In the last quarter, when Bitcoin decreased by more than 50% from its peak, I suggested that the bear market is not a systemic flaw, but rather a part of the early adoption process of Bitcoin. At the beginning of this year, I explained why Bitcoin might reach $11 million by 2036. I still believe this scenario is possible, but what is more worth questioning is: what path will Bitcoin take to get there?

Bitcoin has seen hundred-fold increases in early cycles, but the returns in recent cycles have noticeably narrowed. If this trend continues, Bitcoin will eventually resemble a mature asset more and more, and returns will gradually normalize.

The power law model summarizes this change well. (Referring to the long-term stable power function relationship between Bitcoin's price and time) As the size of the asset grows, its returns gradually decrease. For over a decade, Bitcoin has been operating along a highly stable long-term trajectory.

I recognize the explanatory power of the power law framework and believe that Bitcoin may continue to operate roughly along this trajectory for years to come. However, I am no longer convinced that the power law is sufficient to describe the endgame of Bitcoin.

In the process of Bitcoin's maturation, returns are declining, and volatility is also decreasing. The decrease in volatility will not only change the scale of funds that Bitcoin can absorb but also expand its uses within the financial system.

Lower volatility will improve Bitcoin's risk-adjusted returns, making it easier to finance using Bitcoin as collateral. When Bitcoin becomes high-quality collateral in the global financial system, the scale of dollar credit based on it may expand significantly.

Decreasing returns lower volatility, and declining volatility attracts more funds and expands the scale of financing that Bitcoin can support. Ultimately, these forces may instead drive Bitcoin's price to accelerate upward, breaking through the power law trajectory.

Decreasing Returns, May Just Be the Prelude to the Next Stage

There is an interesting analogy in materials science.

Engineers studying metal fatigue observe how cracks expand under repeated stress. The wings of an airplane bend slightly during each flight, and bridges are repeatedly stressed and unloaded as vehicles pass over. Each instance of stress causes very small damage, but these damages gradually accumulate, ultimately forming an ever-expanding crack. Engineers typically divide the crack growth curve into three regions.

The first region is the crack formation period, where expansion is irregular and difficult to model.

Upon entering the second region, the crack growth begins to follow a pattern, which is called the Paris law interval in engineering (the Paris law describes the power-law relationship between fatigue crack growth rate and stress intensity). At this point, crack growth approximates a straight line on a double logarithmic plot.

Upon entering the third region, the crack reaches a critical point and expands rapidly; the power law that could describe the intermediate stages no longer applies, and the material ultimately fractures.

I believe that the monetization process of Bitcoin also follows a similar trajectory. In this analogy, the continuously stressed material is the U.S. dollar credit system.

The first phase is discovery. Both returns and volatility are extremely high, making it difficult for large funds to allocate to Bitcoin and hard to obtain financing using it as collateral.

The second phase is maturity. Returns and volatility narrow simultaneously, improving Bitcoin's risk-adjusted returns, allowing investors to scale their allocations, and it gradually becomes a more attractive collateral.

The third phase is monetization driven by the financial system. Proprietary capital and credit-driven buying begin to enter the Bitcoin market on a large scale, initiating a self-reinforcing cycle, causing price growth to accelerate again and break above the power law trajectory.

Most people see the second phase and think the decreasing returns will last forever. But in my view, the second phase is precisely creating conditions for the third phase. As Bitcoin matures, with decreasing volatility, improving risk-adjusted returns, and enhanced collateral quality, it becomes easier for existing capital to allocate to Bitcoin, and using credit to finance purchases also becomes more feasible.

Decreasing Volatility is Reshaping Bitcoin's Asset Attributes

Bitcoin's volatility has significantly decreased.

In March 2014, Bitcoin's one-year volatility once approached 147%; as of the publication of the original article, data from Perplexity Finance showed that this number had dropped to about 44%. Fidelity recently also pointed out that Bitcoin's current volatility is below 98.5% of its historical trading days.

While long-term returns remain prominent, Bitcoin's volatility continues to decrease, leading to an increase in the Sharpe ratio. This means that Bitcoin can attract more funds simply through the improvement of risk-return characteristics without relying on new credit. Similar signs were observed from 2016 to early 2017: volatility significantly narrowed, while strong performance began attracting more capital.

