Hope everyone is having a great summer. Been a while since I've written anything long form about BTC. In this article I'm doing a thought dump about the asset and some ideas brewing in my head about how to approach it going forward.
Last year I generally shifted my personal markets focus towards commodities as it became evident that crypto had supply overhang which was making it very heavy, combined with a lack of interest due to minimal innovation outside of isolated pockets like Hyperliquid, at least on a relative basis to the action we've seen in other markets - thus creating a demand problem to absorb all of the supply. I thought that there was a window in which Bitcoin could have done well in late last year when small caps were ripping and gold had just gone on a tear, but was very disappointed when BTC basically did a failed breakout (in the days leading up to 10/10). In Jan of this year I reduced the Bitcoin exposure that I still personally had left as the resemblance to the prior bear market we went through in 2022 seemed apparent.
https://x.com/WClemente/status/2015506306572894332?s=20
Frankly it has not been a fun year to be focused on Bitcoin & crypto broadly. Although it has generally been more mild this time around for BTC just in terms of % drawdown from the highs, in a lot of ways, one could argue that this bear market has been even more difficult than 2022. At least in 2022 you were able to point to the reason for the decline (interest rates rising, leverage & fraud getting purged, FTX blow up), and say "IF these things are subject to change, and in late 2022 things were asymmetrically skewed towards not being able to get much worse, then BTC is very likely to be a good long term buy here" - meanwhile today there is nothing of the sort, with the exception of DATs & quantum, which we'll get to and finally seeing some healing in IMO. Bitcoin ETFs hold $50 billion in assets, which set a record for initial inflows only to be passed up by the memory ETF earlier this year. There are lending offerings emerging at major institutions. Gold did incredibly well last year on the back of central bank reserve demand, which fueled by a de-dollarization narrative, should have been the time for Bitcoin to shine. Virtually any person or entity who wants to get exposure to Bitcoin can, which makes it even more disappointing to see it has net $5b of outflows in ETFs over the past year, while DRAM climbed to $10b of inflows in a month.
Network Health
When we talk about fundamentals for Bitcoin, we obviously are not talking about traditional measures, we look at the underlying state of the network itself. I'm not going through every data point just for the sake of doing so, but there are two points that I think really matter. In a world of increasing centralization, with state directed economies and state influenced markets combined with the most centralizing technological forces we've seen from big tech companies, I do believe that there is value in decentralization.
For those who aren't in the weeds about Bitcoin, there are miners which everyone knows of, and then there are nodes. Nodes, which can be run by anyone, enforce the rules and verify the network, while miners provide security through significant energy backed computation. There are nodes all over the world and there are likely more that you can't track easily. Almost 200 countries in this list below alone.
Source: https://bitref.com/nodes/
While it is possible to look at mining pools (who have no control over individual miners), it is very difficult to track individual miners in the same way that you can with nodes. However, we can look at the overall amount of energy backing the network through hash rate. There is no other way to slice it, hash rate has been in a decline. This has taken place as miner margins got squeezed post 2022 from more competition are higher energy prices, but more importantly the pivot of many into AI/HPC, which so far have shown to be prudent business decisions for the public names that have done it. This dynamic has been reinforced as Bitcoin has underperformed AI related assets & the rate of change in demand for compute. So there's a good and bad spin here. On one hand, the Bitcoin network has technically become less secure in terms of the energy securing it, and the energy input value that backs each individual unit as a digital commodity (production cost) has come down. (Worth noting that because of the difficulty adjustment, the network is fine as it auto adjusts mining rewards every two weeks based on hash rate, incentivizing new miners to come secure the network as competition declines.) On the other hand, I do think the positive spin here is that despite basically every public miner that we know of pivoting into AI/HPC, hash rate overall has only declined to levels from mid last year. This shows that there are more entities out there mining Bitcoin who have access to cheap energy than maybe some would have thought, and paired with the node distribution data, shows the Bitcoin network is still distributed and healthy.
All in all, I do think that the network itself remains just as distributed and healthy as it has ever been.
