Realized Value Equals Adoption
How to navigate through a Bitcoin Super Cycle
The authors of this article are (Twitter handles) @JohanMBergman and @PenningsDerek
Setting the scene
The end of the year 2021 is nearing and for some people it’s not turning out how one thought it would turn out. I was one of those people. With focus on the bitcoin block reward cutting in half on the 11th of May 2020, the expectation was that within one or two years we would have another peak in the four year bitcoin cycle. And not just a new all time high, but a peak comparable with earlier peaks of 2013 and 2017.
Chances are that it’s not happening in 2021 or even in 2022. The whole industry is changed since the last halving event. The world went into a state of crisis because of COVID-19 hitting all of the continents, supply chains clogging up, infinitely more financial instruments on various new exchanges, new players on the market, public companies putting bitcoin on the balance sheet as an hedge against inflation and nation states implementing the bitcoin standard on almost every aspect of their financial framework because they suffer from the negative effects from the monetary policy of the USA.
Thanks to the thought provoking work of @Croesus_BTC and sharing this on the podcast with Preston Pysh, where he explained about the ‘Tech Adoption Curve’ and bitcoin following the same path, I came up with a different way of looking at the price dynamics of bitcoin. Croesus crunched the numbers and came up with similarly outcomes as Stock-to-Flow, but calculated it from another angle, the adoption angle. I really recommend this show to anyone who might want to hear it. I heard this conversation already in August, but just the last few days it struck me of how I might use it to identify the state of Bitcoin.
To be clear, some of the metrics I’m going to discuss in this article, were created by other people way smarter than me. I won’t explain them in length, because the creators did a very good job at it and I will provide links to original articles about it. But even for experienced bitcoiners and analysts, please bare with me, you might find it useful to look at the bitcoin price dynamics with the framework I’m about to explain.
The Realized Cap metric captures the value of each bitcoin the last time it was transferred. Combining the time stamp of the transaction with the market price of bitcoin at that time, one can calculate the total value (in USD terms) that was ‘transferred’ to the Bitcoin Network. What if we use this metric to measure the adoption of bitcoin? There are a lot of other metrics that measure some kind of adoption, like the number of new addresses or the amount of Lightning Channels. But in the end, it all boils down to the amount of value that the Bitcoin Network can accrue.
Speed and Acceleration
You can think about the Realized Value as the Speed of Adoption. This value is almost always growing. It’s an ongoing force that most likely can’t be stopped anymore. Everyday Bitcoin isn’t going to zero, the network will continue to function and eventually will grow larger. But there is also the acceleration of the adoption. I added the 7 day difference of the Realized Value and came up with this chart.
The oscillator is the acceleration of the adoption. Sometimes the speed of adoption is rapidly increasing and sometimes it stops increasing or even go negative and is reversing some of the adoption. With the reversal of adoption I’m thinking about ordinary people who are dipping their toes into the water and buying some bitcoin at $60.000 in April of 2021. Two months later they are selling at a loss around $ 40.000. This was not what they were expecting. During this period, the Realized Value decreased. In a way this makes sense, because the person who sold with a $ 20.000 loss, will not return quickly. It may take a while before he is *trying* to adopt the bitcoin standard again.
Identifying different levels
For this framework, I identified different levels. This is not a new concept, because there are a lot of people who marked different kinds of phases through the four year cycle. But the problem with some of these phases is that the frequency that we change of phase is increasing. What I mean by that, is if we were to enter the Super Cycle, we might see a kind of cycle each year. Instead of going 5 steps forward and then 4 steps backward in a period of four years, we do 2 steps forward and 1 step backward every year. This would fit the narrative of “Lengthening Cycles and Diminishing Returns”.
Make no mistake, there is still going to be a lot of volatility in the price of bitcoin. But it might be within different bandwidths and with higher frequency.
In some of the charts I will use these four levels and at the end I will plot these levels, relative to adoption, on the Daily Bitcoin Chart to make the case.
Relation between Market Value and Realized Value
Short after Nic Carter and Antione Le Calvez calculated the Realized Cap in 2018, Murad Mahmudov and David Puell came up with the MVRV Ratio.
