BTC & ETH look ready to make crypto fun in Q4

Beeple-FOUR-THOUSAND
FOUR THOUSAND. Beeple, popular crypto & NFT artist. Source: Twitter.

Disclaimer: this is not financial advice and nothing here should be construed as a specific inducement to make a particular investment. Do your own research & invest at your own risk. We believe that people should invest from a place of personal conviction. Making money is always risky; and higher rewards typically come from taking higher risks. If that scares you, no problem. We also hope that banks start paying you better than 0.5% interest in your savings account.

Hello friends,

I woke up Friday morning to a near-vertical wall on Bitcoin’s price chart. Price went 10% higher in a matter of hours & #shoktober trended on Twitter thereafter (a reference to an incoming supply shock for Bitcoin that pushes the price to new highs).

So, what’s going on in crypto?

After months of uncertainty, bitcoin & Ethereum look ready to lead the crypto market into a very fun Q4 of 2021.

Bitcoin is ready

Bitcoin is the undeniable leader in crypto.

Currently, bitcoin’s market cap is roughly $900 billion. This market cap is about 40% of the entire crypto industry. The next closest cryptoasset and/or cryptocurrency is Ethereum at a market cap of about $400 billion.

So, despite the rise of “so-called” altcoins (i.e. any coin that’s not bitcoin), no cryptoasset besides Ethereum is really giving bitcoin a run for its money. It’s not close, bitcoin is still the clear leader.

This means that the bitcoin price, in large part, drives the market.

Bitcoin’s prominence & appreciation attract new investors to the space. The sentiment around bitcoin overflows into the sentiments around other cryptoassets. And, since bitcoin is the dominant asset in crypto, it is also a dominant form of collateral that many investors use for obtaining loans; these investors then take those loans & invest in other smaller cryptoassets. In other words, if bitcoin’s price is appreciating, then there is more leverage in the system to push up the prices of other coins.

With that said, bitcoin looks absolutely ready for a great Q4.

Bitcoin is not only OK despite China’s crackdown; it’s actively moving on. China banned bitcoin mining earlier this summer; yet the entire network recovered in only a few months with zero outages.

Bitcoin’s hash rate is essentially a measurement of how much bitcoin mining power is in the network. Note the massive decrease in June/July following China’s ban & the steady rise back up. Source: Glassnode

It’s also worth noting that bitcoin mining became *substantially* cleaner once it moved out of China. Now, most bitcoin mining occurs with renewable energy. This alleviates massive environmental concerns and paves the way for large corporations to start holding & supporting bitcoin again, like Tesla.

By the way, El Salvador mined bitcoin using geothermal energy from its volcanoes for the first time this week. Just another milestone for the world’s first country to make bitcoin a legal tender currency.

Besides putting China in the rearview mirror, bitcoin is currently getting scooped by large investors. Will Clemente, an on-chain analyst (eg, someone who analyzes the open network data) notes that whales (i.e. investors with deep pockets) accumulated bitcoin heavily over the last several months. The whales are still buying now. Over bitcoin’s history, following the whales is generally a good investment strategy. Side note: Will Clemente recently started working at a bitcoin firm called Blockware and confirmed the institutional interest in bitcoin is very much happening.

Willy Woo, the #1 bitcoin on-chain analyst, tweeted about how much bitcoin whales are stacking. Source: Twitter.

Bitcoin is also poised to be a rare safe haven asset in crypto if crippling regulations harm the space. There is noteworthy concern around incoming government regulation on crypto (more about that later). But, bitcoin appears poised to sidestep nearly all of this. The Federal Reserve Chair Jerome Powell was explicitly asked by a congressman in a hearing if the Federal Reserve intends to ban bitcoin and he responded, “No intention to ban bitcoin.” Furthermore, even crypto enemy SEC Chair Gary “Goldman Gary” Gensler all but openly admits that bitcoin can’t qualify as a security via the SEC’s own Howie Test. At the same time, Gensler is stating that most cryptoassets “are probably securities.” This could mean a lot of bad things for crypto generally…but bitcoin appears ready to sidestep all of it.

Bitcoin is also now actively being used as the payment rails for remittances & global payments via the Lightning Network; which is seeing its use go parabolic. The Lightning Network is an open-source network that anyone can use and it allows for nearly free global transactions that take only a few seconds. Twitter recently added the Lightning Network to its social media platform so that anyone can tip anyone around the world.

