As 2021 is coming to a close it is clear that the Bitcoin market has not fulfilled the promises that the onchain data seemed to indicate. To say it in a different way, I was way too optimistic in my predictions of where Bitcoin would end this year. Even just 2 months ago I thought Bitcoin would hit at least $100K by the end of 2021, but that didn’t happen. When I don’t get my predictions right it’s important to look what assumptions were wrong and how they could impact the future, and that’s what I am doing in this post.

In case you are not into Bitcoin on a daily basis, Bitcoin still did quite well in 2021. It went up from around $28000 in late December 2020 to about $48,000 right now, so an increase of about 70%. Not bad compared to most other asset classes, but it’s lower than average for Bitcoin. During the year Bitcoin has been quite volatile, hitting $64,000 before going down to $29,000 before climbing up to $69,000 in October. But the volatility has actually been less than in other Bitcoin cycles.

So what happened and why did Bitcoin not follow its price trajectory from 2013 and 2017? I think I (and many Bitcoin analysts with me) underestimated how quickly Bitcoin matured over the past year. What I mean with that, is that the price is not only determined by mining supply and spot buying & selling like it was during the past 2 halving cycles.

A large part of the market now consists of institutional investors that mainly take derivative positions through futures and options. This means that each time the price overshoots (like when it hit $64K in April and $69K in November) they start shorting it, leading to long squeezes of other investors, which in turns leads to a Bitcoin price crash. The result of that is that you don’t see a real mania phase anymore, because the price starts to go down before FOMO (fear of missing out) sets in among retail investors. So without institutional shorting I believe we might have been over $100K now or potentially even a lot higher. 

Are institutions bad for the Bitcoin price? No, they may actually be a good thing because the other side of the equation is that they will also prevent Bitcoin from going down 80-90% like it did in the past after a blow off top. We will still see Bitcoin going down 50% in the future, but if it goes down much more than that institutions will step in to take long derivative positions. So I expect that shocks to the Bitcoin price will be a lot less going forward. The long term Bitcoin price will not change, just the way we will get there. Bitcoin will be less volatile, which may actually lead to even faster adoption.

It does mean that some of the short-term models that are purely based on onchain data may have to be revised. For example, Plan B’s floor model that had predicted prices of at least $100K in Q4 this year completely missed its mark. I believe that is because you don’t see derivate positions onchain, so you miss out on a large part of the action. You are literally comparing apples from 2017 to oranges from 2021. I don’t know how his model works, so this is of course speculation, but I do think focusing purely on onchain data might not be sufficient anymore. This will only get worse in the future, especially if more people flock into the US Bitcoin ETFs that only use futures. You simply don’t see those flows onchain, but they still drive the market. 

There are a number of other reasons why Bitcoin did not hit $100K yet. However, they seem less important to me and only have a short-term impact. Among them the fact that Chinese exchanges like Huobi informed their users that they can’t sell their Bitcoin anymore after Dec. 31, leading to many people selling their coins and depressing the price. Year-end balancing for institutions also plays a role, as does tax loss harvesting for investors that bought BTC at higher prices during the year. Although they all have an impact before the end of the year they should also lead to increasing prices in early 2022. 

Of course there are other things driving the price as well. One of them is that the Bitcoin mining market changed completely since the 2016 halving. When we started Hut 8 Mining in 2017 and took it public in early 2018, we were the first publicly traded Bitcoin mining company. We decided to HODL our Bitcoin instead of selling them and to simply raise money from capital markets to cover our expenses. Since then many other companies copied that strategy and because of that a large part of the mined Bitcoin do not hit the market anymore. This has big implications for the impact of the Bitcoin halving and on models that are based on this. Although the halving will still have some impact, it is significantly less than it would have been without the publicly listed Bitcoin miners.

The same is true for companies like MicroStrategy that keep on buying new Bitcoin and hold them on their balance sheets. It seems pretty straightforward to me that this could lead to even higher prices from PlanB’s S2F model. There are simply less coins hitting the market, so the resulting price should be higher. Because his model is currently at the lower end of its price band it means other things are keeping the price down for now. 

All in all I continue to be very bullish for Bitcoin. Fundamentally nothing has changed, the market structure is simply different from before. Unfortunately it makes onchain analysis less important, but it is still very valuable to understand what type of investor is buying and who is selling. I believe Bitcoin will keep on breaking new records in 2022, but likely with less volatility than in previous cycles. When we will hit $250K or $500K I don’t know. It might be faster because more coins are taken off the market. Or it may take longer because we see less FOMO because institutions prevent 10X returns within a year. However, if you have a long term horizon it should not really make much of a difference, so just keep on HODLing.

Disclaimer: As always, this is my own opinion and not meant as investment advice!