The Caladan Weekly | The 2021 Redux Myth: Why Bitcoin’s Next Move Likely Won’t Mirror the Past

All probability numbers are simulated based on historical data and current trajectory/market regime. If the extant bullish structure breaks/market regime changes, scenarios and probabilities will likely differ.

Everyone sees the setup. Dollar weakness. Fed rate cuts on the horizon. Bitcoin consolidating after hitting new all-time highs. The pattern recognition part of our brains screams: “We’ve seen this movie before.”

But 2021 may not be coming back. The market structure appears to have transformed in ways that could make historical playbooks misleading. While consensus obsesses over whether the dollar will break out and trigger a correction, they may be missing something bigger: the institutional infrastructure shift that could change how Bitcoin responds to macro shocks.

The real question isn’t whether we’ll see volatility; we likely will. The question is whether that volatility behaves anything like 2021.

Based on current market structure, the evidence suggests it may not.

The Dollar Dilemma: A Coin Flip Nobody’s Pricing

Markets currently appear to price dollar strength as background noise, a technical detail that may not materially impact Bitcoin’s trajectory. This could reflect complacency about what seems to be a genuinely uncertain outcome.

The DXY sits at 98.67, down over 10% year-to-date and trading at three-year lows. The technical case for further weakness looks compelling on the surface: RSI broke out from a multi-year descending channel, global fund managers hold their lowest USD allocations since 2005, and the Fed is cutting rates while US debt dynamics deteriorate. But the bullish case is also credible. Favorable yield differentials versus Europe and Japan, potential Trump tariffs that have historically strengthened the dollar, and technical resistance levels that could trigger a reversal all argue for possible upside.

This appears more like a 45-55 coin flip than a predetermined outcome over the next quarter, though predicting such probabilities with precision is inherently speculative. Yet markets may be behaving as if dollar direction is already decided, potentially setting up asymmetric disappointment risk regardless of which way it breaks.

Here’s where the conventional analysis may break down: even if the dollar does break out, Bitcoin’s response could differ from 2021 patterns.

The inverse correlation that everyone remembers appears to hold only about 30% of the time based on historical analysis.

More importantly, when it does seem to matter, the magnitude of impact may have shifted due to structural changes in who owns Bitcoin and why. However, quantifying this effect precisely remains challenging.

The Longer-Term Dollar Trajectory: Beyond the Quarterly Coin Flip

While the near-term dollar outlook appears uncertain, zooming out reveals important context that may be missing from the current debate. The DXY has been in a multi-decade downtrend since peaking at 164.72 in February 1985.

After the 2008 financial crisis low of 70.698, the dollar entered a 14-year bull market that peaked at 114.8 in September 2022, coinciding almost perfectly with Bitcoin’s cycle low around $15,760.

Since that 2022 peak, the DXY has declined approximately 16.4% to current levels near 98.67, potentially resuming its higher-timeframe downtrend. This longer-term perspective suggests the recent dollar weakness may not be merely cyclical noise but part of a structural shift in global monetary dynamics.

Several forces support the case for continued long-term dollar depreciation beyond the quarterly outlook:

First, the US debt-to-GDP ratio continues expanding with $35+ trillion in federal debt and $2 trillion annual deficits.

As the Treasury issues more debt and the Fed maintains accommodative policy, dollar supply dynamics favor long-term weakness even amid short-term strength episodes.

Second, USD dominance is gradually eroding. US dollar reserves have declined to approximately 57% of global foreign exchange reserves as of 2025, down from historical peaks above 70%.

ECB President Christine Lagarde explicitly called for a “global euro moment” in May 2025, noting that shifting geopolitics could “open the door for the euro to play a greater international role.” The euro currently represents about 20% of global reserves, with other currencies including the yen (5.8%), pound (5%), and yuan gaining share.

Third, the conventional view that Trump tariffs strengthen the dollar merits important nuance. Evidence from April 2025’s “Liberation Day” tariff announcement reveals the relationship is far more complex than historical patterns suggest.

When Trump announced sweeping reciprocal tariffs on April 2, 2025 (10% universal, 60% on China), the dollar actually depreciated rather than strengthening as traditional theory would predict. Research from the high-frequency event study around this announcement shows the DXY fell on impact, contradicting conventional wisdom.

More importantly, senior Trump administration officials have explicitly framed tariffs as bargaining chips for a broader restructuring of the global monetary system.

