WBD672 Audio Transcription
Wen Bitcoin Bull Market? With Rational Root
Release date: Friday 16th June
Note: the following is a transcription of my interview with Rational Root. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
The Rational Root is a Bitcoin on-chain & cycle analyst. In this interview, 9 months on from our last interview, we look into the various Bitcoin price models Root has developed. We again review his Bitcoin Spiral Models, Bitcoin Hodl price models and Bitcoin halving & cycle charts. We discuss the growing evidence of Bitcoin scarcity, and bullish cases as we approach the next halving.
“If we keep on following the same pattern Bitcoin should reach between $100,000 and a million in the next cycle, and possibly higher after that. So that is quite bullish.”
— Rational Root
Interview Transcription
Peter McCormack: Hello, you big carrot, how are you?
Rational Root: Pretty good, good to see you.
Peter McCormack: It's good to see you, man. So, last time I saw you, you came to Bedford, which was very cool, and you kind of called the bottom.
Rational Root: More or less, right?
Peter McCormack: More or less. How close were you?
Rational Root: I mean, yeah, I think we were past the June lows then, right, we had this huge capitulation event in June, and I don't exactly know when we recorded, but it was soon after, right?
Danny Knowles: I think it was in August. It was in August and the low was maybe a month later, but I mean we were pretty much there.
Rational Root: No, the low, the final low we've had has been in November.
Danny Knowles: Is that right?
Rational Root: Yeah.
Peter McCormack: Was it really August?
Danny Knowles: Yeah, I think so.
Peter McCormack: Gosh, such a long time since then.
Rational Root: It was good weather in Bedford.
Peter McCormack: It was good weather in Bedford. I'm bringing the trophies with me now.
Rational Root: Congratulations, yeah!
Peter McCormack: Thank you. But you called the bottom. Look, we used to make shows about the Bitcoin numbers, about the charts. We used to do it with Willy, and we stopped doing it because we didn't want the show to be about that. But I don't mind making it with you because I think it's more about the data and what it's telling you. And so, I found that last show we made, I found it very interesting just because of the way you look at the data. It was really popular as well, had a lot of great feedback. So, thank you for coming back on. At the same time, I think today you're going to tell us about Wen Moon, right?
Rational Root: Well, I thought to do a bit of a follow up of the last show, so I kept most of the charts from the last show in there and I just thought, let's go through them again and see what they tell us now. So obviously, we had the June low back in August, that was in, but I think if I remember correctly, I said that it was likely to have another low, potentially a new bottom later that year, and that happened in November. So that was kind of on point with the whole cycle analysis. And I think if we look at the charts, you will be quite amazed. I think I'm also going to discuss some more bearish scenario, but in general I do think it will be a quite bullish session again.
Peter McCormack: Awesome. Well, it sounds like you're a cycle maximalist, a bit like Rizzo. Pete Rizzo said that to me. He said, "Don't give me any theories, don't give me any of that nonsense". He said, "I'm a cycle maximalist. It will always play out the same".
Rational Root: Yeah.
Peter McCormack: All right. So, for anyone listening, we've got another presentation here from the Carrot, and we will explain it as best possible so those listening can understand what we're talking about. But also, it would probably be worth going to check out the video on YouTube if you really want to see the charts because we'll edit them in right now. All right, cool. So where do you want to start, man?
Rational Root: Yeah, we're going to start again with a spiral chart.
Peter McCormack: Love this one. I think this is my favourite chart. Do you want me to hit it in?
Rational Root: Yeah.
Peter McCormack: So if you haven't seen this chart, how would you explain it? You'll do a better job than me.
Rational Root: Well, if you say that the halving is the catalyst of each bull market, which traditionally it has been in Bitcoin, due to the supply shock, a little bit caused by the halving, obviously that fact is diminishing, but it still has been the catalyst for each bull market. If we take the spiral and we count in block time, in this case each halving is 210,000 blocks. So, a full rotation in the spiral chart is 210,000 blocks, which is a little less than four years. And so, if you do that, if you plot all the data points, then yeah, there are some interesting observations that you can make.
The all-time highs and the bottoms, they kind of fall at a similar point in time if you do that. And yeah, besides that fact, the beautiful thing about the spiral chart is that without any model, it's possible to see Bitcoin's price spinning outwards. So, you don't need any model to see where Bitcoin's price is going. So, if we keep on following the same pattern, Bitcoin should reach between $100,000 and $1 million in the next cycle, and possibly higher after that. So, that is quite bullish.
Peter McCormack: If it continues to play out the same.
Rational Root: Yeah.
Peter McCormack: Yeah. So, I'm with you, this is I think it's such a super-interesting chart. What I can't decide with the halving driving the cycle is, is there some economics to it, or is it the narrative?
Rational Root: It's also a bit of a narrative. I mean, I think in the early days, the effect of the halving was obviously more intense then than it is now. Now, that's why I like it to call it the halving hype cycle, because there's also just a lot of hype around the halving, which also obviously has an effect on price. And so, it can still serve as a catalyst through this narrative, right?
But if we look a bit at the more -- if we zoom out even a little further, if we look at a bit of the macroeconomic picture, we can also see that Bitcoin followed similar patterns to, for example, the S&P 500, or so. So, we cannot not say that the halving was the catalyst of each cycle. Bitcoin came out of, fought out of the 2008 Financial Crisis. And Satoshi, for some reason, chose this four-year period to have these halvings, and that kind of perfectly aligned also with the bigger macro picture, and so we'll get to a chart as well later to show that.
Peter McCormack: And for the next cycle to fall between $100,000 and $1 million is quite broad. Why have you chosen those as the numbers, so people understand?
Rational Root: Well, that is just simply looking at if we cross $100,000. It seems like we're going to cross the $100,000 mark at least next cycle if we continue the same pattern. I actually don't think next cycle we will necessarily cross the $1 million mark, that would maybe be for the cycle after that, but it seems like it's kind of impossible to not go above $100,000 if we follow the same pattern in this spiral chart.
