Bitcoin Exit Strategy

Bitcoin has gone on a great run, which really began in earnest at the beginning of November. From October 21st to today, the 14th of March, Bitcoin is up just about 400%. It’s certainly come a long way, how much more upside could there be?

As we continue through the bull phase of the halving cycle, and as I have a very large allocation (pretty much all available capital), I’m starting to think about how to manage my position in the coming months, which may mean taking some profits and re-balancing the portfolio to prepare for a post bull phase allocation.

Here’s a chart comparing the last three halving cycles, from PlanB.

Seems like we have further to go just based on the historical pattern.

If you aren’t familiar with halving cycles and price dynamics triggered by halvings, this article gets into the details, which also gets into specific conditions unique to this halving cycle.

This article is not investment advice, and everybody’s situation is unique, so you have to factor in your own personal risk tolerance, your conviction with bitcoin, portfolio construction, and time horizon when making investment decisions.

I’ll make a bullish case and a bearish case, and will cherry pick indicators to support each.

Bullish Case

The bullish case is anchored very soundly in Stock to Flow based valuations. S2FX probably has the most support from the community, and PlanB has even said it is his preferred model, because it is not a time series model.

This model has back tested very well and has been incredibly prescient since it was introduced in April 2020. Ignoring anything else, if you believe in S2FX valuation, we have a long way to go, at least to $288K.

Flow based models and on chain data support this valuation. I’ve done my own flow based valuation, based on a combination of Willy Woo’s Market Cap Gain per Dollar Invested, along with potential future flows and confirmed flows. My model suggests a low target of $91K and a high target of $1M this cycle.

Just looking at the magnitude of previous cycles would suggest we have further to go:

• 2011 trough to 2013 peak: 50,000%
• 2015 trough to 2017 peak: 10,000%
• 2013 peak to 2017 peak: 1,500%
• 2018 trough +10,000% = $320K
• 2017 peak + 1,500% = $314K

The amount of reserves on exchanges is a measure of past demand and present scarcity. We have seen a dramatic depletion of reserves from exchanges in bitcoin terms.

One of my favorite charts is HODL waves. I like it because all the fear and greed from holders of different time lengths is right there in the chart. In the 2017 cycle, most HODL cohorts reacted to an early spike in the price, then those corhorts grew in size during the early part of the parabolic phase, with the longer term holders starting to sell near the peak of the cycle.

Here’s an annotated chart that shows some of the patterns that have already repeated this cycle, and appear to be repeating again. A repeat of 2017 suggests another two months of parabolic price action to the upside.

HODL cohorts seem to all be reacting more quickly this cycle, so perhaps this signal will just be more noisy as we approach the peak.

Google Trends shows searches for “bitcoin” are 30% of where they were at the peak in 2017, suggesting that this is not yet the mania that it previously was.

Supply adjusted coin days destroyed has spiked once this cycle, where it spiked several times in 2017, with three spikes higher than our lone spike this cycle so far. This metric going up demonstrates long term holders moving coins, potentially to liquidate them.

Exchange whale ratio has not reached the lows of the 2017 cycle peak. The metric going lower is an indication that small holders (retail investors) are dominating the price action. The theory is that retail investors enter manias late, and are a signal that the end is near. You can see the big dip in this metric at the 2017 peak. Though note this may be a lagging indicator.

I do think there is at least one more wave up, which should be as strong or stronger than the last two legs up, which were 140% and 102%. 100% from the last dip would take us to $87K.

Bearish Case

Stock to flow has been a very impressive way to model Bitcoin price action, but the sample size of halving cycles is quite small (three — with the 2017/2018 cycle being the only cycle with a truly sizable number of participants, and the present cycle yet to complete). The original stock to flow model is a time series model, and predicts a lower peak than S2FX. There’s a live chart here, here’s a screenshot:

The bearish value based on this model still takes us above $100K. Even though we might hit $288K, there could be a significant draw down between here and there, such as there was in 2013.

The Pi Cycle Top Indicator is just about triggered. This indicator has accurately called the three major topics in bitcoin’s history.

Note that we had a double top in 2013, and the indicator called each of them.

Though exchange reserves has declined precipitously in bitcoin terms, in $ terms, reserves have never been higher.

This measure obviously tracks the price of bitcoin quite closely, and we did see the same thing in 2017.

MVRV Z-Score has been running very hot this cycle. This means bitcoin is “overvalued” relative to it’s realized value — the value that was realized the last time coins moved.

SOPR has also gotten quite hot as well, but I think this tends to be more of a short term indicator, and it has reset quite well with the last two dips.

Based on these indicators, it does feel to me like we might experience an intermediate top, similar to 2013.

Conclusion

There are some macro factors I’m thinking about to give me some bias in my call. One of them is related to companies moving cash to bitcoin on their balance sheet. I think we’ve only seen the beginning of this trend, and if this starts to pick up, my conviction to hold will be very high. Look for more announcements from companies, insurance companies, and maybe even pension funds or sovereign wealth funds. These would be very bullish indicators.

Much longer term, the scenario where bitcoin replaces the dollar as the unit of account and replaces US treasuries as the most pristine collateral asset are looking more and more possible. Should this come to pass, we are most likely at least one more halving cycle away from it. If your investment thesis includes this outcome, you have to play out in your head the emotional impact of trying to trade through short term dips while the long term outlook is so, so bullish. Can you just hold your position regardless of what happens in the next two years? Even when that includes an 80% draw down?

Being very heavily allocated to Bitcoin, I’m leaning towards taking some profits in the $85K to $90K range, only in accounts which are tax advantaged, or selling coins where I can avoid a major tax event (avoiding short term capital gains if at all possible). For me, this is primarily motivated to rebalance the portfolio, but I would also consider reopening positions if the market structure looks right.

Factors one may consider managing a position in the next two months:

• What is your risk tolerance? Can you afford or psychologically handle a dip from $90K to $50K?
• What is your conviction level?
• Has your portfolio become far out of balance due to bitcoin gains?
• Do you intend to sell most of your bitcoin during this bull phase, or HODL through this cycle and into the next?

It’s a good idea to put your exit plan in writing, this helps you really think through it in concrete terms. What will be your mental and emotional state in various scenarios? Why do you own bitcoin? Prepare yourself.

Good luck out there!