White House economic advisor Stephen Miran’s notable speech outlined plans for a “Mar-A-Lago Accord”, essentially a modern Bretton Woods conference aimed at addressing how the dollar’s reserve currency status strengthens it artificially, hurting US manufacturing competitiveness. Vice President JD Vance has similarly questioned whether reserve currency status is “a privilege or a burden.”

This suggests tariffs serve multiple purposes: revenue generation, negotiating leverage, and potentially forcing a managed dollar devaluation. If this framework is correct, tariffs are unlikely to remain at peak levels indefinitely.

They function more as pressure tactics to extract concessions in trade negotiations, similar to the Phase One deal with China during Trump’s first term.

Fourth, the positive correlation between tariffs and DXY that held in some historical periods represents only one of many forces affecting the dollar. Fed monetary policy, relative growth differentials versus Europe/Japan, safe-haven flows during crises, commodity prices, and geopolitical stability all play roles that can overwhelm tariff effects.

For instance, during April 2025’s tariff shock, concerns about US supply chain disruptions and recession fears actually weakened the dollar despite the tariff imposition, the opposite of what historical correlation would predict.

Implication for Bitcoin

This longer-term dollar backdrop may provide structural tailwinds for Bitcoin. If the DXY is indeed in a multi-year downtrend punctuated by shorter rallies (as the 2008-2022 pattern suggests), and if structural forces favor continued dollar depreciation over the 2025-2027 period, Bitcoin’s inverse correlation (while imperfect and only holding about 30% of the time) could work in its favor more frequently.

The near-term uncertainty around whether DXY breaks out above 105 or breaks down below 95 matters for short-term volatility. But the longer-term trajectory suggests structural dollar weakness could provide a multi-year tailwind, even with periodic counter-trend rallies that trigger corrections.

The April 2025 correction demonstrated that ETFs provided $2 billion in buying support even during a sharp drawdown, potentially validating the thesis that institutional infrastructure changes how Bitcoin responds to macro shocks compared to 2021.

The Institutional Infrastructure Revolution

What may be the single most important development in crypto markets over the past four years often gets treated as a footnote in analysis: the institutionalization of Bitcoin ownership through spot ETFs and corporate treasury adoption.

In 2021, when Bitcoin crashed 77% from its November peak, the entire decline happened in an environment where price-insensitive institutional holders barely existed. Today, approximately $150-170 billion sits in spot ETF structures holding 1.296 million BTC. Another 3.75 million BTC (roughly 6.2% of total supply) resides in corporate treasuries according to available data. That represents a significant increase since 2020.

These holders appear to have different behavioral characteristics than typical traders. MicroStrategy’s business model centers around accumulating Bitcoin. ETFs face redemption friction that may prevent rapid unwinding.

Combined, an estimated 13% of Bitcoin supply sits in hands that appear less likely to sell except in severe stress scenarios, though this assumption remains untested in major corrections. April 2025 provided some evidence supporting this theory, with ETFs seeing approximately $2 billion in inflows during that correction.

That contrasts with 2021 dynamics, when selling pressure cascaded more freely.

The volatility numbers are notable. Daily volatility appears to have declined roughly 57% from 4.2% pre-ETF to 1.8% post-ETF, even as Bitcoin makes new all-time highs.

The structural bid from ETF flows (averaging approximately 62,000 BTC monthly against 27,000 BTC mined post-halving) suggests persistent supply-demand imbalance that could alter price discovery, though the sustainability of these flows remains uncertain.

What Could Still Go Wrong

Bitcoin is clearly not immune to corrections.

Based on current market structure and historical patterns, there appears to be a meaningful probability of significant drawdowns, though estimating these precisely is inherently uncertain. Understanding the nuance matters: these scenarios might lead to corrections rather than collapses, but this distinction isn’t guaranteed.

Sustained ETF outflows pose a notable risk, though estimating exact probabilities is speculative. If net outflows were to exceed $1 billion weekly for four consecutive weeks, it could signal institutional retreat and potentially force ETF issuers to sell Bitcoin to meet redemptions. However, current flows remain overwhelmingly positive. The week ending October 3 saw $3.24 billion in inflows, with BlackRock’s IBIT alone adding $1.82 billion. Whether this trend continues is uncertain.

A dollar breakout above 105 would require a 6.4% rally from current levels. Historical correlation during some major dollar rallies has been severe. November 2021 to September 2022 saw DXY rise from 94.5 to 114 while Bitcoin crashed from $68,789 to $15,760.