Peter McCormack: And these red dots in the spiral chart, are they the bottom?
Rational Root: Yeah, those are the bottoms.
Peter McCormack: And they look to be within just a few blocks of each other, each 210,000.
Rational Root: Yeah. If you go to the next slide, I drew a line from the centre, and you can see that actually amazingly -- but this is in Bitcoin time, so it's in block time. The autumn high from the last cycle and the current cycle, and also the bottoms from the last cycle and the current cycle, they are just blocks apart, which is quite astonishing. But it was hard to predict this pattern, because obviously the cycle before that was a little more shifted. So, I still think also that using human time, just years and months, is in general better to look at the chart than in block time, because I mean people don't think in block time, right? But it is still astonishing that the all-time highs and the bottoms fell nearly at the exact same moment in the cycle.
Peter McCormack: And do you know what, the one in the previous cycle is still fairly close, especially on the bottom. But to me, that says this is more like a maturing market. You know, as it's matured, there's become some consistency because it's still not that far out. That's within what, one-eighth of the quadrant?
Rational Root: Yeah, it's still very close, I agree. And it seems to be that indeed, this pattern could continue, unless we deviate away from the halving cycle, which is still a possibility as well.
Peter McCormack: So what block is the all-time high going to be at; you must have looked that up?!
Rational Root: It's right in the chart, right? It's a 78,000, a little more, no?
Peter McCormack: Of the cycle.
Rational Root: Of the cycle.
Peter McCormack: So, what's that?
Danny Knowles: That's maths I can't do.
Peter McCormack: Hold on, it's 210,000 times 3 plus 1, 2, 3…
Rational Root: Yeah, so it's also in the charts.
Peter McCormack: Yeah, so it's 4 times 210,000 plus…
Rational Root: Yeah, it was the 630,000 plus the, let's say 80,000.
Peter McCormack: So it's about 710,000?
Rational Root: 710,000, yeah, that was more or less.
Peter McCormack: We need to be able to put alarms in our phone to save some blocks now, block time, can we do that?
Danny Knowles: I mean, probably.
Peter McCormack: NVK, we'll ask that in BlockClock.
Rational Root: Yeah, block alert!
Peter McCormack: Block alert! Do you self-trade based on this data?
Rational Root: Yeah, I do. On a cycle basis, yeah.
Peter McCormack: Interesting. It's fascinating, it blows my mind.
Rational Root: I'm not a day trader, I cannot tell where the price is going tomorrow. But on a cycle basis, yeah, there are definitely very good patterns.
Peter McCormack: There are two trades you need to make on the cycle.
Rational Root: Basically, yeah.
Peter McCormack: That's fascinating. The other thing I like about it is the way that you track the price in the spiral chart, the lines have never crossed.
Rational Root: Exactly, yeah.
Peter McCormack: And it's quite an important thing to maintain, quite an interesting thing to maintain.
Rational Root: Yeah, if we would cross, that would -- I mean, I do think and I think I already mentioned that also in our last interview, is that at some point in time we will likely cross, because I do think cycles are -- I mean, for now they're not shifting, but it's very likely that they will shift at some point in the future. And also, if price is going to stabilise a bit more at some point. Maybe also it becomes more volatile first, but eventually, who knows? Measured in USD, it could actually become more volatile, we'll also get to that. But if the market cap grows, it could happen that the lines will cross at some point in time. I mean, I still think that the spiral chart will be useful even if that happens, but it's cool for now that that hasn't happened, yeah.
Peter McCormack: Yeah, and I think one of the reasons, one of the things that supports that, is the liquid supply appears to always be falling as we have new bitcoiners coming in, becoming hodlers, and then you add into that there's less new supply coming in every day after the halving, you can see why there's a certain catalyst for it to keep growing like this?
Rational Root: Yeah, exactly. Yeah, and I'll get to that in some of the charts as well. I made the HODL Model, which we discussed also in the last interview, and there's definitely some interesting observations there that are actually very bullish.
Peter McCormack: All right, let's go to the next one.
Rational Root: Yeah. So, here we continue with the with the spiral chart, but now we use just normal time. So, this is the four-year cycle, which also is a common term in Bitcoin, right? But you can see now that the green dots, those are in the in the northwest, let's say. They are not completely on the vertical line, let's say, where the four-year cycle starts, because the halving is a little less than four years. So now, one full rotation in the spiral represents four years and obviously it's on a log scale, so each ring going outwards is times ten. So, it goes from $1 to $10 and so forth. The most outer ring is $1 million in this case. And yeah, the cool thing about looking at this in human time is because we can track a bit better seasonality as well.
So it seems every four years at least, around Christmas time, we have this all-time high; it again came true this cycle. And the year after around Christmas time, we have a bottom, you know, those red dots in the bottom.
Peter McCormack: And they're even closer, the bottoms are even closer in those three years, based on time.
Rational Root: Yeah, so you can see that the halving kind of shifts back a little bit. I also added in the predicted halving of this, so there's one green dot there. I put that at $40,000 because I think that's a reasonable price to make at the next halving. But you can see that again, that's a little shifted, it's a little earlier in the cycle. I mean, we will reach that point a little earlier than the previous halving in the same cycle. And so the cycles are shifting a little bit, and you can also see that in the bottoms very well, right? So, all those three dots, they appear a little earlier in the cycle, also the all-time high in the last cycle, at least, it did not in the previous cycle. But yeah, so the cycles are shifting a little bit there.
But yeah, most of the all-time highs are all made in that first quadrant, which is one very interesting observation. And yeah, I mean all bottoms are in the south, and it's very likely that if we continue the pattern with the cycle, that the bottom is in this time. I'm way more confident now than I was last time. Last time we had this capitulation event in June, which was a true capitulation event. It was a significant one, comparable with bottoms of other cycles. But timewise, yeah, there was still the south of this chart that kept saying like, "Okay, we can make another low there". And I warned for that last time, and indeed that it did happen as well, we made another low; although I was not sure if we were going to make another low, but I did expect some downside still in that south area.