Valuation Methodologies & Current ReadingsWhile there are obviously no cash flows associated with Bitcoin, there are several unique ways of measuring its relative valuation to how the market has behaved historically.
Looking at technicals, Bitcoin is current consolidating along its prior 2021 all time high levels, just below the 200 week moving average (EMA), with a weekly RSI bull divergence coming out of oversold levels that were reached for the first time since the depths of the last bear market. Historically, the 200 week has been a good basic threshold to use to start thinking about accumulating spot BTC positions.
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**One of the best blockchain data based valuation methodologies is the market value to realized value ratio. This compares the current marginal trading price of BTC to the aggregated cost basis of the network based on when coins were last moved to new clusters of wallets. When the ratio gets high, the current marginal trading price is way above the average cost basis of the network, meaning there is a strong incentive for profit taking from a lot of unrealized PNL outstanding in the market. When the ratio goes below 0, this indicates that the market in aggregate is underwater, which historically has marked a prudent time to accumulate. You'll notice that in 2024-2025 this reading never really got to the true euphoric blow off top reading that it had in the past, which represents the maturity and thus volatility compression for the asset class in recent years. Given the persistent lower highs in each bull and slight higher lows in the lowest readings during the depth of each bear, it could be reasonable to conclude that we may not need to get into negative territory to bottom. It is very difficult to bottom tick, the main takeaway here is that Bitcoin is in its lower bounds of historical valuation readings.
Long term holders also appear to be accumulating pretty aggressively after distributing through mid-late 2025, a sign that they are seeing value down at these levels.
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**Trading volumes have completely dried up, here is a great chart from @n3ocortex showing spot turnover relative to the market cap of Bitcoin reaching the lowest level ever. ETFs and DATs trading volumes also look similar.
Front end implied volatility in the options market is at the lowest reading in years, implying that the market sees Bitcoin as dead money.
Meanwhile, options skew shows that the market has only been interested in buying more downside protection over the past year.
Lastly on the derivatives front, Bitcoin's futures futures basis (spread between dated contract futures and Bitcoin's spot price) has been in a multi-year decline, struggling to even get to par with treasury bill yield. This means that A) More funds are arbitraging BTC's futures basis, but also B) The market is not pricing forward dated futures contracts at much of a premium to spot.
When we put all of this together, the objective picture is that the market has been completely dead, traders are not showing bullish views in both the futures or options markets, and are also pricing a continued flattening of volatility for BTC. This is taking place as the asset is reaching deep value territory on several measures and we are seeing a backdrop of long term holders accumulating, seemingly contrary to traders views as well as the $5b of net outflows in the last 52 weeks from Bitcoin ETFs. DATs and the Quantum Boogeyman
The biggest overhang of the bull market of 2023-2025 has been digital asset treasury companies, vehicles that were at least in theory designed to dilute common shareholders in an accretive to accumulate more Bitcoin and drive shareholder value. However, due to the increased competition to capture returns after the success of Strategy and then Metaplanet in Japan, flows into these vehicles got diluted across the board and then caused a compression of premiums to NAV.
In recent months we have seen multiple headlines of treasury companies slowing the rate of change in their Bitcoin accumulation, selling Bitcoin outright, or even pivot strategies entirely in select cases. I believe these are positive signs of the market healing itself. Recently we've seen Bitcoin even popping on Saylor BTC sale announcements, as Strategy consolidates its capital structure and prioritizes STRC as per their recent earnings call, a stark contrast to BTC selling off on purchase announcements. On a forward looking basis I don't think DATs present the same overhang on the market that they did 6-9 months ago, especially with price now down over 50% off the highs.
Quantum I do think is a real concern, especially looking 5+ years out. I have become somewhat familiar with quantum from looking at several early-maturing startups and talking to some people in the industry during my employment helping with investment analysis at STIX in recent months, although by no means am I an expert. My take is that the threat should be taken seriously, however, at $60k BTC 50% off the highs underperforming other assets, I do think this risk is probably being discounted in the current price quite a bit. From here, albeit an armageddon scenario, the concerns (very publicly discussed at this point) are probably getting skewed towards only getting less bad. The more Bitcoin underperforms from perceived quantum risk, the stronger the incentive is for large holders or institutions making money off of Bitcoin trading/custody/lending to incentivize a group of developers to find and propose a solution. Similar to the ETF approval last cycle, the market is going to front run the probability of the issue getting resolved and so you aren't going to be able to buy at dirt cheap prices once the concern has been fully de-risked.
