Summary Bitcoin's recent performance may appear extreme, but it is not surprising given Trump's election and recent equity market strength. Trump's election has created a favorable environment for cryptocurrencies, with a more supportive SEC likely and speculation about US Treasury Bitcoin purchases. The current Bitcoin cycle appears to be maturing, though, which may limit further upside. I tend to think a market top between $100,000 and $150,000 and a cycle trough between $35,000 and $55,000 is likely. Bitcoin ( BTC-USD ) has performed well in recent months, which can largely be attributed to fundamentals (MicroStrategy ( MSTR ) purchases, Trump's election). It should also be noted that investor risk appetite has exploded in the wake of Trump’s election, meaning that Bitcoin’s recent move higher has also likely been driven by the fact that it is a high beta asset. I suggested in early August that the dip in Bitcoin's price had likely been caused by a forced unwinding of positions, creating an attractive entry point. I also cautioned that tighter monetary policy in Japan could pressure the Yen carry trade, potentially creating problems for risk-on assets like Bitcoin. I now tend to think that the current Bitcoin cycle is looking fairly mature, creating a less attractive setup. While many of the warning signs typically associated with the end of a Bitcoin cycle are still absent, equity market valuations are already stretched, meaning extremely strong earnings growth will be needed to support equities, and in turn Bitcoin. MicroStrategy MicroStrategy continues to be an important source of demand, with the company issuing both debt and equity to support purchases, enabled in part by the company's large valuation premium relative to its Bitcoin holdings. While this has created hype around a “free money glitch” it is a pro-cyclical phenomenon that has played out in the past. At some point in the not-too-distant future, Bitcoin’s price will likely drop significantly, which could also see MicroStrategy underwater on its holdings. This is not particularly problematic in the short-term given the maturity dates of the company’s debt, most of which is convertible and has low/no interest. Longer-term, MicroStrategy is dependent on a rising Bitcoin price, particularly if the company continues to make purchases at all-time highs and hopes to roll over debt rather than selling its Bitcoin holdings. Figure 1: Bitcoin and MicroStrategy Returns (source: Seeking Alpha) Trump’s Election Trump’s election has directly benefited Bitcoin by creating an expectation of an administration that is far more open to cryptocurrencies. For example, Paul Atkins has been nominated for the SEC Chairman position, replacing Gary Gensler, who had taken a tough stance on cryptocurrencies. As a result, there are expectations that the SEC will introduce rules clarifying when a cryptocurrency is considered a security and review some crypto enforcement cases pending in the courts. There have also been suggestions that the US treasury could purchase Bitcoin, potentially leading other countries to follow suit and supporting greater institutional adoption. The US Bitcoin strategic reserve would involve the US Treasury investing 76 billion USD (~2% of Treasury reserves) in Bitcoin over five years. Treasury assets typically include cash reserves, gold and securities. While this could be important from a signaling perspective, the actual volumes being considered are unlikely to have a large direct impact. Macro Environment An ongoing normalization of inflation after the COVID pandemic, and Russia’s invasion of Ukraine, along with a slow softening of economic conditions, has led the Federal Reserve to begin lowering interest rates. While looser monetary policy would generally be expected to be positive for Bitcoin, there is a fairly widespread belief that inflationary pressures are persistent and that central banks have begun to cut rates too early. Trump’s election has contributed to this situation due to an expectation that tariffs will lead to higher inflation and tax cuts could contribute to larger deficits. While the Federal Reserve has been lowering its target rate, longer-term rates have risen on the back of inflation expectations and Trump's election. The USD also continues to move higher, which represents a threat to risk assets due to both slower earnings growth and tighter Japanese monetary policy. I tend to think that downside economic risk remains, which is exacerbated by the recent rise in long-term rates. Total private employment growth has been weak over the past 18 months, although this has largely been offset by fiscal stimulus. This situation could come to a head that housing construction activity now appears to be in the process of contracting, which could eventually have an outsized impact on the economy. ETFs Bitcoin ETF inflows also continue to be an important determinant of Bitcoin’s price. ETF inflows began to increase in October, although didn’t really surge until after Trump’s election. There have been outflows in recent weeks, though. AUM has also been fairly flat since the start of December, while volumes have steadily declined over this period While ETF flows now appear to be one of the primary drivers of Bitcoin's price, they are probably more useful for explaining past moves than predicting future ones. In addition, inflows are likely to be pro-cyclical, meaning outflows will likely accelerate if/when Bitcoin's price corrects. Cycle Indicators Perhaps the strongest argument for a continuation of the current bull market comes from indicators that have helped to identify past cycle peaks. It is worthwhile noting that Bitcoin continues to mature, though, and that this cycle is different to the previous ones in many ways. For example, Ethereum has performed poorly overly the last year and Bitcoin's rising dominance is more typical of a cryptocurrency bear market than an up cycle. Figure 2: Bitcoin and Ethereum Returns (source: Seeking Alpha) Balances held on centralized exchanges tend to rise towards the end of cycles as investors look to lock in gains. This figure has actually fallen over the past year, suggesting Bitcoin may have further to run. The growing importance of ETFs and institutional adoption likely makes this a less reliable indicator than it has been in the past, though. Bitcoin’s current price relative to the average price at which Bitcoins were last traded is also a useful end of cycle indicator. Typically, the end of cycle is near when the ratio of Bitcoin’s current price to the average last traded price is high. While this metric isn't as extreme as it has been at past tops, it is still elevated. The time elapsed from when Bitcoin’s were last traded on average is also a useful indicator. Generally, when more Bitcoins have been recently moved, the end of the cycle is near. Longer-term holders have begun to move their Bitcoin recently, which could indicate the end of the cycle is near. Google search volumes also suggest that speculative fervor may have already peaked. A point supported by a decline in centralized exchange and ETF volumes. Figure 3: Bitcoin Price and Search Interest (source: Created by author using data from Google Trends) From a time perspective, Bitcoin’s price should be expected to peak sometime in the second half of 2025. How long Bitcoin will continue to exhibit a clear 4-year cycle remains unclear, though. For example, the supply impact of Bitcoin halvings is decreasing, and institutional adoption could reasonably be expected to lead to less cyclical behavior. Figure 4: Bitcoin Price Behavior Post-Halving (source: Created by author) Equity Markets The S&P500 and Nasdaq indices both performed well in 2024, although this was more the result of multiple expansion than strong earnings growth. In particular, equity markets surged after Trump’s election, with investors expecting a strong economy and more favorable business environment. This is a risky setup, though, as Trump’s presidency could lead to significant economic disruptions. High expectations will also be difficult to fulfill, particularly if the surge in AI investment doesn’t both continue and lead to broad-based benefits for end users. The recent behavior of some speculative stocks (e.g. quantum computing) is also indicative of a market top. This is important for Bitcoin as it is a risk-on asset. If investor risk appetite begins to wane, Bitcoin will be dragged down, regardless of other factors. Figure 5: Bitcoin and Nasdaq 100 Returns (source: Seeking Alpha) Conclusion Bitcoin appears to be at a crossroad at the moment, with a continuation of the current bull market or a significant correction both appearing possible. I tend to think that the risk-reward setup looks unfavorable at the moment, though. A market top between 100,000 USD and 150,000 USD seems reasonable based on past price behavior. I also think the cycle trough could be in the 35-55 thousand USD range. Figure 6: Bitcoin Price Estimates (source: Created by author)