But we did make another low, and that was also mainly due to the events that happened around FTX. And so, if we didn't have an FTX, maybe we would have just made another low, but not a cycle low there, but in this case we did.
Peter McCormack: Isn't it strange though, every cycle we find a reason or something happens that does cause that?
Rational Root: Yeah, I mean it's not that strange because if price starts going down, things start falling apart. So, it's just like this waterfall effect, so it's not that strange. But there's some event that will happen, indeed, and it depends on which one.
Peter McCormack: So, Christmas time is going to be good, not this year, next year!
Rational Root: Yeah, so we're still a year away from the halving and basically, if we would make an all-time high again at more or less the same time in the cycle, that would be two years out.
Peter McCormack: All right, man.
Rational Root: Yeah, here are marked still the all-time highs, the bottoms and the halvings.
Peter McCormack: That's mad.
Rational Root: They're all at exactly the same moment in the cycle.
Peter McCormack: And they're basically within about a month of each other, it looks like.
Rational Root: Yeah, more or less, yeah.
Peter McCormack: Hold on, each quarter is a year. Yeah, it looks like about a month.
Rational Root: More or less, yeah. It's really close to each other.
Peter McCormack: I'll be interested to do this again in two years if we're plotting it the same.
Rational Root: Yeah, I will be too.
Peter McCormack: All right.
Rational Root: So this, yeah, I had that in there as well the last time, and it's actually very interesting. This is the same, I mean, the price pattern is just on the four-year cycle again, except now we colour-coded the chart based on the short-term holder cost basis. And the short-term holder cost basis is really an amazing, very powerful on-chain metric in my opinion. There's so much information that you can pull out of that classification.
Peter McCormack: Do you want to explain what it is?
Rational Root: Yeah, so the short-term holder cost basis is actually the same as the short-term holder realised price. So to say again, first, what is the realised price? The realised price is the average purchase price of all Bitcoin. So, all transactions on the blockchain, we can look at the price that they moved, and so the average price that we get is the realised price. So, it's the average investor price, basically. We can also then look at only the age, the certain age of coins, and so it's very useful to do this because if we look at a relatively young coin, so in this case it's about five months, there's a lot more recency in the data, so you can see what's happening now rather than what has happened in the whole history of Bitcoin.
So, the short-term holder cost base is just the average purchase price of young coins, so young holders, and they are more affected by recent news and events. Typically, if price drops, it's mostly short-term holders that are selling rather than long-term holders, so it's very useful to have this metric as an indicator. And you can actually use this for all kinds of things. We're going to get to some, but in this case, I used it to mark the difference between bull and bear markets within Bitcoin. And we can see that the second quadrant of the spiral here, it was completely red, yellow, there was not even a single dot of green. And actually, in nearly all cycles, it was just only red, that whole quadrant. And again, we got out of that quadrant and we made the bottom in the south, and we started to have the first green appear again, a little bit. So the first signs of, again, a bit of more bull market. It's not maybe yet a full-grown bull market, but at least some of the early signs.
So, yeah, I think to continue maybe with the short-term holder, the usefulness of the short-term holder cost basis, we can also go to the next chart. This is actually to look a bit more at the recent data, so what is Bitcoin doing now? So I mean, we can see just the current cycle here. So, we had the all-time high in April, then we had the November highs, and then we made a bottom in June. You can see that that touched that black line.
So here, the green line is the short-term holder cost basis, and then basically the red and the black line, those are mezzanine and the floor, I call them, they are two levels lower than that. And I chose those levels myself, but if you look at the history of Bitcoin, price has almost never fallen below the floor in its entire lifetime. And as well, this intermediate level has been touched many times. Sometimes a local bottom is formed there. And so with the June low, you can see that we had really a true capitulation event and we even touched that black line there, whereas actually the actual bottom that we had, I think it was in November as well, it only touched the intermediate level, the red line. And then we actually crossed above the short-term holder cost basis, which is an indication that we're kind of getting out of the bear market, we're now in a bull market. And then we had a confirmation by actually again finding support on that same-short holder cost basis, and we continue.
Now, we're kind of in the level again where we might have either, like find support again on the short-term holder cost basis, which would be bullish because that would be kind of a continuation of the bull market; or if we fall below, we could see some temporary downside, and maybe fall back to lower levels, like the intermediate level or the floor.
Peter McCormack: Is there any logic to why this happened; is there a mathematical reason why you think this might happen?
Rational Root: Yeah, so I mean the logical reason is because short-term holders are more affected by price movement, so they will be tempted to sell more quickly than long-term holders. So, when there are events happening, short-term holders will either sell or -- and the short-term holder cost basis is the average purchase price of such short-term holders. So, when prices are trading above the short-term holder cost basis, short-term holders are in profit, so they feel good in general, right?
So if price is below the short-term holder cost basis, they are at a loss. And so, this level of the short-term holder cost basis for that particular group serves as a level where either if we're trading above it and we fall to the short-term holder cost basis, they might step out of the market to step out and not have any profits, but to not get any losses, right? And the same thing happens when we're below and when they're at a loss for quite some time. Whenever they get to that level where they're equal, then they might also step out of the market. That's why it's such an interesting level.
Peter McCormack: Recovery, amazing.
Rational Root: So, here's the zoomed-out version of that chart. So, more or less it's since 2013, I see. But yeah, you can see that the floor, it has been touched every time more or less in the bottom of the bear market. And those intermediate levels have also been touched several times, soon after making a bottom, and that again happened this cycle, so it's a useful level to watch as a trader.
Peter McCormack: Okay.
Rational Root: Yeah, we'll still continue with some spiral charts. So this is again a bit bigger picture, but we compare Bitcoin to silver, gold and real estate. We did that last time as well.
Peter McCormack: Yeah, let me just explain the chart to people who are listening. So where we have these circles, concentric circles, are they concentric circles?
Rational Root: Yeah.