Potential Bull Case
Even if you think that Bitcoin is probably at good long term levels, as a short-medium term allocator there is a tremendous perceived opportunity cost consideration for allocating to BTC relative to a flaming hot economy with real innovation to speculate on and invest in. The main question that has persisted for months is what would have to happen to get BTC to perform at this point given its lack of rally alongside gold and high beta outperformance in the equity market this year?
As mentioned earlier with charts illustrating, we are seeing some fairly heavy long term holder buying from blockchain data readings with DAT capitulation and pretty significant net sell pressure from ETFs as well. Prior Bitcoin bear markets ended from an exhaustion of sellers, not necessarily a catalyst for aggressive new demand. At this point, if you were concerned about DATs, quantum, or underperformance, who else is left to sell at a rate greater than that of the last 6-9 months? Obviously there is risk of a correlation to one spike down from macro/geopolitical turbulence, but speaking with a multi-month high time frame view here. I very much understand that there is no clear catalyst (Clarity perhaps but I don't think this does a whole lot for Bitcoin specifically), but this is often times what bottoms look like. You are weighing the probabilistic outlook for things to get worse relative to expectations that are currently priced in, similar to the inverse of probabilistic outcome for things to get better than expectations in bull markets. I am open to a final leg down at some point throughout the year, but at this point I think a lot of these risks have been priced in by the market over the past year.
One catalyst for Bitcoin could just be mandated steady buying from large institutions. While the initial run up in AUM was remarkable, we are now well past the initial excitement phase for ETFs and have seen a steady drift down in total AUM since last October. One catalyst could be large asset managers deciding to add a minor single percentage point allocation across their portfolios, creating price insensitive inflows for the asset. While it kind of sounds like cope, Bitcoin's lack of correlation to various asset classes over the past year could justify having a small allocation to it for large managers often looking to diversify asset correlations and exposures.
Conclusion/thinking about approaching allocating going forwardTLDR. I think Bitcoin is "cheap" although we could have a leg lower at some point throughout the year. The network is generally fundamentally healthy. Most of the risks are priced in at this point and anyone who would sell because of these risks likely has already. You are very unlikely to buy the exact bottom. There are a few ways to approach allocating from here in my mind. (NFA of course!) It makes sense to me to think about dollar cost averaging spot over the coming months, which would be the simplest strategy. You could also wait for either a final leg down or wait until the market has started to show signs of life and momentum again. Another strategy is to just go ahead and allocate and then because implied volatility is so cheap, use the options market to hedge any final legs down that could shake you out of your holdings. I have not personally pulled the trigger yet, but I will likely start doing so soon in some fashion. Hope that this was reasonably insightful and sparks some conversation about how others are thinking about things. Maybe the four year cycle is confirmation that we live in a simulation, but the next few months are looking interesting for the orange coin. Thanks for reading.
Disclaimer: The content of this article reflects my personal opinions and is provided for informational and educational purposes only. It does not constitute financial, investment, legal, tax, or professional advice of any kind, and should not be relied upon as such. I am not a licensed financial advisor, attorney, or accountant. Attribution for data sets are shown in each respective chart for relevant providers, I claim no ownership of these datapoints.
Cryptocurrencies such as Bitcoin are highly volatile and speculative, and investing in them carries significant risk, including the potential loss of your entire investment. Past performance is not indicative of future results.
Nothing in this article is a recommendation or solicitation to buy, sell, or hold any asset, security, or financial product. You should conduct your own research and consult a qualified, licensed professional before making any financial or legal decisions. Any actions taken based on this content are strictly at your own risk, and I accept no liability for any losses or damages arising from any reliance on it.
