November 3, 2023
Greg Cipolaro

Research Weekly - Bitcoin Rallies Despite $13.5B Overhang


  • Bitcoin’s impressive rise comes despite worries of billions of dollars of bitcoins coming to the market from bankruptcies and government sales.
  • Bitcoin’s dominance continues to rise but remains well below the peak of the last cycle.
  • Past cycles indicate that bitcoin’s outperformance in this stage of the cycle is anything but extraordinary.

Climbing the Wall of Bitcoin Worry

In the world of finance, there is a saying that goes, "climbing a wall of worry," which highlights the remarkable ability of financial markets to overcome obstacles. This saying perfectly captures the path of bitcoin this year, which has witnessed an astounding 108.7% year-to-date rise through October, despite the overhang of nearly 390K bitcoins valued at a staggering $13.5B that potentially come to the market due to government sales or the resolution of bankruptcies. We note that half of this impending influx stems from potential bitcoin sales resulting from asset forfeitures in various legal cases, such as Silk Road and the 2016 Bitfinex hack, while the other half arises from the resolution of bankruptcies, with the infamous 2014 Mt Gox bankruptcy being the primary contributor.

The timing of when these bitcoins will enter the market is a topic of much speculation, as many think it could be detrimental to price. Concerning the holdings by the US government, the coins associated with the James Zhong forfeiture, who is accused of hacking Silk Road, were expected to be sold in four installments throughout 2023, as stated in legal documents, with two sales already completed. While it remains unclear when the other coins held by the US government through other civil forfeitures will be made available, it is worth noting that many sales in the past have historically been conducted by the US Marshals and announced well in advance. As for the disbursement timeline of the coins connected to the Mt Gox bankruptcy, it has experienced persistent delays but is now set to commence by the end of 2023, with a final deadline of October 31, 2024. In terms of other bankruptcies, they are currently progressing through the court system. BlockFi has recently enabled withdrawals for wallet customers, with BIA repayments scheduled for the upcoming year. FTX has partnered with Galaxy Asset Management for the purpose of liquidation, while Genesis is on the path to liquidation but remains entangled in the legal process. Celsius, on the other hand, has already begun converting its altcoins into cash or BTC and ETH since July, but we still await a final resolution of the case.

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How significant is a $13.5B overhang? The magnitude of its impact hinges on the timing and way it enters the market. If it were to flood the market abruptly with a large influx and immediate liquidity demands, it would have a far more detrimental effect on prices compared to a more calculated approach over an extended period. Our past experiences have shown that these events tend to instill a sense of apprehension rather than causing a direct market disruption. Price corrections typically occur in response to news of a potential sale or when there is a notification regarding coin movement on the blockchain, rather than solely due to the sale itself. Nevertheless, we are encouraged by the fact that despite these potential overhangs, bitcoin has managed to rally over 100% on a year-to-date basis.

Bitcoin Dominance Continues to Rise, But Well below Previous Cycle High

Bitcoin's dominance, its share of the market cap in the industry, has been steadily increasing throughout the year. However, when compared to the previous cycle, it may still have a way to go before reaching its peak. Interestingly, in the past, bitcoin's dominance has reached its lowest point at the top of a price cycle. This might seem counterintuitive, but the reasoning behind it is that during the peak of the cycle, speculative digital assets tend to outperform in terms of price, therefore "stealing dominance" from high-quality and large-cap digital assets like bitcoin. Bitcoin's cyclical dominance lows (January 2018 and May 2021) coincided with the last cycle peaks.

Then, as the correction phase of the cycle ensues, the speculative assets fall more on a percentage basis, while bitcoin falls less on a percentage basis, gaining market cap “dominance.” The growth in dominance begins in the drawdown period (2018, 2022), continues through the initial phase of a market rebound (2019, 2023), and peaks (early 2021) when the speculative phase of the market begins.

