Date of writing: 27/05/2021 & Bitcoin price: $39,600 USD/BTC or 1 sat = $0.0004 USD

Every now and again I feel like writing up a post so here we go! Bitcoin recently took a drop from about 60k USD/BTC to about 30k over the space of a few days in late May of 2021. My reaction at the time was:

If we could still drop 50% when most of the on chain indicators were pointing towards this being middle of the cycle (see my chat with Will Clemente III SLP274), then it clearly shows that the new people coming in were not highly convicted. If Bitcoin drops 50% on this, then it’s reasonable to think an 80% drop could come at the end of a parabolic blow off top like the end of 2013 or 2017.

The people coming in towards the late part of the cycle are surely even less convicted than the people coming in at the start or middle of it.

So what is this idea of the supercycle?

My friend Dan Held (also a past guest on the show, most recently SLP251) has written on this topic in his post here, essentially arguing that because we’ve got more clarity about the narrative of why Bitcoin is important, the macro backdrop, institutions coming in, that this cycle may be different.

We always have to be wary when asserting ‘this time is different’ and of course reasonable people can disagree here. I just think it’s not likely yet. Of course, let’s not confuse what we want to happen, with what we think is most likely.

The way I think about it, a supercycle implies no big peak-to-trough drawdowns like the 80% drops we’ve seen. It points towards this idea that we’d just get smaller dips on the way up, call it 20-30% dips.

Recall that the 2017 cycle had multiple 30% dips on the way up to the eventual blow off top $20k in December 2017. And recall it didn’t just drop 80% all at once, it took about a year to grind down to the absolute bottom of the cycle around $3k December 2018.

r/CryptoCurrency - The 2017 Bullrun had 6 30% dips between 2016 and 2017 before hitting new ATHs. We're still doing really well in 2021

Is it hubris?

I’m seeing a bit of chatter on the Bitcoin Twittersphere that suggests hubris. Any talk that doesn’t suggest Bitcoin will be $10M tomorrow is shouted down for being ‘too bearish!’.

hubris: a way of talking or behaving that is too proud

Cambridge dictionary

The moment everyone thinks “this is it, hyperbitcoinisation is upon us!” is probably the time just before it hits the peak for this cycle. If too many people are going into this thinking it’s just “get rich quick” and “you can’t lose”, then that’s precisely the time that many people will lose. Of course, if you’re a long term convicted HODLer you’ll HODL on, but the newcoiners may be the ones who panic sell.

If you don’t have a fundamental valuation in your mind, you’ll sell too early. But what does it take to build up a valuation model on Bitcoin? Check out this chat with my friend Vijay where we talk about that:

What caused this dip?

Perhaps it is a confluence of factors:

  • A high number of momentum traders
  • Lots of leverage being used and cascading liquidations
  • Unconvicted newcoiners who sell at the first sign of trouble
  • Elon Musk and his nonsense drama about Bitcoin’s energy use (though I think fiat media latched on too hard to this particular story)

What we really need are hardcore convicted HODLers and stackers, builders and contributors to Bitcoin and open source projects. The tourists are really not as helpful for us here. That said, sometimes you have to take a chance because that tourist might just orange pill themselves and transform into a hardcore Bitcoiner. And maybe it takes a full cycle for some people to go through that process of getting rekt, and then stopping to actually learn what Bitcoin is about before they become hardcore convicted.

An alternate view of supercycles

Su Zhu’s tweet about it with a different spin (and in fairness, a different definition) is interesting:

I can agree that each bear cycle seems to be ‘less cold’ than the last. For me as a 2013er, the 2014/15 bear cycle was particularly brutal. The 2018/19 bear was uncomfortable but not anywhere near as bad. It’s quite feasible that the next bear cycle will be less bad still.

Remember that during a bear cycle, it really is so much more difficult to get people interested in Bitcoin. Bitcoin businesses end up having to let people go, because they can’t make as many sales. The news cycle turns more bearish and/or indifferent to what’s going on in Bitcoin land. Bitcoin mining hashrate growth slows, Podcast/Youtube download growth slows, Bitcoin wallet downloads slow, and yet, this is the best time to have your auto DCA (Dollar Cost Average) Bitcoin plan going!

So when would it happen?

So my friend Preston Pysh and I spoke about this idea of The Final Cycle in this episode from November 2020:

I think the key argument would be around the macro backdrop and seeing enough people accept the case for Bitcoin. Perhaps seeing enough people rotate out of bonds into Bitcoin would kickstart this thing! Though my guess is we’re more likely to see it kick off in either 2025 or 2029.

Maintaining realistic expectations

So at the end of the day, a common strategy is to lump sum in whatever you’re comfortable buying and HODLing for the long term, and then set up your Auto DCA plan. But be mentally prepared for a big drop, because they’ve happened before and could happen again.

But if you think an 80% drop is coming, why not trade the cycle?

I dare not trade the cycle! I’m not a trader (probably only 1% of them are profitable), and I don’t know where the top or the bottom is. You also have to consider tax impact also, which many people forget. For most people, selling on a KYC exchange means you will have capital gains tax, so beware.

Wouldn’t it also be terrible to incorrectly sell some Bitcoin thinking you’d buy back more at the bottom, only to find that you really did sell while The Final Cycle was taking place? Then you’d end up with less Bitcoin overall…

My approach is to keep on DCA’ing Bitcoin. I’d consider an Unchained collateralised loan (disclosure: Unchained are a sponsor of my podcast), to potentially get property or other life event type stuff, but even here I’d be thinking really seriously about how overcollateralised I’d go to account for an 80% drop. But depending on how this works out, if it’s a small enough portion of my stack and I believe the overall risks are manageable, this could be a more tax efficient way to unlock some of that value. I think of it like, better to pay interest on the loan, than taxes on disposal of Bitcoin.

Interested readers/listeners can see these relevant episodes:

As a quick DCA example, if you had committed to DCA Bitcoin $10/day for 4 years, starting 4 years ago (as of today 27/5/2021), this is what you would have gotten:

$14610 invested became $78940, or 440% per

What would it take for me to be wrong here?

Probably two main points:

  • Strongly convicted HODLers
  • A big enough ‘DCA army’

So the question is how quickly will the newcoiners build up conviction? I think it simply takes time and getting rekt for most people to learn. In personal financial planning, it’s quite common for people to overestimate their risk tolerance. i.e. they overestimate how much of a drop they can withstand.

Let’s put it this way, at some point near the end of this cycle, I think Bitcoin’s price will ‘overextend’ beyond the point we have ‘DCA Army’ support, and all the higher time preference, less convicted hands will sell out. Then we might have a ‘less cold’ winter bear cycle for a couple years… Then rinse and repeat.

Wrapping this up

So be smart and don’t go into this thinking it’s a ‘no way to lose’ situation. You can lose if you don’t have a good strategy, and you don’t stay cognisant of how things have gone before. But on the positive side, if you help grow the DCA Army, the floor will be higher.

Make sure you subscribe to Stephan Livera Podcast on your podcatcher app, and share this post so your friends don’t succumb to hubris!

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