportunity cost that made the decision to hold rather than sell over the lifetime of the Bitcoin network (scaled down to a single Bitcoin value terms)." When the hodl bank shrinks, it signals less confidence at current prices; when it grows, it shows investors are forgoing the ability to sell now to sell at some point in the future. This signals confidence in bitcoins future price.

Reserve Risk allows us to compare changes in hodl bank to changes in price. When the price is low, and the hodl bank is increasing, risk relative to reward is low, and when the price is high, and hodl bank is decreasing, risk relative to reward is high.

While the data is limited, Reserve Risk has helped identify whether "smart money" is accumulating or distributing. As the cumulative opportunity cost grows, it signals accumulation; as it decreases, it signals distribution.

Another tool at our disposal is Market Value to Realised Value (MVRV). Realised value is defined as the aggregated price of all bitcoins since they were last moved. Many in the industry consider MVRV a great way of understanding the current market value verse a "fair value". To us, it purely provides upper and lower bounds for bitcoins price in any given cycle.

Historically, accumulating bitcoin while below realised value has been a favourable period. While allocating to bitcoin when market value is multiples higher than realised value has proven to be much less favourable.

Etherbridge Market Cycle Model

Using the Puell Multiple, Reserve Risk, MVRV and 4 other on-chain indicators, we have created a market cycle rating model. This model is at the core of how we analyse what's going on under the bitcoin network's hood.

Ratings below 1,5 signal warning signs across all stakeholders, and ratings above 4,5 signal favourable conditions to allocate. Our current market cycle score is 2,6. Clearly, we are well underway into this new halving cycle.

Our on-chain analysis tells us that we are nowhere near a long-term market top from a historical perspective and that the opportunity for further price appreciation still remains. This, coupled with rising inflation expectations, additional rounds of stimulus and just the sheer amount of attention that bitcoin is commanding, paint a positive picture for what the rest of the cycle may look like.

If history is anything to go by, we expect that we may start to see warning signs from stakeholders in Q4 of 2021. However, the market structure of bitcoin is about to change hugely. Banks are beginning to offer clients the ability to buy, sell, and custody bitcoin. We have also seen that investment managers are exploring the launch of cryptoasset ETF's. This creates a trusted and familiar means of acquiring bitcoin. This ease of access was not possible in previous market cycles. How this will affect the market cycle, only time will tell.

Notable Articles and News Stories This Week:

Governments Are Looking to Buy Bitcoin, NYDIG CEO Confirms

According to Robert Gutmann, CEO of New York Digital Investment Group, sovereign wealth funds have been making enquiries into the possibility of buying bitcoin. This was confirmed during a virtual podcast between Gutmann and Raoul Pal of Real Vision, where Pal also shared that Singapore's sovereign wealth fund Temasek was already a bitcoin investor. They believe that these allocations are an attempt to potentially hedge dollar-denominated liabilities. Gutmann stated, "If you look at the world today on a forward basis, it is reasonable to be asking yourself as an investment committee or as an allocation committee [if] having all of [their] assets denominated in dollars against dollar-denominated liabilities is the right allocation mix." This has also been in line with several corporations converting some of their treasury into bitcoin.

Read the story here

Goldman Sachs Prepares to Offer Investment Product Linked to Bitcoin

Goldman Sachs is currently in the process of providing its clients with exposure to an ETF that is invested in the cryptoasset industry. The ETF is the ARK Innovation ETF that invests at least 65% of its assets into companies they consider disruptive innovators. The exposure to Bitcoin within the ETF is facilitated through the Grayscale Bitcoin Investment Trust and forms a small portion of the ETF'sETF's holdings. It is an exciting step forward as it shows big banks shift in attitude towards some of the assets that make up these ETF'sETF's.

Read more here

Biggest Bitcoin Whale Accounts Accumulating BTC, Says Crypto Analytics Firm Santiment

In an analysis of the market, cryptoasset data provider and analytics firm Santiment has unveiled that bitcoin whales (specifically bitcoin wallets with 100-1000 BTC) have been accumulating under the $60k level. They have added almost 353 thousand bitcoin to their wallets since the first of February. This generally shows longer-term confidence, as discussed in the above article. 

Read about it here

Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum, and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.

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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.