The Strike app also integrated the Lightning Network as the monetary rails for its app. “If I’m sending money from the US to Japan, Strike is going to take $100 behind the scenes from my Chase checking account,” Strike founder/CEO Jack Mallers recently explained. “I don’t need to know what Bitcoin is, how it works, or think it’s going up or down. Strike programmatically converts my $100 into bitcoin on the Lightning Network, zips that value all the way to Japan and that physical value is going to get from the US into Japan in one second and at no-cost. Then we just convert it into Japanese yen.

Finally, it’s worth noting that historically September is not a great month for bitcoin, but October as well as Q4 generally is great.

Oh yeah, we might also finally get a bitcoin ETF in the near future since even Gensler is talking about approving a futures ETF for bitcoin now.

Ethereum is also ready

Nearly everything that was said about bitcoin being ready for Q4 also applies to Ethereum right now:

  • the market is, in large part, driven also by its second largest cryptoasset
  • price only dropped slightly in response to China’s bans
  • environmental concerns & power usage are waning due to coming changes in how the network is secured
  • use cases for global payments are increasingly occurring (for example, Visa is building a universal hub on Ethereum for transmitting central bank digital currencies & stablecoins if/when those exist)
  • maybe sufficiently decentralized enough to sidestep the SEC classifying it as a security (definitely more debatable, but possible)
  • possible safe haven asset in the event of a regulatory crackdown

The only other things worth noting about Ethereum is that recent protocol changes/upgrades are setting up a massive supply shock. Its upgrade to EIP-1559 is now actively decreasing the supply of Ethereum. In other words, Ethereum is now deflationary.

But, perhaps even more importantly, Ethereum’s even larger upgrade in early 2022 could apply an even larger supply shock on the system. (check out mins 41:00-45:00 of this Bankless podcast).

What does all this mean?

At a high level, current asset prices & leverage in the markets suggest that we continue to have room to run in a broader bull market.

Despite the exponential adoption of crypto over the last 6 months as well as the massive progress in the space, the prices haven’t fully followed yet. That might change soon.

ETH Reddit channel’s active user count is back to fall 2020 numbers. Source: Messari.io.

Additionally, the prices of bitcoin & ethereum remain in ranges that are solidly outside of any sort of euphoria stage in the market. In fact, bitcoin appears to be around a floor price . Ethereum’s Net Unrealized Profit Loss ratio is currently around 0.60 – this remains significantly below its top around .77 in May prior to the crash. (you can read my article predicting that correction as well as an explanation of NUPL here)

Ethereum Net Unrealized Profit Loss (NUPL) ratio. Source: Glassnode.

So, as bitcoin & ethereum prices reclaim strength, all of the crypto markets should see strength building. We don’t know the future but we are bullish about Q4.

Hang on, it should be a super fun ride.

Until next time,

Noah

Must-see resources

I read A LOT about crypto, decentralized finance, and macro trends regarding the global economy as well as politics. Out of the hundreds of content pieces that I read this past week as well as the thousands that I’ve read over the past several months, here are some you must see.

  1. Taking the SEC Very Seriously: Michael Saylor, CEO of Micostrategy which holds $5 billion in bitcoin, sat down with Real Vision founder Raoul Pal and discussed crypto, bitcoin, and coming regulations. It’s one of the best interviews I’ve ever seen about crypto & bitcoin. You have to read it/listen to it at some point. Check it out here. You need to be a Real Vision pro member to watch the video. But, signup now & first year is free.
  2. Most important thread of the year.”- Messari founder Ryan Selkis: Selkis retweeted this Twitter thread a few days ago about the importance of crypto & non-fungible tokens (NFTs) to the world. The thread outlines how crypto helps society solve some of its deepest problems. I read A LOT about crypto and this is pretty incredible.
  3. Full Interview: Jack Mallers & Bitcoin vs the World! You can’t miss this interview by Anthony Pompliano. It highlights how bitcoin can be incredibly useful & valuable for even people who don’t care a single bit about crypto.
  4. Crypto is Both Important & Fun: OK, this one’s short & it’s a must-see video just because it’s so darn fun… crypto is innovative, incredible technology that can be leveraged to bring economic freedom to so many people around the world. That’s awesome — and it also makes the community so much fun. Enjoy, I’ll let you access it here via my retweet 🙂