Bitcoin (BTC) stands at the start of a "new regime" after its early 2023 price gains, and next year will prove pivotal.That is the opinion of Charles
Bitcoin (BTC) stands at the start of a “new regime” after its early 2023 price gains, and next year will prove pivotal.
That is the opinion of Charles Edwards, founder of quantitative Bitcoin and digital asset fund, Capriole Investments.
As investment behavior around Bitcoin recovers in line with network fundamentals and price action, Edwards, perhaps like many other institutional professionals, is gearing up for an explosive period of growth.
The jury may still be out on whether the bottom is in for BTC price, but for long-term investors, the time to allocate is just beginning, he argues.
In an extensive interview with Cointelegraph, Edwards reflects on the prospects for Bitcoin and the crypto industry in the coming years and whether the 2023 rebound really has legs.
Looking ahead, next year’s block subsidy halving will be especially important, as Bitcoin becomes, in his words, the “hardest asset in the world with certainty.”
Cointelegraph (CT): Bitcoin’s NVT metric is now at two-year highs. You said this is “showing indications of value normalization and the start of a new market regime.” What is NVT and why is this a big deal?
Charles Edwards (CE): NVT is often referred to as the Bitcoin version of a “PE Ratio” – a simple yardstick for relative value of the network. NVT = Network Value to Transaction Value. It is the ratio of Bitcoin’s USD market capitalization to the 90-day average USD transaction volume that flows through on-chain Bitcoin transactions.
The reasoning is simple. If Bitcoin’s network is used to settle a lot of transaction value, then the network should be worth more. So, when NVT is relatively low, it means the market is undervaluing Bitcoin versus the value of transactions it is securely settling.
One way to identify the relative value of NVT is using Dynamic Range NVT; this applies two-year Bollinger Bands to the NVT ratio. When NVT hits the lower band, Bitcoin has historically been very cheap (a better value buy); when it hits the top band, it has been relatively expensive (a time to manage risk).
Bitcoin spent most of the second half of 2022 in the $16-20,000 region, and during this time it was trading at the lower NVT band — a signal for great long-term value. As of February 2023, NVT has broken out above fair value. This can be a signal that we are in a new regime, the early stages of a new bull market. However, as of writing, NVT is fast approaching the overvaluation band. We are not there yet, but we could be in for some near-term volatility.
CT: How confident are you that Bitcoin is now in a “new regime” or bull cycle?
CE: There is a very good chance this is the start of a new regime, the early stages of a Bitcoin bull market. We have all the signs of a typical turning point on value and sentiment. This is not to say I expect price to dramatically rally upwards from here like it did in January; the early stages of Bitcoin bull markets typically involve a 6-12 month period of volatility and an overall slow trend and grind up. My base case is a positive 2023, with the more significant cyclical growth and returns coming in 2024.
Here are some of the reasons why I see a new regime forming today. As of January 2023 we have:
- Just exited a period of deep value as defined by many on-chain metrics including Bitcoin trading at its Electrical Cost for 2 months ending this January. Historically this is the global price floor for Bitcoin and this was the second-longest period spent at the Electrical Cost in Bitcoin’s history (the first was 2016).
- Completely eclipsed the price collapse of the third-biggest fraud of all time in just two months. Despite the industry’s great loss of wealth to millions of people, Bitcoin has demonstrated that there are very few marginal sellers left and the level of deep value is too much to maintain prices this cheap for long, regardless of such negative news.
- A major technical price confirmation and confirmed fakeout at the most important price level on the Bitcoin chart — the old $20,000 all-time high and the point of the FTX collapse.
- Witnessed a 40% short squeeze with identical characteristics to the 2021 China mining ban Bitcoin price bottom.
- Entered a new regime of upward momentum, confirmed across multiple long-term moving averages commonly referenced in major markets.
- Are having an optimal halving cycle timing where Bitcoin typically bottoms (Q4 2022 and Q1 2023).
- The Bitcoin cycle drawdown hit typical -80% levels in late 2022.
- In November/ December, sentiment was at its worst, and market hedging at its highest on record.
- A likely Fed rate pause and change of policy is due in 2023.
CT: What was the significance of the $20,000 breakout in January?
CE: The $20,000 breakout was the most important price movement we have seen since the all-time high in 2021. $20,000 is important for many reasons:
- It is the 2017 (prior Bitcoin cycle) all-time high.
- It is the price level that the FTX fraud was exposed at and the third-biggest exchange (and top three fraud…
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