Bitcoins Third Act?

Aug 16, 2021 8 min read
Bitcoins Third Act?

The Great Mining Diaspora, Strike, and growing liquidity on The Lightning Network all serve as the foundation for a leg up in Bitcoins price. Previous Bitcoin cycles have followed a Three Act structure and we appear to be entering this cycles Third Act.

Background

On July 19th, 2021, Bitcoin put in lows below $30,000. Since this time, Bitcoin has had an impressive rally off of this low and as of today, Monday, August 16th, Bitcoin has marked a high of $48,000. From where I stand, it looks to me like bullish sentiment is on the cusp of flooding back into the market.

YTD Chart of Bitcoin Price (Ending Monday, August 16, 2021)

Summertime Correction

Recovering from the lows as strongly as it has, brings to mind memories of Bitcoins Third Act, something that has occurred in the prior two most recent bull market cycles (2013 & 2017). After reaching an all-time high of $65,000 on April 13th, 2021, Bitcoin completed the first act of this cycle's bull run. What followed has been a brutal 3-month correction, where we saw a 50%+ selloff, the second act. And we are now roughly mid-way between the all-time-high and the local, recent low.

Emerging Third Act

If Bitcoin is to have a third act, then we should see this summertime correction fade behind us as we continue the roaring bull market that began in 2020 and ran into early 2021. This could see us taking out the all-time-high and continuing much further above those levels as we head into the end of this year/beginning of next year.

Repeating Patterns

Bitcoin price action has historically followed a series of repeating patterns. These patterns hinge around events known as halvings, which occur roughly every four years. The following chart shows these four-year cycles overlaid atop one another on a single logarithmic chart.

The following chart shows:

  • The 2012 Cycle in Cyan
  • The 2016 Cycle in Blue
  • The Current Cycle (2020) in Red
2012, 2016, and 2020 cycles plotted atop one another - corrections, before continuation, occurred in the Summer of 2013, 2017, and 2021 respectively.

If this cycle follows the pattern of the last two cycles, we might see 2021 play out similarly to 2013 and 2017. In price terms, this could see us reaching and exceeding $100,000 per Bitcoin.

On Magnitude

Because the above chart plots the price of Bitcoin on a logarithmic scale, the 2013 and (especially) the 2017 corrections do not look as significant in their magnitude, but in reality, Bitcoin experienced very similar 50% corrections in both of those timeframes.

Waiting on Confirmation

A hard breakout above the previous all-time-high ($65,000) will serve to confirm this. But we still have a long way to go before that point. In the meantime, the price action over the past few weeks puts us a lot closer to achieving those levels.

Past performance is, in no way, predictive of the future. And the above chart is by no means a guarantee. But one of the things that is unique, and poorly understood, about Bitcoin is the repetitive pattern its growth has followed over its 12-year lifespan.

Act I - A surging bull market, ignited by the halving
Act II - Followed by a brutal 50%+ correction
Act III - Followed by a significant bounce taking us past the local high and up into uncharted territory.

Shrinking Inflation

Bitcoin's core logic (the computer code that comprises its protocol) codifies a four-year cycle on the supply side of the equation. Each halving event cuts in half the amount of Bitcoin emitted as a result of Bitcoin mining.

Bitcoins in existence (Blue) & Bitcoin inflation rate (orange) - Each 210,000 block period represents approximately 4 years.

Now, the shrinking issuance of bitcoin is not, in and of itself, enough to cause the price to rise. There must be accompanying demand, or even better, growth in demand.

The Demand Side

And this demand cannot be easily modeled or predicted. BUT... we do know that crypto user growth is, so far, following the trajectory of the growth of the internet itself. Indeed it is actually outpacing the growth of the internet. No doubt because, unlike the internet, Bitcoin is able to leverage the network effects of the internet itself.

Adoption of the Internet and adoption of Bitcoin overlaid

The network effects of Bitcoin (and crypto broadly) are taking hold, just as they did with the internet itself. By 1997, internet usage had crossed the rubicon, companies like AOL had brought millions of  "normals" onto the information superhighway. And while AOL itself did not navigate the next two decades very well, the Internet's blistering growth continues to this day.

Collision

The growing demand for Bitcoin is colliding with the supply constraints coded into its protocol. As more and more people desire to hold Bitcoin, the amount of newly mined Bitcoin has shrunk. Furthermore, the strong hands in Bitcoin have tightened their grip, accumulating more and more Bitcoin, leaving less and less overall supply available to new entrants.

Less and less newly mined Bitcoin is becoming available while demand for Bitcoin grows, creating a supply/demand imbalance, pushing the price higher.

The Open Question

Act I and Act II of this cycle have now happened. In March 2020, due to COIVD panic across the broader markets, Bitcoin made lows around $4,000. In April of this year, it achieved a new all-time high of $65,000 and then experienced a massive correction down to levels below $30,000.

