I've been thinking a lot about Bitcoin lately for obvious reasons. It's one of the hottest topics of conversation in the investing world, and well, also on Hive. The other day I was opining on Twitter that if we don't see whale quantities moving back onto the exchanges, then at least the medium term outlook for price action is going to be bullish for me. The chart below looks a little scary to a lot of people, but I'm not bothered by it at all.
The reason I say this is due to liquidity, as in, the total amount of liquid Bitcoin that's available to trade on exchanges is relatively small compared to the total market cap of the coin. During the last rally through February into March, we saw a massive exodus of BTC from exchanges to the tune of multiple billions of dollars at a time. All these coins moved into private wallets and nobody is trading with them right now. Since we haven't seen a commensurate move in the reverse direction (that I know of), that leads me to believe that the big whales, the strong and steady hands of the investing world, are going to continue to hodl for the time being. This also leads me to believe that they don't think the bull market is even close to over. I'm sure some will continue to hodl through whatever volatility in the next few months, but some will likely move their coins back on exchange to sell them when they feel that a top is near.
As we saw during the last Bitcoin bull cycle, exchanges became overwhelmed during the highest volume trading at the end. Unless you had your coins on exchange at the time, and you already had your limit orders in place (to sell at that specific price), you just missed out on some of the gains as the price quickly flashed back down. If the big whales were pumping before and dumping now, they sure wouldn't want to have their coins in cold storage. They'd want them on exchanges, ready to pull the trigger at a moment's notice, and they're just not doing that right now (as far as I know anyway).
This morning, this concept crossed my mind again, and I realized something. Unlike traditional assets like stocks, the total market cap on a cryptocurrency can be extremely large while the total liquidity on exchanges can be more like a small cap stock. Small market cap with large demand and high volume trading equals wild price fluctuations, usually to the upside, which leads me to my theory.
If you look at the charts over time, you can see that Bitcoin has a steady exponential growth curve with brief 5-6 month volatile price spikes in the up direction roughly a year to year and a half after each halving, and then a regression back to the main trend line (in keeping with the volatility, it always overshoots to the downside and shakes out all but even the steadiest hands). I hypothesize that the reason this happens is that long-term investors buy up all the liquidity following a halving, take it off exchange, and then shortly thereafter, retail money comes in with all its inexperience and bipolar skittishness and runs the price to the moon and back. The majority of those new and inexperienced investors buy near the top and sell for a loss as it crashes back down.
This is how it seems to go in the year after every halving, and I think I'm finally understanding why, in spite of a very reliable repeating pattern that investors should be able to count on and avoid getting trapped in, people always get duped by this phenomenon. It's because it's always the noobs participating in it. This is also why we see the volatility get a little less extreme every time and the multiples it runs up to gets smaller every time. This is a product of the market maturing. A larger and larger quantity of the players in this space are seasoned pros each time a bull cycle occurs. This leads me to believe that we probably won't see a 20x run from the previous all time high like last time ($1k to $20k), but I don't think we're anywhere close to the end of this mania right now. It will continue for now in my opinion. I'm a hodl for now.
As always, please do your own research. This is not investing advice. In the interests of full disclosure, I am a holder of several cryptocurrencies, including some Bitcoin, so I have a strong incentive to see positive price action in these coins. Take what I say with a grain of salt, and if you want real investing advice, seek out a professional investment advisor or some other trusted source. I'm just some guy on the internet with an opinion, sharing my inner thoughts with you all. If you have a different opinion, I welcome civil discussion below.