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7 min read · Dec 4, 2023
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A boom-and-bust cycle in the blockchain and cryptocurrency industry is entirely normal. This cycle is led by the ‘crypto king’ Bitcoin.
Bitcoin is designed to halve the supply of new coins given to miners every 4 years. The halving events cause a supply shock to the market, and as seen in the past three cycles, extreme market valuations contribute to dramatic ups and downs.
Other factors also play a crucial role in this cycle, including the overall network adoption, expanded use cases for Bitcoin — such as the Lightning Network for scalability and Ordinals for NFTs — and the increasing ‘institutional adoption.’
In 2020, Dan Held, a Bitcoin educator and marketing advisor for Trust Machines, predicted that Bitcoin would eventually experience a ‘super cycle,’ citing the increasing network value due to growing adoption (Metcalfe’s law), rising scarcity from halving events, and the increasing institutional adoption.
In theory, this super cycle would see Bitcoin establish new all-time highs (ATH), eliminating bear markets as there would be enough institutional acceptance and support to sustain price momentum.
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The Crypto Winter began in late 2021
This support did not materialize in the previous cycle, and Bitcoin ‘free fell’ from its all-time high of $69,000 at the end of 2021, dragging the rest of the market with it. Factors such as reduced supply, a stronger network, and increased support from businesses and institutions were insufficient to facilitate a quick BTC recovery.
In the late stages of the cycle, institutional support increased significantly, with portfolio exchange-traded funds (ETFs) being approved worldwide. The first physically-backed BTC ETF was launched in Canada in February 2021 by Purpose Investments.
Since then, Canada has also approved CI Galaxy Bitcoin ETF and Evolve Bitcoin ETF. Germany has ETC Group’s physically-backed Bitcoin ETF, while Brazil and Australia introduced Bitcoin ETFs for immediate trading in 2021 and 2022. However, these products did not provide the anticipated institutional support that many believed would come from ETFs.
Regardless, various stock markets worldwide still cannot compare to the United States.
The European Union comprises 11.1% of the global equity capital market, while Australia and Canada account for 1.5% and 2.7%, respectively. Combined, these markets are overshadowed by the United States, which holds 42.5% of the total global stock market.
This adds weight to the idea that this cycle could indeed become Held’s ‘Bitcoin super cycle,’ as the largest country in the global stock markets may soon allow for the trading of Bitcoin ETFs.
BlackRock, one of the most prominent names in asset management and investment, registered its own Bitcoin ETF in June 2023, paving the way for other institutions to join. However, institutions are just one factor here.
Adoption could be a trend in the emerging market
According to a recent ‘Cryptocurrency Geography Report for 2023’ by Chainalysis, India, Nigeria, and Vietnam are the top three countries in terms of cryptocurrency adoption in 2023. The ranking is based on the index score examining concentrated services, retail services, P2P transaction volume, decentralized finance (DeFi) activity, and retail DeFi value received.
The United States accounts for the highest percentage of transaction volume in North America, ranking fourth overall. As the chart below shows, North America has the largest institutional transfer rate but the lowest large and small retail rates.
This difference is crucial because the market value of a commodity does not stem from concentrated entities but from independent agents recognizing the value of the commodity. As the Chainalysis report notes, investing in Bitcoin and other cryptocurrencies is similar to early-stage investments in this adoption cycle.
Participants, not institutions, bring value
While institutional adoption is sure to be a crucial factor if and when the Bitcoin super cycle sustains, Bitcoin itself needs to have value perceived by market participants; otherwise, it won’t have enduring strength. In the past, there have been many examples of thriving industries being replaced by new technologies that the market deems more useful and quickly overthrowing giants overnight.
The advent of petroleum products completely disrupted the whaling industry in the mid-1800s. There was a massive industry and infrastructure behind the global whaling business, including ships, trade, and infrastructure. However, no matter how much money was invested, the market saw that using new products would be better.