Peter McCormack: I mean, when you look at the spiral chart, what the big carrot's done, he's put circles in to explain essentially the market cap for silver, gold and real estate and how Bitcoin is chasing these down and it's touched on the silver market a couple of times. Is that twice in the last year?
Rational Root: The last cycle we did kind of in April and then in November. I think in November, we actually went above it just slightly, but yeah, we surpassed silver's market cap just by a small margin but then again we dropped back below it. But it seems if we continue the pattern, that indeed next cycle we will have to go above silver's market cap, and we're going to start going after gold, which will be cool.
Peter McCormack: It will be fascinating.
Rational Root: It will be fun. Also, because especially after the next halving, so in a year, Bitcoin's inflation rate will also be lower. It's now more or less the same as gold, but after next halving, which is already in a year, it will actually drop for the first time lower than gold. So it's going to be interesting.
Peter McCormack: Someone will have to check on Peter Schiff! That will be fascinating though, because the gold bugs just will be in disbelief.
Rational Root: Yeah, I mean I think once Bitcoin really starts competing with gold, it's going to be very interesting.
Danny Knowles: I mean $10 trillion, that's a long way to go yet.
Rational Root: Yeah, I still expect at least a full cycle. I mean, I don't expect actually to trade above that the next coming cycle, it's probably going to take another cycle after that.
Danny Knowles: Yeah.
Peter McCormack: Do we know what the price of Bitcoin would be for it to do that then, rough?
Rational Root: Yeah, I have that mapped out. I have a chart where I have Bitcoin's price and gold's price if we would surpass it, but I'm not sure what the price is at now.
Peter McCormack: It's basically, is it $500,000?
Danny Knowles: Yeah, about that. I mean, there's not quite 20 million coins.
Peter McCormack: Yeah, but 20 million-ish, $500,000? Yeah, I mean we could flirt with it, interesting. It depends what gold does as well though.
Rational Root: Yeah, and gold has been going up recently obviously because of recessionary fears. So this here, I compare Bitcoin -- it's a bit similar but I compare them to the biggest currencies in the world. So we have the British pound there, the Japanese yen, the euro, the USD and the Chinese yen.
Danny Knowles: The pound is fucked! It's coming for it.
Rational Root: Yeah, we're now more or less trading similar to, for example, the Mexican peso or so. So, these are the biggest currencies in the world, by the way. So, Bitcoin already surpassed many in market terms of market cap, but we're already trading at a similar currency like, for example, the Mexican peso now. And yeah, we're going after the pound next. So, that looks good.
Peter McCormack: I don't have to feel too patriotic about that one! Interesting, fascinating.
Rational Root: Yeah, so here I plotted the Bitcoin halvings, they're scaled to the current cycle. So you can see how much of a price increase, for example, the 2013 cycle had. It would have gone more or less $2 million almost if we would have the similar returns in this cycle, which is obviously not reasonable to think because the market cap has increased significantly. But I added here also the realised price. Those are those other lines that you can see there. And we can see that those bottoms, they again fell more or less at the similar moment in time below realised price.
So, realised price is again the average purchase price of all Bitcoin. And yeah, so price only trades about like maximum a year below realised price each cycle. And it seems that we're past that point now and we made a low.
Peter McCormack: I mean, the pattern here is every cycle, the percent growth we see is reducing.
Rational Root: Yeah. So those are diminishing returns, as they call them.
Peter McCormack: Yeah. So does it eventually get to the point where there's no returns to be made and we go backwards.
Rational Root: Yeah, so I have some evidence why I think that's not going to happen. And actually, I think that potentially the next cycle might have a higher increase than current cycle. And I'll show the reasons for that, but it has to do with illiquid supply and each Bitcoin getting more scarce, and so we'll get to that in the next charts. But yeah, if you think -- and the log growth curve again is one of those famous models in Bitcoin, yeah, then you would expect diminishing returns each cycle. But if we look at the patterns on-chain, what's actually happening, Bitcoin is getting more scarce. And I think when hype is coming back next cycle, yeah, I think it might cause higher price increases than we had last cycle.
Peter McCormack: Interesting, okay.
Rational Root: Yeah, this is still the same comparison, but now they're not scaled. They're just really on the normal price scale. So we can see again, I also mentioned this chart I showed in the last interview, where we have this period of a year where it's actually really a good accumulation zone. I think we mentioned that last interview, like this is an ideal time to be accumulating Bitcoin. And we're kind of now past that red zone, so I think our last interview was like eight months ago or so?
Peter McCormack: Yeah.
Rational Root: Yeah, so that year more or less has passed now. I mean, it's still reasonable to buy Bitcoin or to average in, especially if you think that next cycle we will reach prices higher than $100,000. But yeah, the ideal accumulation zone was in that red zone, where we made the bottom obviously.
If we look at the amount of supply that is in circulation that is held by short-term holders, I think this again shows where the short-term holder is such a powerful metric. We can use this kind of as a proxy for demand or how much hype is there in the market currently. Is there a high amount of young coins? That means a lot of new people are coming in the market, and that's why these peaks here that you can see, they correlate with all the blue dots in the price chart where all the highs are made during those peaks. And yeah, as you can see, we're nearly at a low, we're very low, so there's really not much of a hype in the market currently, there's not many young coins in the market, which is also reason to believe that we cannot expect high price increases.
I think we're still going to have some horizontal price movement, let's say. I expect that to be the case until the next halving. But it's kind of waiting for one of those peaks again in young supply, where new hype is coming in the market. It seems to happen more or less every four years.
Danny Knowles: It's interesting that the previous all-time high basically had no hype, you know, the second time we hit $68,000, whatever it was, $69,000.
Rational Root: Yeah, the second top, but that was actually a top made only on long-term holders being really excited about Bitcoin and expecting that price would still continue to go above $100,000. But if you looked at this indicator, you already knew that was not very sustainable. And so, that's why we also barely made a new all-time high there, by the way, we almost didn't. So, the April top was actually the true peak of the cycle, also in terms of hype. And yeah, if hype is gone, it's not going to come back soon, it takes a couple of years. Again, it needs to build up, there needs to be some catalyst, but yeah, it will come again next year, I don't see any reason why not.
