The Grayscale Bitcoin Trust and the cycles of BTC

The price of GBTC (Grayscale Bitcoin Trust) is at its lowest in 2022. 

Before the implosion of the Terra/Luna ecosystem in May, its price was $25, but after that event, it fell first below $20, and then to $12 in June. 

With the failure of FTX in early November it dropped further first to $8 and then even to $7.7 in late November. It is now nearly $9. 

Compared to the price at the beginning of May, the current value is 65% lower, while in the same period BTC lost “only” 55%. 

Grayscale Bitcoin Trust and Bitcoin

The Grayscale Bitcoin Trust, whose symbol is GBTC, is a fund fully invested in Bitcoin (BTC). So in theory the market value trend of its shares should follow that of Bitcoin, while instead during 2022 GBTC lost significantly more than BTC. 

At this moment in time, GBTC is proportionally worth 42% less than BTC, although in mid-November it went as low as -45%. 

This means that market demand for GBTC is significantly lower than for BTC, while selling pressure is higher. 

This disconnect started at the end of February last year, and began to intensify at the end of March also in 2021. 

It is possible that this is due to the presence of financial derivatives in the market that are preferred by investors when taking a position on the price of Bitcoin without having to buy, and hold, BTC directly. 

Thus it would just be pure competition resulting from financial products with better features. Bitcoin, on the other hand, has no real competitors. 

In other words, the conspicuous decline in GBTC that has been going on for more than a year and a half cannot be taken as a benchmark for evaluating Bitcoin’s price performance. 

The MVRV parameter

Meanwhile, however, Grayscale continues to analyze Bitcoin’s price trend. They recently discovered an interesting value of a parameter that seems to be related to BTC cycles. 

This is the MVRV (Market Value to Realized Value ratio) parameter, which is the ratio of current market capitalization to realized capitalization. 

“Realized capitalization” means the total value of all existing BTC by taking as a reference not the current price, but the individual purchase prices of all individual Satoshi. One Satoshi is the smallest unit of measure into which Bitcoin can be divided, and corresponds to one hundred millionth of a BTC. 

When MVRV is greater than one it means that the current price is higher than the average purchase price, whereas if it is less than one it means on the contrary that the current price is lower than the average purchase price, i.e. most BTC are currently at a loss. 

The curious thing, as Grayscale points out, is that Bitcoin’s MVRV is rarely less than 1. 

From our newsletter: #Bitcoin's Market Value to Realized Value ratio (MVRV) recently reached its lowest point in more than 3 years. In a report earlier this year, we explored how MVRV can be used to analyze historic crypto market cycles: https://t.co/52UuC0vbvJ pic.twitter.com/60WTQRWxAp

— Grayscale (@Grayscale) November 28, 2022

Indeed, historically those few times its value has fallen below 1 it has then generated gains of 300% over the next three years. 

Since 2012, which is the year of the first halving, only three other times has Bitcoin’s MVRV been negative. In 2012, 2015 and at the turn of 2018 and 2019, with a very brief hike in March 2020 during the collapse of global financial markets due to the onset of the pandemic.

In other words, so far BTC’s MVRV has followed Bitcoin’s four-year cycle driven by the halving. 

Grayscale points out that recently Bitcoin’s MVRV reached its lowest peak in 3 years, effectively suggesting that the current phase may be the bottom of the current cycle. 

Bitcoin’s cycles

Bitcoin has a cycle, predictable and planned, of about 3 years and 10 months, tied to the fact that every 210,000 blocks mined and added to the blockchain occurs the halving of the miner’s reward. The latter is also Bitcoin’s only monetary policy measure, given that all existing BTC have been created, and will be created in the future, as a reward for miners. 

It is not surprising, therefore, that the price of Bitcoin follows a trend that is heavily influenced by the halving. 

The first halving took place in 2012, and the following year triggered the first huge speculative bubble on the price of BTC that caused it to rise in less than twelve months from $13 to $1,100. 

The second halving occurred in 2016, and the following year there was the second big bubble that took the price up to $20,000. 

The third halving, which occurred in 2020, was also followed the following year by a new bubble, but this time of smaller proportions. 

The next halving will occur in the spring of 2024. 

The graph of BTC’s MVRV gives a good idea of this cycle. It also gives a good idea of how the 2013 bubble was larger than the 2017 bubble, which in turn was larger than the 2020 bubble. And it also makes it clear that these were really speculative bubbles, and not organic growth. 

The question now is: will the MVRV of BTC grow again in the coming years as it has in the past. Will there be a new speculative bubble in 2025? 

This is unclear to date, but at least that graph makes it clear that right now we are in a situation that is absolutely comparable to the bottom of the previous two cycles.