For as long as I can remember, the phrase “this time it’s different”, uttered during bull markets, sent chills down my spin. In 2000, it was used to justify multi-billion dollar valuations for companies with a website, but no revenue. In 2007, it was used to induce people to pay much more for houses than they could afford. In 2017, it was used to explain multi-billion dollar valuations for token projects without users, but with “disruptive potential”. There were other examples, but every time I heard “this time it’s different” to describe valuations that could not be justified by reasonable metrics, I shuddered, fully expecting the inevitable crash…
So, when I thought about how I would describe the recent rally in Bitcoin, it made me laugh to realize that this time really IS different. The reason, however, is that metrics DO matter and CAN be used to explain how this rally differs from 2017 and why it will likely continue. There are several reasons, but lets start with the hash rate of the Bitcoin network.
As one can see from the above chart, the hashrate of the Bitcoin network has increased by over 6 times from December of 2017, when Bitcoin made its all time high price. This is actually pretty remarkable when one considers that the block reward halved earlier this year. The growth of the network and its resilience in the face of its non-inflationary monetary policy bodes well for its future. While it is far from certain, it does strongly indicate its increasing likelihood of achieving status as a store-of-value to rival or eclipse gold in the long run. It also suggests that the asset itself is “worth” a lot more than it was at the end of 2017.
The second reason that this time IS different from 2017 is the macroeconomic picture. While fiat currencies were certainly being debased at the time, the global pandemic has dramatically accelerated the expansion of monetary aggregates. This is shown in the following graphic from the OECD data store, which shows the growth of M3 over the past 10 years.
Bitcoin, in contrast, has a deflationary monetary policy, that, as shown by the hash power increase, has flourished over its first decade of existence. It is not surprising, therefore, that luminary investors such as Paul Tudor Jones and, more recently, Stanley Druckenmiller, have embraced Bitcoin as an investment with strong potential in such an environment.
To put the potential appreciation into perspective, consider the current market caps of Gold, which is traditionally considered the hedge against fiat currency depreciation, and Bitcoin. Gold is valued at over 9 Trillion, while Bitcoin, despite the recent rally, is only worth 1/30th of that amount…
Despite all of these reasons, plus the entry into the Bitcoin market by corporate treasuries (Microstrategy) and payment processors (Paypal), this rally does not resemble the parabolic moves seen in December of 2017. Before looking at the trading pattern, it is important to document the lack of hype associated with Bitcoin at the current time. As the following graphic from Google trends makes clear, there is nowhere close to the amount of public interest in Bitcoin today as there was at the previous all time high:
This is very important context, as it implies that the buying interest in Bitcoin is coming from a more professional segment of investors, rather than the pure retail market that typically buys in towards the top of the market. In addition to the difference in public interest, the trading pattern itself is much more orderly.
As shown above, the November rally has been over 30%, but has featured multiple pullbacks along the way and few large gaps. While this is not definitive proof of anything, it, combined with data suggesting that Bitcoin has not reached anything close to the hype cycle it achieved in 2017 , it is highly suggestive that there is more room on the upside.
All of this taken together might mean nothing, but, in my opinion (and PLEASE do your own research and do not construe this as investment advice in any way), the future for Bitcoin is promising indeed. I have written many times that Bitcoin trades like an option on its own adoption potential, with a “payoff” of it becoming digital gold. As that would translate into a price that is roughly 30 times todays $18000, the potential is large. Obviously, such an outcome is far from certain, but the global environment is moving in its favor.