As has been the case in prior cycles, the question before us is:

Is an Act III in the cards? What we are seeing right now is that Bitcoin is rallying strongly out of the correction. If it can continue its momentum, the latter half of this year (and the beginning of next year) could see Bitcoin making impressive gains and blazing new territory.... yet once more.

I believe the answer to this question is yes. And in the rest of this article, I outline a few of the reasons I feel strongly support this view.

The Mining Diaspora

Over the past two months, Chinese authorities have effectively banned bitcoin mining in jurisdictions under their authority. Prior to this ban, close to 50% of bitcoin mining took place in China. This event was covered in the mainstream press when it occurred. But I feel it has been given short shrift.

On its face, a ban on Bitcoin mining may seem like a negative event. But the truth is quite the opposite. Having a large concentration of mining in China has always represented one of the biggest risks to Bitcoin. This is a complicated topic, but suffice to say that the most significant attack vector against Bitcoin has always been what is called the 51% attack. Insofar as 51% of Bitcoin mining takes place in a jurisdiction that is unfriendly to Bitcoin, a 51% attack is available to said jurisdiction.

This chart shows the difficulty to mine a new block - the Chinese mining capacity going offline is very clearly shown

Surrendered Killswitch

Considering that China is a totalitarian menace, it was not healthy for Bitcoin mining to be so heavily concentrated in areas under their control. In banning Bitcoin mining, they have caused mining operations to flee and seek out new jurisdictions. In essence, they have dispersed Bitcoin mining across the globe, voluntarily ceding the killswitch on Bitcoin. To surrender such a killswitch seems like an uncharacteristically short-sighted strategic error for the Chinese Communist Party. Frankly, it is a surprising misstep by the Chinese.

Why

It seems to have been motivated by two primary concerns:

  1. Capital controls
  2. Energy consumption

First, provincial governors cracked down on the miners when energy supplies in their respective districts came under pressure. Then we saw the Chinese Vice Premier pile on, calling for renewed restrictions on mining and trading. No doubt the trading comments having more to do with capital controls. The end result is that bitcoin mining (for all intents and purposes) no longer takes place, in any meaningful way, inside mainland China.

Massively De-Risked

I believe that this event, The Great Bitcoin Mining Diaspora of 2021, represents the single largest de-risking event in Bitcoins history at least since I began following the space some 8 years ago. And I believe that this event only adds to the likelihood of Act III playing out over the next 12 months.

Lightning Network

Over the last five years, Bitcoins developers have worked to build a Layer 2 solution that sits atop the Bitcoin network. This layer is called The Lightning Network and it enables a litany of new features which are beyond the scope of this article today. Suffice to say that the Lightning network is now ready for primetime and people have begun to build apps, companies, and other services on top of the Lightning Network.

Strike

Strike is like Venmo, Zelle, or PayPal, in that they have an app that allows users to send dollars (even 1 cent transactions) back and forth to one another. They also allow small denomination purchase and sale of Bitcoin. This front-end suite of services all occurs atop the Lightning Network. What's clever about this offering is that many users might not even know they are utilizing the Lightning Network because it is abstracted away by the app's sleek design.

Zero-Fee Remittances

The most interesting thing about Strike is that it allows for seamless, zero-fee, cross-border remittances. Indeed, Strike is growing rapidly amongst immigrant populations. This cohort often earns money in the US and then sends that money home to loved ones. However, prior to Strike, their options were usually limited to companies like Moneygram and Western Union.

These services charge exorbitant fees to transmit money outside of the United States, often as high as 20%. Strike provides a better service at a better price, so it's no surprise that Strike installs are surging in immigrant circles.

Killer App

I believe Strike may represent Bitcoin's first killer app. While not exactly sexy, Strike is poised to eat the lunch of money-transmitters like Moneygram and Western Union. I believe this will set Strike up to pursue its next endeavor which may target, more directly, American millennials, the holy grail for any service provider. What this service might look like, I am not sure. But it seems to me that Bitcoin may finally be on the cusp of birthing a few Unicorns beyond Coinbase, maybe even with one or two that don't deal strictly with trading or money transmission.

As a result of Strike's success, Lightning itself is now growing exponentially. An important component to Lightning's success is how much Bitcoin flows thru its channels. The more liquidity brought into the system, the more utility it can provide, meaning that ever more creative products and services become viable to be built atop Lightning.

Emergent Use Cases

Strike on its own represents a wonderful development. But more broadly it signals another positive trend in that Bitcoin is finding its way into more people's pockets for reasons beyond, it goes up in value. Via Strike, Bitcoin is now solving real-world challenges in areas long overdue for disruption - see remittance example above.

Looking out over the next few years, it seems that Bitcoin is well poised to solve ever more problems. This adds to Bitcoins utility value and should, slowly but surely, cause the price to rise.

DISCLAIMER: Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.

Join the conversation

Table of Contents
Great! Next, complete checkout for full access to EricFreeburg.com.
Welcome back! You've successfully signed in.
You've successfully subscribed to EricFreeburg.com.
Success! Your account is fully activated, you now have access to all content.
Success! Your billing info has been updated.
Your billing was not updated.