More recently, technological innovation driven by the blockchain revolution, the dot-com bubble in the 1990s, and the early 2000s witnessed many companies being overvalued. Part of this trend came from the assumption that adoption would be faster than what actually happened.
Signals like Netscape’s internet browser reaching 3 million downloads in three months excited investors about what the rest of the industry could do.
In 1995, Netscape had a successful initial public offering, backed by organizations like Morgan Stanley, pushing the stock price from $14 to $28 — valuing the 16-month-old profitless company at over $1 billion.
Investors continued to seek the next Netscape among a host of companies in Silicon Valley, and money continued to pour into this space. In economics, the peak of the boom cycle, when overvaluation reaches its peak just before the crash, is called the ‘Minsky moment.’
The Minsky moment for the dot-com bubble occurred in 2002. There was a lot of investor psychology and institutional money flowing in, but there was no fundamental acceptance of the invested companies. Ultimately, there was nothing to support these companies and increase their value.
The Nasdaq stock market rose significantly from 1995 to 2000, reaching its peak in March 2000 at 5,048 before plummeting 76.81% to 1,139 in October 2002. Without customers and actual use of these companies’ services in the market, there was nothing to keep them going.
What does this mean for Bitcoin?
According to Chainalysis, “It cannot be denied that global adoption of cryptocurrency is diminishing.” However, as mentioned earlier, low to middle-income countries (LMIs) — such as India, Nigeria, and Ukraine — have seen increasing adoption. “LMIs are the only group of countries where total retail transactions are still higher than in Q3 2020, just before the recent growth in the market,” the report states.
While the United States may rank fourth in cryptocurrency adoption, it is not driven by P2P Bitcoin transactions, as the U.S. ranks 12th in that category.
Instead, stablecoin transactions dominate, with Bitcoin trading less than altcoins. Bitcoin is not currently a widely used medium of exchange in the U.S.
This is not because Bitcoin lacks perceived value in the market but because Americans have little need to use it for payments.
LMI countries are adopting more due to high inflation in their respective countries, and Bitcoin, despite its volatility, could be a better alternative than holding local currencies.
As the world continues its trend towards de-dollarization, Bitcoin could be the safest choice.
Could this happen in the U.S.?
Three major credit rating agencies — Standard and Poor’s (S&P), Moody’s Investor Service, and Fitch Ratings — have all downgraded the credit ratings of the United States.
In August 2011, S&P downgraded the U.S. credit rating from AAA to AA+. Fitch followed suit in August 2023. On November 10, 2023, Moody’s downgraded the U.S. credit rating to Aa1 from Aaa. These are some of the world’s highest credit rating agencies, and all three have downgraded the creditworthiness of the U.S. economy.
The S&P downgrade marked the first time the U.S. had not held the highest possible rating since 1917. This is a clear signal that the world is preparing for a post-dollar era.
A major issue facing Bitcoin and its adoption in the U.S. is regulatory uncertainty. The U.S. has not had a comprehensive set of rules regarding the use and taxation of cryptocurrencies.
The U.S. is currently the largest economy in the world, and Bitcoin is a global currency. A clear set of regulations for Bitcoin in the U.S. would allow more institutions to adopt it and potentially lead to broader acceptance.
If the world is truly moving away from the dollar as the global reserve currency, Bitcoin could be a viable alternative. However, if Bitcoin is to become a super cycle, it needs to be recognized as a medium of exchange by a large number of participants in the market.
There is currently no need for Americans to use Bitcoin for everyday transactions. Even if the U.S. dollar loses its status as the world’s primary reserve currency, the new currency may not be Bitcoin.
A more likely scenario is a currency that is backed by a combination of precious metals and/or commodities, or a government-issued digital currency.
It remains to be seen if Bitcoin can become a super cycle and thrive as a globally recognized medium of exchange. The current trend in adoption is promising, but regulatory clarity and widespread recognition as a useful currency will be essential for Bitcoin to truly fulfill this potential.”
🚀 Wishing you the soon realization of your dreams.
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