What Is The Best & Worst Case For Crypto?
The Blockchain Sector @ 2023-11-17
In this newsletter I’m going to lay out a thought experiment for what the markets would look like under best and worse long time frame scenarios.
🐂 The Best Case
Bitcoin will eventually make a new all time high thanks to the limited supply and devaluing dollar. The best case scenario is for this to happen in the next two years continuing the trend of the 4 year cycle for another term.
Let’s look at what occurs when Bitcoin attains a new all time high?
The year is 2024 and in the past few weeks Bitcoin's price value has appreciated, resulting in an increase in volatility. It ran up from $50,000 dollars and even broke out above $69,000 dollars, setting a new ATH.
Mainstream media has caught on, sparking a cycle of media interest, leading to a return of retail investors and speculation. The first day will be quite a spectacle marked by erratic price movements.
The short interest on future exchanges built up because of a perfectly risk defined trade at the ATH level for traders, as it breaks out they get rekt in a cascade of upward liquidations. By the end of the first day, Bitcoin's breakout could reach the $75,000-dollar range.
Throughout the following week, the focus would shift towards a $100,000 dollar price target with numerous influencers calling for million dollar Bitcoin. This would set social media ablaze in a frenzy of fomo bidding, infused with euphoria.
Within a short span of time, perhaps just a month or two, we could find ourselves nearing the 100k level. At that juncture, we might see substantial profit taking throughout the industry. Many who bought during the recent Luna/FTX crisis plan to sell into the next bull run, between $90-100k is a region where a lot of price targets are set.
This could significantly impact the market, leading to a considerable pullback or slow down. The next surge or upward pulse will be where the battle is fought and won. Bulls will want to see a break out above $100k where as for bears there is another perfectly aligned risk defined trade.
It's possible price will hover for a while as everyone interested in selling in the $90-100k region unloads onto new market entrants. If Bitcoin can then go on to break above $100k, we'll enter a phase of price discovery where there are no clear levels to trade at.
This time however, it is different, institutional capital is being sucked into Bitcoin ETFs which compounds the situation. Charts are showing that supply on exchange is dwindling, fund managers are taking allocations, it seems the sky is the limit and maybe those $1m predictions aren’t so crazy.
At some point, the excitement will fade. Just when we are deciding on the color of our Lamborghini, the market will peak before it crashes back down. Newcomers will witness for the first time the soul crushing volatility within crypto markets.
The markets will eventually rebound, fail to reach a new high, and the cycle will repeat once more in another four years.
I hope you enjoyed your morning dose of hopium ☕
🐻 The Worse Case
What happens if the four year cycle breaks?
The worse case scenario for crypto markets is that Bitcoin fails to make a new all time high over the next two years. This isn’t bad in itself as much as it destroys the hopes and dreams of an entire industry which will have knock on effects.
The non-zero chance of the four year halving cycle breaking down sends a shiver down my spine and it's something I've not seen discussed.
The cycle is deeply ingrained in the market’s expectations. If the cycle doesn’t continue and a longer more drawn out crypto depression sets in, this will have a self-fulfilling component.
How many investors, traders, developers, users will stick around if crypto loses the perceived opportunity to “get rich quick”?
As the bear market continues beyond what is justifiable as a small delay on the cycle, more and more brain drain will occur. As people leave the industry they will sell off assets causing further negative sell pressure and ultimately creating that self-fulfilling spiral.
So the question then becomes “At what point would you lose hope in crypto?”
If Bitcoin was down only for 3 years, 5 years, 10 years, 20 years, 30 years? Would you have the conviction to stick around and not sell off or forget about your now worthless digital assets?
FYI Gold made a new all time high in 1980 which wasn’t broken until 2007, the Arca Japan Index was down from 1991 to 2021.
Your answer to that question would probably mark the bottom of the worse period in the markets history as the average crypto native exits.
We’ve seen how dark the crypto community can become over a 2 year downtrend, many things would collapse for a longer period of market difficulty.
There would be no users for DeFi and Web3 applications, devs would lose hope of build it and they will come
VC investment will disappear as it becomes harder and harder to raise capital
The quality of new projects reaching the market will decrease as the best devs have already left to other industries which pay a real salary
Mainstream media and traditional finance no longer criticize crypto because no one cares anymore and it’s not newsworthy
There’s more scams and shady practices as those that “made it” become desperate and their ego is on the line
The ETF’s finally launch to no demand from institutional investors who see crypto as a risk rather than an opportunity
The separation of state and finance goes back to being a pipe dream of libertarians
These are two extremes and probably we will end up somewhere in between (hopefully closer to the bull case). Don’t take anything for granted in crypto as the 4 year cycle wont last forever.
Independent Research
News, Articles & Speculation
Vitalik brings back PLASMA, which sounds more exciting than it is
Ark Invest Cathie Wood interesting insights on crypto from tradfi
As we speculated on last week Blackrock has filed for the Spot ETH ETF
Figment research report on Eigen Layer - stage 2 testnet announcement
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