Summary Bitcoin has entered its midcycle correction. The Bitcoin dominance should peak during the next 1-2 months. Looser monetary policy should cause Altcoins to outperform in the post-halving year after capitulating during the halving year. Hodlers have stopped taking profits. It’s time to stack Sats & Wei again. Recap of the Year for Crypto 2024 has been a great year for investors so far with the S&P500 ( SPX ) returning ~10% YTD with the largest companies outperforming. Not surprisingly, it has been a good year for crypto assets. Similar to the outperformance of large caps, Bitcoin ( BTC-USD ) offered by far the best risk/reward in the crypto asset space, returning ~28% YTD. The second-largest crypto asset, Ethereum ( ETH-USD ), returned only ~5% YTD. Data by YCharts Personally, the situation is favorable for me. On February 26th, I i ntroduced the possibility of a mid-cycle correction for crypto assets at around $50,000 per bitcoin along with rising bitcoin dominance, while signaling that I would not take profits for now. On April 23rd, I changed my mind after prices rose above $71,000 and took profits by selling ~20% of my position. The rationale was that my position had become too large and long-term holders were starting to sell bitcoin into the rally. Since then, I've been steadily but cautiously DCA'ing exclusively into bitcoin as I suggested in my last article. I believe the next 4-6 months will be a great time to rebuild and/or restructure one's crypto asset allocation as I believe this mid-cycle correction will take longer than most market participants expect. It is important to know the previous crypto cycles and macroeconomic circumstances to be prepared for similar events and drawdowns. Therefore, I'm going to share and discuss my game plan for the rest of this year and early 2025 - the post-halving year. Here's my bitcoin positioning over the last 3-4 years: Positioning of Author (tradingview.com) Sentiment Turned with Rising Prices It should come as no surprise that sentiment turned positive after bitcoin started to rise from the lows of 2022 and 2023. However, over the last four months, the number of unique addresses that were active as either senders or receivers started to drop 20% from 860,000 addresses to the current 685,000 addresses as prices started to top out at a bitcoin price of ~$70,000. BTCUSD (orange) & active addresses (blue) (tradingview.com) The further drop in on-chain activity solidifies the assumptions I have been making throughout this half-year about a mid-cycle correction before the real bull run. Currently, active addresses have even fallen below the trendline that has been forming since 2018. However, the move could be exaggerated by the immense ETF inflows, which could have depressed the number of active custodial addresses as more market participants opt for non-custodial addresses. Ignoring the distortions of bitcoin ETFs, I think it is fair to say that the rally from $15,000 to $70,000 happened without mania and broad retail speculation on the price of bitcoin, unlike 2021. During the last two significant bull runs in 2017 and 2020, active addresses shot through the roof along with crypto asset prices. Interestingly, both 2017 and 2020 were post-halving years. Previous halves occurred in 2016 and 2019. Historically, the mania phases of the bull run haven't occurred in halving years, where everyone expects them, but in post-halving years. This fits well with the odds of a prolonged consolidation phase throughout 2024 (halving year) and a real bull run in 2025 (post-halving year). The Link to Monetary Policy Personally, I find it amazing that the four-year cycle in 2023 and 2024 played out almost the same as it always has. I believe that the biggest influence on crypto asset prices still comes from monetary policy, i.e., demand rather than supply, as bitcoin is designed to hedge monetary debasement. The thought process is as follows: During periods of monetary restraint with less quantitative easing, even quantitative tightening and/or restrictive interest rates, crypto assets should underperform. Bitcoin's dominance (percentage market share of Bitcoin vs. Altcoins) should increase, similar to the outperformance of less risky large cap stocks and riskier small-cap stocks during such periods in the stock market. After monetary conditions have been restrictive for a long enough period of time, assets begin to undergo some form of correction. During this correction, monetary conditions ease significantly and bitcoin dominance peaks, i.e., altcoins (small caps) begin to outperform bitcoin (large caps). These phases of the cycle are where broad-based retail speculation finds its best breeding ground. I believe we could be in this phase again as early as 2025. Interest rates have been restrictive for long enough, and the economy is starting to show weakness. BTCUSD (orange) & FEDFUNDS (blue) (tradingview.com) As interest rates get cut, asset prices usually fall. Many investors will try to rationalize that lower interest rates should be positive for asset prices because of lower discount rates. However, falling interest rates are the primary signal of a weakening economy, hence the correction in asset prices that is historically associated with rapidly falling interest rates. It is only after the asset price correction that looser monetary conditions begin to drive markets to new highs and crypto assets begin to outperform again. The chart above doesn't do justice to how much Bitcoin prices fell during the halving year of 2019 into the early part of the 2020 post-halving year. In June 2019, Bitcoin peaked at $13,880 only to fall to the low of the halving year in December 2019 at $6,425 - a drop of ~53%. In early March of the post-halving year, during Covid, Bitcoin temporarily dropped as much as ~72% to a low of $3,850. Applying historical drawdowns to today's situation, a bitcoin price of $36,000 - 50% off the peak in March 2024 - doesn't seem unrealistic and should be expected by every investor. Bitcoin Dominance has Little Upside Left Bitcoin's dominance fits perfectly into the cycle described above. In times of monetary restriction, investors tend to flock to larger, less risky assets. In the crypto asset space, this is bitcoin because it has by far the most decentralized, time-tested and secure network of any crypto asset. However, when monetary policy begins to ease significantly, speculation drives investors into smaller, riskier, less decentralized and insecure