Peter McCormack: If you had a platform with live charts for this, I would subscribe. I would pay to access it.
Rational Root: Yeah, you're a lucky man.
Danny Knowles: Is it on the roadmap?
Rational Root: You're a lucky man. You can go to bitcoinstrategyplatform.com and subscribe, you will have access to --
Peter McCormack: Is it already there?
Rational Root: It's already there, yeah.
Peter McCormack: That sounded like such a setup, didn't it? It sounded like such a setup! Danny, can you bookmark that?
Danny Knowles: Yeah.
Peter McCormack: All right.
Rational Root: Yeah, so here, we'll discuss a bit of the bearish case. So here, I compared Bitcoin to the S&P 500, and we use TA because obviously we don't have access to on-chain analysis in traditional finance. So, we can only compare the two through TA. So, we use the Relative Strength Index, which is on a scale from 0 to 100, like what is Bitcoin's momentum basically, or the S&P in this case; the blue line is the S&P. And so, I zoomed out a little further, but you can see that the orange line -- so we had the recession in 2008, we had the Relative Strength Index touch values below 20 there. And Bitcoin, yeah, it came forward out of that crisis more or less, so it was launched.
But you can see that Bitcoin's RSI kind of follows the same pattern. In the beginning, a little less still, but it starts to correlate more and more with the S&P. So we can see the similar cycles there actually.
Peter McCormack: Why do you think that is; why do you think we have that correlation?
Rational Root: I mean, the S&P as well is a bit of a risk asset, so Bitcoin is correlated to risk assets currently more than it was in the past. But it seems to be the natural human psychology. So, these market cycles, they obviously happen in all markets and risk appetite, that happens in all markets. And so, that's why this correlation is there. But yeah, this again shows why also we cannot say that the halvings -- which actually those are the horizontal lines that you can see there, those are actually the halvings in time.
So we made a bottom and then the halving comes. And we do see that after the halving, that Bitcoin's price outpaces the S&P, so there was, especially in the first cycle for example, if you look at the first halving Bitcoin's RSI spiked way higher than the S&P did. But it has been more similar. Also, if you look at other indicators in macro, Bitcoin also will follow a similar cycle pattern. So, that's why also I do believe the halving is a bit of a narrative. It still causes obviously the hype around it currently probably more than the actual halving, but it still serves as a catalyst.
But yeah, this is kind of worrying in a way, because if Bitcoin's price stays correlated and we do get a recession later this year or early next year, and we get to an RSI in the S&P of below 20 again, like we did in the dot-com bubble or in the Great Recession, yeah, Bitcoin's price could temporarily -- we could deviate a bit from the four-year cycle in that sense.
Peter McCormack: So we kind of need the bull market before then?
Rational Root: Well, I mean I think it will kind of go hand-in-hand. I mean, if there's going to be a recession, I don't expect an immediate -- recession takes about a year, two years, so we'll just have a bit of a delay before we get to the bull market. So, it depends on what's going to happen on a macro level with Bitcoin. I mean, if we do get a recession, yeah, we can have a bit of a delay in the next bull market, which would also deviate the cycle pattern. So this is a very, I think, important chart to keep track of, because if we get an RSI below 40 again in the next month or so, that's a severe warning signal that we could potentially -- or Bitcoin needs to decorrelate, which also can happen.
If Bitcoin becomes more, if we get the digital gold narrative, it will be interesting to watch. I don't know if that will happen. I mean for now, it's quite correlated to the S&P, but we could decorrelate, it's possible. And definitely, if we look at some of the charts later that I'll still show about illiquid supply, so how Bitcoin is getting more scarce, there is a possibility that we actually might decorrelate.
Peter McCormack: Okay.
Rational Root: So this is the --
Peter McCormack: The HODL Model; she's back!
Rational Root: -- HODL Model, or these are the charts that go along with the HODL Model. So here is Bitcoin's supply shown, that's just the circulating supply. So the orange line that you can see, it's 19 million-something coins that we have currently in circulation. And here, I made the division between illiquid supply and liquid supply. So the orange part of this chart is actually the supply that's available for trade, whereas the illiquid supply, the blue part of the chart, is actually coins that hardly move.
So, instead of looking at the age of coins, what we do with illiquid and liquid supply is looking at the spending behaviour of coins. So, if someone spends less than 25% of their holdings, it's considered illiquid supply. Whereas, if someone spends more than 25% of his holdings, he's considered an illiquid person or illiquid entity because he might sell Bitcoin at any moment in time basically. And so, this is very interesting because especially the orange part of this chart, so the liquid part, the supply that's actually available for trade, you could see that if you think of price as a function of supply and demand, the orange part is actually the supply part of the function. And so it's obviously proxy, it's an approximation, it's not a perfect indicator, but it does a decent job in my opinion about what is the actual supply available for trade.
Peter McCormack: Yeah, and the interesting part of this is that the circulating supply, the liquid supply, every four years it's reducing. So, that's going to start going horizontal-ish?
Rational Root: Yeah, so the circulating supply after every halving, the steepness of that curve will basically halve because the issuance halves every halving, and so that flattens out. We're already at 19 million and we will only go to 21 million in the next 100 years. But the illiquid supply seems to be growing. And so, the idea of the HODL Model is that the third halving was kind of an inflection point, because as you can see in this chart, the supply issuance outpaced illiquid supply growth until the third halving. But after the third halving, suddenly illiquid supply is growing at a faster rate than new supply is entering Bitcoin in circulation. And that's kind of fascinating, because that means that Bitcoin is getting more scarce.
Peter McCormack: Yeah.
