What happened with the bitcoin network since the start of the year?
Bitcoin is off to a hot start in 2023 with a very bullish technical analysis of its investment fundamentals. The digital currency has increased in price by 38% since January 1st, leading most risk assets in this latest price rally. Most of this appreciation is likely due to the increased liquidity entering the global financial system via the expansion of the top 10 central bank balance sheets over the last ~ 60 days.
There are other factors at play as well. Some of the interest in bitcoin is probably coming from investors seeking potential safety from the low likelihood of a US default amid the debt limit crisis. A strong argument could also be made that many investors are trying to front-run the Fed’s eventual monetary policy pivot, so they are continuing to deploy capital into risk assets they deem most likely to benefit from a return to loose monetary policy.
What is happening in the current financial markets?
The beauty and challenge of financial markets is their complexity. A nearly 40% increase in bitcoin price over 35 days is not likely to have a single contributing factor but rather a multitude of reasons for renewed investor interest. Although this interest is encouraging for the bitcoin community, it is essential to note that bitcoin is still down nearly 50% over the last 12 months and approximately 65% from the all-time high of $69,000 in Q4 2021.
What is happening with the fundamentals of the bitcoin network?
As many of you know, and as we have discussed at length over the years, bitcoin doesn’t have traditional fundamentals like cash flow, etc. It is a decentralized network that is not owned by any person or group so that the fundamental data points will be slightly different. That isn’t a black eye on the asset. I see this as a first principle way of evaluating the health of the asset and network.
What to check when evaluating bitcoin fundamentals?
Those three trading fundamentals are code execution, adoption, and hash rate.
How is the bitcoin network designed?
First, code execution refers to the idea that bitcoin’s software is executing as designed. A strong value proposition of the asset is that it remains unchanged significantly when economic and geopolitical conditions change. Over the last three years, we saw significant changes in interest rates, fiat currencies monetary policy, fiscal policy, geopolitical conflicts, supply chain disruptions, and inflation, but bitcoin’s code continues to execute flawlessly block after block.
How to measure bitcoin adoption?
The second data point is adoption. There are various ways to measure this, but I like to look at on-chain bitcoin address balances. The following charts show a continued increase in bitcoin addresses that hold 0.01, 0.1, and 1 bitcoin.
This strongly indicates that adoption is continuing to increase, especially with smaller investors who tend to dollar cost average into bitcoin over time. One thing to call out as an important note would be that some of this recent growth in the last 6 months could be from people withdrawing their bitcoin from exchanges after the bankruptcies of Celsius, Voyager, FTX, BlockFi, and others. Here is the net change in exchange balances over time.
This is an interesting situation because at the same time that bitcoin is rallying hard, many bitcoin holders are putting their bitcoin into cold storage or on-chain addresses that would indicate a lack of appetite for selling the asset. I am still amazed daily that we have access to this type of on-chain data for a financial asset.
What are the changes in the bitcoin network hash rate?
Lastly, let’s take a look at bitcoin miners and hash rate. Put aside the debate around whether hash rate follows price or price follows hash rate. We aren’t worried about price when we are looking at fundamentals. We want to understand if the network is healthy and more specifically if the network is becoming more robust and secure.
The hash rate has continued to grow rapidly since the 2017 bull market. Even though China’s ban of bitcoin mining in 2021 created a temporary 50% drawdown in hash rate, the recovery has been at an even steeper pace than before the ban. There have been short-term fluctuations in hash rate, usually due to price drawdowns driving some miners to shut down, but the long-term trend is very clear — bitcoin continues to get more robust, more secure, and more decentralized over time.
Using the analysis framework of code execution, adoption, and hash rate, bitcoin continues to look incredibly attractive despite the chaos across financial markets and various economies. This framework is not perfect, nor is it as in-depth as possible. We use it to check the three significant factors that could raise red flags and cause me to re-evaluate bitcoin’s core value propositions.
It is easy for investors to get distracted by price action for a decentralized asset that is traded 24/7/365 globally. Add in the fact that it has immense volatility compared to other financial assets, and it is easy to see why the price conversation sometimes sucks the air out of the room. But if you can put aside those distractions and merely focus on the underlying fundamentals, it becomes apparent that bitcoin is doing exactly what it was designed to do.
What is happening with the global bitcoin network in 2023?
The monetary policy is unchanged. Adoption is happening bottom up. The bitcoin blockchain is getting more decentralized and secure.
An entire generation is slowly learning about the economic system and deciding that a programmatic, decentralized digital currency is the superior asset. At the bottom of bear markets, the value proposition can be lost. People can become dismayed by shrinking portfolio sizes or pessimistic sentiment. Don’t be one of those people.