However, there could be new factors driving bitcoin's increasing dominance in this cycle. The anticipation of a spot bitcoin ETF and a more clear regulatory environment in the US for bitcoin, are undoubtedly unique aspects influencing the current market. Additionally, there are few new narratives emerging in the crypto industry that are attracting fresh interest. In the previous market cycle, NFTs, DeFi, and alternative layer ones were highly intriguing, but their popularity seems to have waned without being replaced by a new narratives. While it remains challenging to predict the ultimate trajectory of bitcoin's dominance, investors can find solace in the fact that we are still far from reaching the peak of the previous cycle.

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Bitcoin Goes First (Again)

Based on our analysis of past market cycle bottoms in 2015 and 2018, it is evident that bitcoin has consistently been the asset to pave the way for industry recovery, a finding that supports our previous analysis on dominance. As an illustration, we compared bitcoin with two other major assets, litecoin and ether (Ethereum).

Looking at the comparison with litecoin, one of the oldest assets that has remained a top coin, in both previous cycle troughs (January 2015 and December 2018), bitcoin led the way out of the downturn. It took some time for litecoin's price action to gain momentum and similar pattern appears to happening during this recovery phase.

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Comparing bitcoin with ether, we can observe a similar trend, but this current cycle has a slight twist. In 2018, bitcoin reached its lowest point around the same time as ether, but the first year of recovery, in 2019, was completely dominated by bitcoin. However, this recovery in 2023 is slightly different as ether experienced its cycle low much earlier in 2022 compared to bitcoin. Nevertheless, this year seems to be following a similar pattern to 2019 in which bitcoin significantly outperformed ether. As of October, bitcoin has surged by an impressive 108.7%, while ether has risen by (only) 50.8%.

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Market Update

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Bitcoin continued its rally again this week, up 2.8% and breaking through the $35K barrier. While this is the first time since the collapse of LUNA/UST and Three Arrows on May 9th, 2022, that bitcoin has been at this price level, its ability to hold the level has proven elusive thus far. But if bitcoin can hold this level, the next significant barrier would be $40K, which is a level it had spent the first part of 2022, all the way until the fateful events of early May. Equities have sprung back to life this week with a 2.5% increase in the S&P 500 and a 5.6% increase in the Nasdaq Composite. Bonds also rallied as the Fed stayed pat on interests rates this week and communicate a more cautious tone to future rate increases. Investment grade corporate bonds rallied 2.0%, high yield corporate bonds rallied 2.3%, and long-term US Treasuries rallied 3.1%. Gold rallied 0.3% as real rates fell while oil fell 0.9%.

Important News This Week


Billionaire Druckenmiller Calls Bitcoin A 'Brand' He Should Probably Own - The Block

Bitcoin's Safe Haven Appeal Strengthens as U.S. Treasury Bonds Disappoint, Allianz's Advisor El Erian Says - CoinDesk

Bitcoin Could Hit $150,000 by 2025, Says Bernstein - Decrypt

BlackRock's BTC ETF Might Have Trading Support of Heavyweights Like Jane Street, Jump and Virtu - CoinDesk

CME Whisker Away from Replacing Binance as Top Bitcoin Futures Exchange - CoinDesk

Cantor Fitzgerald Sees Spot Bitcoin ETF As 'Most-Important Short-Term Catalyst' - The Block

Fidelity's Director of Global Macro on Bitcoin: Thread 1 Thread 2 Thread 3 Thread 4


Bitcoin's Whitepaper Turns 15 - Here's the Original Thread and Discussion - The Nakamoto Institute

Regulation and Taxation:

Sam Bankman-Fried Found Guilty on All Seven Counts - TechCrunch

SEC Charges Crypto Company SafeMoon and its Executive Team for Fraud and Unregistered Offering of Crypto Securities - SEC


Binance's Market Share Continues to Decline Amid Rally - The Block

Coinbase Opens Up Crypto Futures Trading to US Investors - Blockworks

Tether's 3Q23 Attestation - Tether

MicroStrategy Bought More Bitcoin in October as Asset Gained Value - The Block

Upcoming Events

Nov 8 - End of rebuttal period for many ETF applications

Nov 14 - October CPI reading

Nov 17 - US federal budget deadline

Nov 24 - CME expiry

Dec 13 - FOMC interest rate decision

Jan 10 - Final ETF decision deadline for the first bitcoin ETF, ARK 21Shares

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