Rational Root: And that has only been happening for a relatively short amount of time. We started out with a relatively high amount of -- actually, around that third halving is the highest amount of available supply, so a very abundant Bitcoin, let's say. And we had the kind of disappointing, perhaps, bull market after that. But if you think that, yeah, we had a lot of supply during that bull market, it makes sense that we didn't get to extreme high prices; whereas next halving, it looks quite a bit more bullish.
Peter McCormack: Definitely, yeah. That's a cool chart.
Rational Root: Here's the HODL Model then; so, what does the HODL Model do? So, it tries to kind of predict the growth rate of illiquid supply. And because we can map -- Bitcoin's supply issuance schedule is known into the future, and so we can map the HODL Model, we can try to predict like what is illiquid supply going to do. And the HODL Model is a very conservative model in this case. And you can see also that illiquid supply is quite a bit above the model value there.
In the bottom chart, we look at the same thing, but we look at it in percentage terms, so how much supply is illiquid of the total supply in percentage terms. And so, we can see that we started at 100% because in the beginning of Bitcoin, nearly all supply was illiquid, and then supply starts moving more and gets spent more, and so it dropped. But at that third halving, we made a low there. So the HODL Model makes a low and illiquid supply made a low there. And we have been rising since. So that means that, again, the available supply for trade is shrinking, so Bitcoin is getting more scarce since that third halving.
This was the model that I also showed last time. And what I didn't show was, I also -- this was the conservative HODL Model. I also had an optimistic HODL Model, which is the HODL Model S.
Peter McCormack: Oh, wow, that's the S-curve.
Rational Root: That's the S-curve, yeah, the HODL Model S, which is a model that I actually have never shared yet.
Peter McCormack: Hold on, where are we here?
Danny Knowles: 2030.
Peter McCormack: 2030.
Rational Root: Yeah.
Danny Knowles: Do we want Bitcoin to become very illiquid though, or do we want people spending it?
Rational Root: I mean, yeah, if you think of Bitcoin as a store of value mainly, it makes sense that most of the supply is just stored, right? But there will be always a small part of the supply that's liquid and that will be used for trade. But if you think of all the money in the world, most value is also stored either in real estate or bonds or in all kinds of things, right, it's just sitting there. Whereas, the money that's spent on an actual day-to-day basis is a lot less.
So, the HODL Model S, I've never shared. It's actually the first time that I showed this model. The reason I didn't share it last time also was because it was kind of too optimistic, and coming from a stock-to-flow model that kind of had a bit of a negative impact, it's better to have a conservative model and be wrong to the upside than to have an optimistic model and be wrong to the downside. But even now with the HODL Model S, we're actually still trading. The illiquid supply is still above the model value, even with the optimistic model that I had.
Peter McCormack: So, by the end of the next cycle, that really could get crazy.
Rational Root: Yeah, if we keep track with this model, I don't know. I mean, we will have hyperbitcoinisation within two cycles. I can also not believe it myself. That's why I didn't share this chart last time. But I think now we've been past a bit the whole stock-to-flow model, and it's fine. And especially since we're still trading above it now, I feel like, okay, it's good to share this.
Peter McCormack: This is where it gets really real with all other football clubs where they'll be like, "Oh, this is why he did it".
Danny Knowles: Well, you'll be in the Premier League in eight years!
Peter McCormack: No. I mean, I'm thinking I'm looking about the middle of the next cycle. What's that; two, three, four years? I think it's by the time we hit the league, our treasury will start accelerating in price and then we can probably build that 50,000-seat stadium in Bedford!
Rational Root: I mean, if this model is going to continue keeping up, you can hire some really good players.
Peter McCormack: Oh, this excites the fuck out of me. But it's funny because, you know, when you first see prices go up, you get really excited because you think about personal net wealth. But I'm beyond that now; all I think about is this football club, "How do I get this football club up the leagues?" Money is a function of this, available funds to invest in players, a team, your facilities. I look at this and think, "Oh, we can do this".
Rational Root: Yeah, yeah. I believe you can get to --
Peter McCormack: Did you come to a game? I can't remember.
Rational Root: I went to see your field.
Peter McCormack: Oh yeah.
Rational Root: But there wasn't a game, no.
Peter McCormack: We're going to get you over for a game at some point. This is the coolest chart in here. What does it make you think?
Danny Knowles: I don't know. I think I like the idea of spend and replace, and then you don't have as much liquid supply.
Peter McCormack: But you can still spend it. It doesn't matter how, what they do.
Danny Knowles: But then it is liquid at that point. If it's moving regularly, then it's become part of the liquid supply presumably.
Peter McCormack: Yeah, but the value you've got is so much more that you don't need to spend that much of it.
Rational Root: Yeah, if the dollar value increases, obviously you need to spend less Bitcoin.
Danny Knowles: I'd hope more and more people start spending and replacing as more and more people accept Bitcoin. So I guess that then increases the -- I understand the point, but --
Rational Root: Yeah, but also more and more people will use it as a store of value.
Peter McCormack: Both can be true, right?
Danny Knowles: Both can be true at the same time, yeah.
Peter McCormack: Yeah, more can be spending and --
Danny Knowles: Because if you're spending and replacing, it doesn't remove the store of value aspect of it, but you also are actually using this.
Peter McCormack: And if we're recruiting more bitcoiners at an increasing rate, you can all be spending more.
Rational Root: By the way, in this model, so here the third halving serves as this inflection point where Bitcoin becomes more scarce. But what I don't show here, but I do think there will be a second inflection point, because here kind of all of Bitcoin supply will be illiquid by, I don't know, 2035 or something.
Peter McCormack: Supply shocks.
Rational Root: But that obviously won't happen. There will always be a liquid supply.
Peter McCormack: You just need to zoom in more. That's the point, is that there will always be a gap.
Rational Root: Yeah, there will always be a gap, but I think that gap will stabilise at some point.
Peter McCormack: Yeah.
Rational Root: The closer we get to hyperbitcoinisation, there will be a second inflection point, because here the available supply will kind of shrink to zero, but that's obviously not going to happen. So, there will be some second inflection point, and that likely will be more close to hyperbitcoinisation, where we will stabilise in terms of liquid supply.