Notice the different levels that we defined earlier. So we started in 2020 in a bear market and March 2020 brought us to the very ‘BOTTOM’. In the end of October 2020 we leveled up to the ‘LOW’. What caused the leveling up? The halving triggered the beginning of a supply shock, but as we look at it from an adoption view, it was the beginning of a new era for the adoption of the bitcoin standard. This was brought and powered by Michael Saylor. The new era is that (public traded) companies started adding bitcoin onto the balance sheet as the best store of value available, if you have a low time preference.
Then we leveled up again after Tesla made clear that they were adding bitcoin on to their balance sheet. Being in the ‘HIGH’ level, means that things start to become overheated. The Market Value is front running the Realized Value a lot.
The acceleration of adoption was epic. In January 2021 we hit the ‘PEAK’ level. After the first correction, things started to slow down and consolidate.
We had a healthy time (months) of distribution and consolidation in this area and because the Realized Value was growing larger, we even leveled down to the ‘BOTTOM’ in May.
Then the market price dropped. A lot. What happened? Maybe the relation between Market Value and Realized Value is like Icarus and his wings. ‘Don’t fly too high’, said Daedalus to Icarus. ‘The wax that holds the feathers together will melt through the warmth of the sun. But don’t fly too low, because the water from the sea will make your wings too heavy’.
Did the bitcoin price went too high? What caused the price to level down to the lowest level throughout the summer. To answer that, we have to look at the behaviour of investors.
HODL Waves present a macro view of the holding and spending behaviour by keeping track of the period coins are being held by owners. There is a lot of confluence between the behaviour of bitcoin being held and the relation between market value and realized value.
When Short Term Holders are buying bitcoin, it is usually in periods when adoption is accelerating.
Long Term Holders are acting contrary. They are usually selling when things are heating up. The levels on this chart are inverse. LTH buying high amount of bitcoin during bear markets and selling them again during bull markets. Notice that during the run up in the end of 2020, the Long Term Holders were selling, even up to ‘PEAK’ levels.
Adoption + Behaviour + Sentiment = Direction
I’m aware that there are a lot more metrics, indicators and ways to measure price, behaviour and other aspects of market psychology. Some legends in the field of on-chain analysis, like Willy Woo, David Puell, Philip Swift, PlanB, Will Clemente and Dylan LeClair are producing new metrics and high quality content every single day. Together with friends, I’m gathering lots of data, building dashboards and plotting charts to make sense of it all. But for now, my goal is to keep it clean and simple with a framework that a lot of people can use. You know, for the sake of adoption ;-)
Back to navigating through a possible super cycle. Navigating requires a compass. With a compass you can set direction. Market sentiment is something to bear in mind. If people getting greedy, they take on too much risk. You can track this by the amount of Open Interest for Future Contracts, the dominance of Spot versus Futures and the Funding Rates across different exchanges.
Being aware of the sentiment, behaviour and the speed of adoption, it could give you a good sense in which direction the market is going. Having said that, macroeconomics and geopolitics trumps everything else.
To visualize the framework, I plotted the different levels onto the Daily BTC / USD chart. I want to point out four things:
1. This is why consolidation is important after a big increase of the market value. The realized value has time to increase as well, and without having a big correction, we are leveling down to a more healthy level because the ratio between Market Value and Realized Value is getting smaller.
2. Because of the behaviour of Long Term Holders and Greedy sentiment we almost went to ground zero in May. Some people said during this period ‘We’re still in a Bull Market’. They were not wrong, if you look at it from the ‘Four Year Cycle Perspective’. But looking at the data, the behaviour, the sentiment and adapting to another perspective, in hindsight I’m more convinced that, like Willy Woo called it, we were in a (mini) bear market. Also notice that the market value of the bottom is increasing. This happens because of the adoption earlier in the end of 2020 and beginning of 2021, measured in realized value.
3. The correction in September was healthy. We leveled up and market price rose with 80% in less than 50 days. LTH had been buying and stacking bitcoin again, so behaviour wasn’t the same as in May. Sentiment was getting Greedy again and Futures Open Interest needed a flush. But the bottom of the ‘HIGH’ level held up nicely.
4. And here we are. Price dropped again in the mid range of ‘LOW’. Relative to the summer of 2021, we are at the same position (around 1,5 MVRV) but the market price is higher because of adoption of the network. In the last six months, more value (fresh USD) went into the Bitcoin Monetary Network and made the Realized Value rise.