But this correlation doesn’t hold consistently across all periods, and when it does trigger selling, the institutional bid may now provide a support level that didn’t exist in 2021, though this remains a hypothesis that hasn’t been fully tested.

Note: These probability estimates are subjective assessments based on current market conditions and historical patterns, not precise forecasts. Actual probabilities could differ materially.

Looking at this estimated probability distribution, no single catalyst appears to exceed 35% likelihood based on current conditions, and the severe outcome scenarios (major exchange failure, deep regulatory shock) seem to sit in the 5-20% range based on historical frequency.

The weighted average outcome, if these estimates are directionally correct, would skew toward modest corrections rather than capitulation.

Aggregating these rough estimates suggests a deeper crash might carry around 25-35% likelihood, meaning current conditions could imply roughly 65-75% probability of either modest corrections or continued rally, though such aggregate estimates compound the uncertainty of individual probability assessments.

The Bullish Case: When Structure Meets Supply Shock

If Bitcoin avoids major corrections, the rally case could become compelling through sustained institutional demand and supply constraints, though many assumptions underpin this scenario.

A base case of consolidation in the $110K-$135K range with year-end prices around $125K-$132K appears plausible based on current trends, though calling any scenario a “base case” implies more certainty than may be warranted. Alternative bull case scenarios targeting $150K-$210K by Q1 2026 are possible but depend on several favorable conditions aligning.

ETF inflows remain a primary driver if sustained. Q3 2025 saw $7.8 billion in inflows, representing 85% growth from Q2. BlackRock’s IBIT has indicated targets around $100 billion AUM within 450 days, implying potential continued accumulation if market conditions remain favorable. These flows, if maintained, would create the supply-demand imbalance noted earlier, which could eventually push prices higher to clear the market, though demand sustainability remains uncertain.

The supply dynamic intensifies when considering the broader picture, though estimates here involve considerable uncertainty. Exchange reserves have declined from approximately 3 million BTC in 2020 to 2.3 million currently based on available data. That’s roughly 700,000 BTC that appears to have moved into long-term cold storage. Add an estimated 3-4 million BTC that may be permanently lost (though this figure is highly speculative), and the functional supply available for trading could be more constrained than headline supply numbers suggest.

Continued dollar weakness appears to have roughly even odds (45-50% estimated probability based on current positioning) and could amplify any rally if it occurs. If DXY breaks below the June 2025 low of 96.37, it might target the low 90s range based on technical analysis. Historical inverse correlation during periods when it has held suggests potential 15-30% Bitcoin rallies when the dollar declines significantly, potentially making BTC cheaper in foreign currency terms and increasing international demand, though this correlation has proven inconsistent.

Note: These are subjective directional assessments, not precise forecasts. Actual probabilities and impacts could vary significantly.

Perhaps the most speculative scenario involves major corporate treasury adoption. A large S&P 500 company (such as Apple with $162 billion cash, or Amazon with $88 billion) announcing even a 2-5% Bitcoin allocation could trigger significant price movements as markets potentially reprice institutional legitimacy.

Estimating probability here is particularly challenging, but based on corporate treasury trends and public statements, this might carry somewhere in the 30-40% range over the next 12 months, though this is highly speculative.

If a sovereign wealth fund were to confirm entry (Abu Dhabi with $970 billion AUM, Singapore’s GIC with $690 billion), the impact could be substantial as capital markets potentially recognize Bitcoin’s evolution into a more accepted reserve asset. However, predicting such institutional moves remains highly uncertain.

The Bottom Line: Potentially Asymmetric Risk-Reward

The Fed cutting rates rather than hiking. Inflation declining rather than accelerating. Volatility dropping significantly despite new all-time highs. These factors could reinforce a different market environment than 2021, though unexpected macro developments could quickly change this calculus. Can Bitcoin correct 15-25%? Absolutely, the catalysts exist and the scenarios are plausible. But expecting 2021-style crashes may misread potential structural changes in market dynamics, though this hypothesis remains incompletely tested. The institutional infrastructure shift could change how Bitcoin responds to macro shocks, potentially creating support levels that didn’t exist in previous cycles.

The more interesting question isn’t whether we’ll see volatility (as aforementioned, we likely will) but whether that volatility represents opportunity or risk. With current market structure suggesting institutional demand may exceed mining supply by a significant margin, the setup could favor strategic positioning, though defensive considerations remain prudent given inherent uncertainty.