Peter McCormack: I love this chart.
Danny Knowles: Can I just ask one more question on that, because I can't quite figure this out in my head? If we move to a world where everyone's getting paid in Bitcoin and spending Bitcoin, everything becomes much more liquid, presumably, because coins are moving hands, even though there's not a US dollar trade or a pound trade, the Bitcoin is swapping hands more?
Rational Root: Yeah, that's why I think there will be a second inflation, but it might be satoshis that are swapped, so it depends on Bitcoin's price. So, the higher Bitcoin's price gets in US dollar terms, the less Bitcoin needs to be moved.
Danny Knowles: But the more of the global economy that goes to being paid in Bitcoin, then I think that could probably outstrip the shrinking --
Rational Root: So, if price does a 10X and you start moving, you know, if price does 10X or so, then also the supply that you trade would be 10 times less in dollars terms. So, Bitcoin can grow a lot in terms -- if the user base grows times 10, but the price also times 10, then you have the same amount of liquid supply trading.
Danny Knowles: But I don't know if it's just the growth of the user base, because the vast majority of the user base, like 99.9% I would guess, are not getting paid in Bitcoin. And so, if the way that people interact with Bitcoin changes, I guess that could change that ratio as well. Because if say that 0.1% of people that get paid in Bitcoin now becomes 10%, then the 10X in price can get outstripped by that.
Rational Root: Yeah, I also think, I mean by the time that nearly the whole world gets paid in Bitcoin, we're not going to measure in USD terms any more, it's not going to be a value, but we can still look on-chain how much supply is going to be liquid and how much illiquid; that percentage we can still see. And I cannot predict that now, but I do think, yeah, there will be a second inflection point.
Danny Knowles: Where it starts to go the other way?
Rational Root: Where we again maybe start increasing or at least stabilise in terms of available supply for trade. So, this is again zoomed in on that orange part, which is the available supply for trade, but here we look at it at percentage terms, so how much percent of the supply is available for trade. And we can see that in the first halving, around 20% of the supply was available for trade, and we had these huge price increases that came with that. Then we had, in the second halving, we had 25% of the supply available for trade, and we still had a decent -- we did 20X or so in 2017. And then the third halving, so that was actually the inflection point, we had the highest amount of available supply for trade, which you can see quite clearly in this chart. And since then, we have been going down.
Peter McCormack: So, we've just lived through what should be the hardest cycle?
Rational Root: Actually, I do think so, yeah. If you look at Bitcoin scarcity, that is the case. Obviously, it also depends on all events and how much demand there is, so there's other factors at play. But in terms of Bitcoin scarcity, yeah, the highest amount of available supply was available around that third halving.
Peter McCormack: Yeah, and so then it kind of makes sense that we didn't really have a 10X cycle that a lot of people expected. They expected it based on previous cycles, but they weren't looking at this data. And for us to have such a huge jump from, I mean, well we kind of did -- what was the bottom; $3,000, we topped at $60,000, so that's really a 20X actually. But I think that some people thought we're going to get $100,000, $150,000, $200,000, maybe even $300,000 because they were basing it based on the growth of a previous cycle, but with a massive increase in the supply available for trade, that made it a lot harder.
Rational Root: Yeah, I usually measure from the previous all-time high. So in that sense, the previous all-time high was $20,000, and so this cycle we only got to $69,000, so it was like a 3-point-something-X. Whereas in 2017, we had the 20X; we went from $1,200 --
Peter McCormack: Yeah, nearly, about 18X.
Rational Root: Yeah, something like that. So, yeah, but if next cycle, and it looks like it, I mean that we're going to have a supply that's available supply for trade that's going to be more similar to the 2017 cycle.
Peter McCormack: So, another 18X! Hold on, that would be on $60,000; no come on, that would be $1 million.
Rational Root: Yeah, that would be, yeah.
Danny Knowles: That's the title!
Peter McCormack: Yeah, "Root says we definitely hit $1 million next cycle!"
Danny Knowles: "He promises".
Peter McCormack: Yeah, "He promised us!" What was my bet with American HODL?
Danny Knowles: I think, was it $1 million by 2027?
Peter McCormack: I think it was. He could win that.
Danny Knowles: You might lose, yeah. I mean, I fucking hope you lose that bet!
Peter McCormack: Oh, I hope I lose that bet. I've never wanted to lose a bet more than that one! Connor, do you understand why we want me to lose that bet?
Rational Root: Yeah, so yeah, it is truly amazing. I think this is really the most underrated data. I think that kind of even adds to the fact that it can happen more likely, because no one is expecting it. Everyone is expecting diminishing returns next cycle, just because everyone's focused on this log growth base. Also, all history of Bitcoin has been diminishing returns. If you look at price, you will only think diminishing returns. But if you think of price as a function of supply and demand, now the supply is really getting more scarce. And it seems to be, I mean, I made a conservative model, which I shared eight months ago. I actually made the optimistic model before the conservative model, but I found it too optimistic to share. So I tried to make a more conservative model, which I shared eight months ago.
But now I feel like since we're still trading above it, I also have to share the optimistic model. But even the optimistic model is not optimistic enough apparently. So it's at that fast pace it's going. And the optimistic model is kind of by 2030, which I also cannot believe. So, I don't know, but the data is the data. I mean, obviously also demand is a function, but we showed that with the short-term holder supply, which I think is a pretty good function for demand. So, you have these peaks coming in. But if the supply is kind of scarce around the next halving and we get one of those spikes again in hype, like in short-term holder, a lot of new young coins coming in, which I do expect at some point, yeah, price could go quite insane.
Peter McCormack: What do you think we top out in the next -- what's your strike price?
Rational Root: Yeah, I don't want to make any price picks.
Peter McCormack: I know you don't, I know! Why don't we all make one; should we all write one down and come back to it? We don't have to tell.
Rational Root: I just said $1.2 million, right, I promised!
Peter McCormack: Holy shit, if we went to $1.2 million…
Danny Knowles: Premier League, here you come.
