This past week marked the anniversary of the bottom of bitcoin’s bear market. On November 21st 2022 bitcoin fell to 15790 USD. It is usually impossible to pinpoint the exact through in the real time other by the sheer luck. A year ago, however, there were some signs that the end of the decline may be near.
The price has recovered substantially since then and so I thought it would be interesting to compare the performance of the past year with the first years of the previous three bull markets. I’m omitting the first bull market (0.05 USD -> 30 USD), as it lasted less than a year in total. The second bull market started in Nov 2011, the third in Jan 2014, while the fourth in Dec 2018. Let’s look at their progress over the first year:
To my surprise, the performance of the current advance at one year mark has been nearly the same as in the previous two bull markets. Here are the summary statistics:
The three most recent bull markets had recorded an annual return of about 120% in their first year. The latest advance has been characterized by lowest volatility ever, which resulted in a phenomenal Sharpe ratio of 2.8.
Sometime in 2015 or 2016 I imagined that bitcoin advances would become less violent in the future and at some point resemble gold and silver during 2001-2011 bull market. This has materialized only partially in bull #4 (2018-2021), as the advance was indeed smaller than the bull of 2015-17, while the volatility stayed nearly the same at 73% (for the full cycle). In contrast, in the most recent advance the return in the first year has been nearly identical to the 2018-19 advance, while volatility dropped substantially, which resulted in an improved Sharpe ratio. It looks like we’ll have to wait several more years for the analogy to gold or silver to occur.
So, where do we stand today? Another advance of less than 100% would put us above the previous top of 69k BTC/USD, so we’re about 60-65% advanced in the “stealth” phase of the bull market – still in the shade of the previous peak. The annual increase and the Sharpe ratio suggest we had a good run recently compared to the previous two bull markets. Let’s look at the financing rates embedded in the prices of futures:
Here, too, we can start to see a little bit of froth. In contrast to the -25% annual financing rates embedded in futures prices a year ago, we currently are faced with 8-13% IFRs depending on the exchange. The theoretical value is equal to the risk free rate, or currently about 5.4%. On balance this suggest a pause, consolidation and perhaps a drift lower over the next several months. However, the trajectories of bull markets at this stage have been rather chaotic in the past, so one should take this into account when gazing into the crystal ball.
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