altcoins. BTCUSD (orange) & BTC.D (blue) (tradingview.com) During the last mid-cycle correction in 2019, bitcoin's dominance topped out, and during the mania phase in the post-halving year of 2021, bitcoin significantly underperformed the average altcoin. I believe it is likely that we are in a similar situation. Since early 2023, when monetary policy started to become restrictive again, bitcoin has significantly outperformed the average altcoin. The Bitcoin dominance increased from 40% to 56%. Due to more and more upcoming Altcoin projects, the clear overall trend of Bitcoin dominance remains downward, with lower highs. However, the dominance bottomed in 2018 and 2022 at ~40%. The dangers of holding an altcoin during a period of rising bitcoin dominance, however, is not only that the risk/reward of simply holding bitcoin is much greater as both variables work in favor of bitcoin. But many altcoins disappear forever in the depths of the bear market. In addition, historically, bitcoin's dominance has risen in three of the four years of recent cycles, only to collapse in the mania year of the cycle. Therefore, I believe it makes the most sense to maintain a strong core position in bitcoin at all times in one's crypto asset portfolio, and only diversify a portion of it into altcoins when bitcoin dominance is near its peak. After all, investors could choose the wrong altcoin and still underperform bitcoin even during falling bitcoin dominance. Hodlers have Stopped Taking Profits One of the main arguments of my last article was that hodlers (wallets with a bitcoin holding period of more than one year, i.e. the "smart money" of the crypto asset space) have started to take profits. Historically, hodlers tend to sell into rallies and accumulate during bear markets. The same is happening in this mid-cycle correction. Hodlers have stopped taking profits as prices have continued to fall to now ~$56,000. If the mid-cycle correction continues, most hodlers would start accumulating, according to the historical behavior of the cohort, especially visible during the mid-cycle correction of 2019. This dynamic would be the precursor to a possible mania phase in the post-halving year of 2025, as Hodlers begin to sell aggressively again to short-term holders when monetary conditions are easier and altcoins again outperform bitcoin. BTCUSD (orange) & Hodler Positioning (blue) (tradingview.com) The Yield Curve Suggests a Hard Landing The US10Y-US02Y Yield Curve is finally starting to steepen after inverting in June 2022 as short-term yields are now falling, putting pressure on the Federal Reserve to react and lower the Fed Funds Rate. The yield curve has a great track record of predicting recessions after a curve steepens out of an inversion. The last three times the yield curve steepened out of an inversion were before the Covid crash in 2020, before the Great Financial Crisis in 2008, and before the dot-com bubble in 2000. This time, the yield curve has been inverted for more than two years. An inverted yield curve means that the average bond investor expects falling long-term interest rates due to impending economic stress, and therefore lower inflation and growth. US10Y - US02Y (blue) (tradingview.com) The curve hasn't steepened out of an inversion yet, but signs of economic stress and rising unemployment increase the odds every day. The last time that the yield curve steepened out of an inversion was in late 2019, before the Bitcoin midcycle correction and the top of the last cycle of the Bitcoin dominance. BTCUSD (orange) / US10Y-US02Y (blue) (tradingview.com) If the yield curve continues its current steepening and comes out of the inversion in the next few weeks, the chances of a mid-cycle correction in crypto asset prices due to the very likely scenario of a recession increase significantly. The continued steepening would likely result from falling short-term interest rates due to signs of immediate economic uncertainty. In 2019, the "hard landing" of the covid crash led to a sharp rise in unemployment. Perhaps we can see some early signs of such a dynamic in this cycle as well. However, the unemployment rate historically rises sharply in a short period of time without much predictive power. BTCUSD (orange) & Unemployment Level (blue) (tradingview.com) Conclusions for Positioning I have a passive and an active part of my crypto asset portfolio. The passive portfolio is the larger part and has a 100% Bitcoin allocation. I don't plan to do anything here. After all, even during the 2022 bear market, the bitcoin hash rate has been rising steadily since its inception, making the network more secure day by day without any interference from price volatility. Fundamentally, Bitcoin serves as a hedge against monetary debasement. I believe that increasing demand for a permissionless, decentralized, immutable, deflationary digital asset in a world of centralized monetary debasement seems inevitable. BTCUSD (orange) & BTC Hashrate (blue) (tradingview.com) In addition, the number of retail users is growing steadily, even though the number has dropped in the past during the biggest corrections / crashes of crypto asset prices. Therefore, it makes sense to have a position in this emerging asset class that hasn't stopped growing rapidly since its inception. BTCUSD (orange) & Number of Retail Users (blue) (tradingview.com) For my active crypto asset portfolio, there are a lot of consequences because the recent dynamics are playing out similarly to 2019. Due to my expectation of rising Bitcoin dominance the active portfolio consisted of ~ 95% Bitcoin. However, over the next few months, I believe that rotating into the second-largest crypto asset, Ethereum, makes a lot of sense from a risk/reward perspective - especially when interest rates have already fallen and asset prices have corrected lower. As I expect the Bitcoin dominance to peak in the next 1-2 months, it also makes sense from a risk/reward perspective to diversify into a broad range of altcoins, led by Ethereum of course, as it has proven to sustainably survive multiple crypto cycles. Altcoins have massively underperformed over the past two years, but potentially looser monetary policy in a post-halving year is the perfect breeding ground for speculation and short-term retail interest. Typically, retail investors tend to buy riskier and smaller assets, so the average altcoin should outperform if a bull run materializes in 2025. Until then, I believe it is time to stack Sats & Wei again.