Peter McCormack: Premier League, here we come.
Rational Root: There are some caveats here. I mean, I do think since the increase in market cap, it does become a little more difficult for the price to move. So, even if we have a scarcer supply, I mean, it could still be harder to have the same amount of increase as we did early on. But, yeah, for me I think $100,000 next cycle is the bare minimum. Based on the spiral, based on just available supply for trade, it seems very unlikely that we'll not surpass that.
Peter McCormack: Yeah, and I wonder if we did get up to those crazy numbers, then we would see more liquid supply come in, because there's people who have just come from, you know, I don't mean this to come across like a dick, but say you've got enough Bitcoin, you're worth $100,000, you're suddenly a millionaire, it's like, "Fuck, well I'm going to sell half of this. I can buy a house"; so people just have such massive gains?
Rational Root: We always see during bull markets that long-term holders are selling and taking profits. And I do think since we didn't reach prices higher than $100,000 last cycle, that a lot of long-term holders are still sitting on their Bitcoin, that they would have liked to maybe take more profit in the last cycle, and so maybe also more tempted to sell a bit of that if prices start reaching those levels.
Danny Knowles: But no one ever takes profit. Everyone always expects it to go much higher than it does, and no one ever takes profit!
Rational Root: Yeah, so here you can see the conservative model and the optimistic model of the supply. And so, you can see that available supply is still trading below the optimistic model here, so that, it's just kind of amazing. So here, yeah, I still showed this demand curve. So imagine getting another spike of demand with less supply in the next cycle? Yeah, I do think 2017 price increases, maybe less because we have an increased market cap, but I wouldn't be surprised if we surpass the last cycle's increase in price. So, I said I don't really like to make price predictions in the future, because I also think on-chain is not very good at predicting the future. I think on-chain is more valuable in telling what's currently happening. Like, give me a block and I tell you what's happening.
So, I made this on-chain value map, which actually built a bit also on Willy Woo's work. So the bottom indicator here is actually one of, well, a bit adjusted, but it's one of the indicators that Willy Woo did, which is coin value days destroyed. So, it looks at how many days a coin builds up and how many of those days are destroyed once there is a transaction of that coin. And so, it's kind of useful to make a bottom indicator. But the top indicator of this chart, I think, is very promising, and that is actually based on the average money invested in Bitcoin plus the available supply for trade. It's a very simple indicator, actually, and it gives this near perfectly, like we touch this top line of this value map near perfectly with each cycle.
So, since Bitcoin is getting more scarce, also, that line has kind of flattened out. You can see in the current cycle, that line kind of just stays relatively high. It's even higher than it was at the peak in April, and that is because available supply is shrinking. So that line, you know, it's good. And yeah, so if more people start buying Bitcoin, so if new hype is coming in, then this red line will start to move up because Bitcoin's average purchase price will move up, so there's more money flowing into Bitcoin, which it measures. And it also measures the available supply for trade. And so based on that, I think it's going to be one of the better top indicators for next cycle.
But I cannot predict into the future because I don't know how much money is going to be invested into Bitcoin over the next cycle, and I also don't know what trade of supply will be in the future. But we can look at the current moment. So as soon as this model -- if Bitcoin's price starts hitting this red line, or it gets close to it, yeah, I think it will become a top signal.
Peter McCormack: You know what I'm going to say, Danny?
Danny Knowles: I don't, go on.
Peter McCormack: We need some more Bitcoin; we need more Bitcoin, we don't have enough Bitcoin!
Danny Knowles: No one has enough Bitcoin.
Peter McCormack: Saylor's going to be the richest person in the galaxy.
Rational Root: Yeah, I do think so. I also need more Bitcoin.
Peter McCormack: We all need more Bitcoin. That's amazing, I love your charts. I think it's brilliant, I think it's very cool. It's super-interesting. Look, I understand, they're just models and models can be broken, but it's super-interesting. The bit that just really interests me is the available supply starting to drop. That inflection point is super-interesting. You have that against growing demand…
Rational Root: Yeah, and almost no one is talking about that. I mean people say, "Yeah, Bitcoin is scarce", but here's actually the data showing Bitcoin is getting more scarce, and not many people are paying attention to this.
Peter McCormack: And so, on your bitcoinstrategyplatform.com, I'm definitely advertising that right now, I can get live versions of these charts?
Rational Root: Yeah.
Peter McCormack: I am on, we need to subscribe to that. Root, that's amazing. Anything else you want to talk about?
Rational Root: No, I mean I kind of wanted to do the follow-up of the last charts, and we went through them, so unless you still want to discuss some football or...
Peter McCormack: No, I'll tell you what I want to do, is I want to come back and have a chat with you in about, I think we need to do this in about a year.
Danny Knowles: Yeah, just before the halving.
Peter McCormack: Yeah, before or after?
Rational Root: Yeah, around the halving would be very interesting.
Peter McCormack: What about halving day; why don't we do halving day together?
Rational Root: Yeah.
Peter McCormack: Do we know when that is?
Danny Knowles: About April.
Rational Root: Yeah, it's the end of April.
Peter McCormack: You know what that is? That's the end of the football season.
Rational Root: Okay, yeah, let's do it.
Peter McCormack: Halving 2024. All right, Root, amazing. Do you want to re-shill your platform, tell people where to go?
Rational Root: Yeah, you can go to bitcoinstrategyplatform.com and sign up. You get free newsletters and if you become a paid subscriber, you get access to the platform with all these charts.
Peter McCormack: How much is it?
Rational Root: It's $21 a month, but currently there's a limited 30% discount.
Peter McCormack: Why are you discounting? I would switch that discount off now. After people hear this, they're going to be on it. You've gone for $21 to be like a bitcoiner, but you could charge way more for this.
Rational Root: I could, yeah. It's extremely valuable info, I think.
Peter McCormack: Yeah, all right. We're going to sign up. Root, love you, man. Thank you for this.
Rational Root: Thank you.