Volatility also acts like an “invisible tax” on position sizes. For investors with fixed risk budgets, if Bitcoin's volatility decreases by half, they can theoretically double their position size without increasing their portfolio’s risk contribution. Therefore, even without creating any new credit, the decline in volatility itself will expand the space for existing capital to allocate to Bitcoin.

The maximum drawdowns also illustrate the same issue. The maximum drawdowns in the previous three main bear markets for Bitcoin were about 85%, 84%, and 77%. In this current cycle, Bitcoin fell from a peak of approximately $125,000 in October 2025 to a low of about $58,500 in June 2026, resulting in a drawdown of approximately 53%.

NYDIG has also offered a similar conclusion near the June low: this drawdown was 52.7%, while from 2021 to 2022 it was 77.6%, and earlier rounds were between 84% and 94%. Each round’s decline is narrowing, and the bottoms are rising. NYDIG views this long-term decline in volatility as one of the most distinctive features of the current stage.

For Bitcoin holders, this change may be disappointing: bull market increases have shrunk, bear market decreases have shrunk, and overall returns are declining.

But from the perspective of lenders, the same trend is very attractive because Bitcoin is becoming higher quality collateral.

The Lower the Volatility, the Greater the Scale of Credit Bitcoin Can Support

From the lender's perspective, the most crucial question is: How much of a drop can Bitcoin withstand before the value of the collateral approaches the loan balance?

Suppose someone holds Bitcoin worth $100,000 and borrows $20,000 against it, with an initial loan-to-value (LTV) ratio of 20%; when the LTV rises to 80%, the lender will liquidate the collateral.

The smaller the possible worst-case drawdown for Bitcoin, the higher the loan amount the lender can safely issue with the same collateral safety. If the liquidation rules remain unchanged, a predicted worst-case drawdown decreasing from 80% to 50% could increase the safely issueable loan amount to 2.5 times the original amount.

The same logic applies to borrowers. Companies like Strategy and Strive utilize financing structures that can expand Bitcoin exposure without taking on the risk of immediate liquidation; the shallower the drawdown, the stronger the resilience of these structures. Thus, lower volatility can support a larger financing scale while reducing credit risk.

Price increases will further amplify this effect. If Bitcoin's price doubles while the corresponding dollar debt remains unchanged, the LTV will be halved. The same amount of Bitcoin can thus support more borrowing, providing funds for subsequent purchases.

Even if Bitcoin gradually matures and annual returns no longer reach 100%, this financing logic may still hold; the expandable credit scale can still be substantial.

Assuming the expected annual return on Bitcoin drops to 30%, while the financing cost of Bitcoin-related preferred stock is about 13%, there is still about a 17 percentage point expected return gap between the two.

As the extreme drawdowns of collateral continue to narrow, such a yield gap is still sufficient to support large-scale financing. As the market's assessment of collateral risk decreases, cheaper financing channels may gradually open up, including bank credit, investment-grade bonds, and Bitcoin mortgage securitization.

This mechanism has already begun to manifest in public markets. Strategy has released a schematic credit model that derives its preferred stock credit spread using a hypothetical Bitcoin volatility.

Under unchanged assumptions, when Bitcoin's volatility is at 60%, the model indicates that the STRC credit spread is 360 basis points (1 basis point equals 0.01 percentage points), placing it in the non-investment-grade range; when volatility drops to close to the current realized level of 40%, the spread quickly narrows to 56 basis points, entering the investment grade range; when volatility further drops to 30%, only 6 basis points remain. Meanwhile, the probability within the model where collateral assets cannot cover the liabilities has also decreased from about 26% to less than 0.5%.

Declining volatility results in lower credit risk for the same type of instrument; the lower the credit risk, the more funds the financial system is generally willing to provide.

The starting point is a decline in both yields and volatility, but the outcome could be a rise in yields again.

The Flywheel of Capital and Credit, Driving Prices to Accelerate Again

These factors combine to form a self-reinforcing cycle.

As Bitcoin continues to grow and mature, volatility decreases; risk-adjusted returns improve, allowing investors to inject more capital; improved collateral quality makes financing cheaper and more abundant. Existing capital and buying pressure supported by new dollar credit begin to compete for the total cap of 21 million Bitcoins, pushing prices upward. Rising prices in turn boost collateral value, releasing more financing space, and thus the cycle continues.

From the perspective of credit expansion, this cycle resembles a speculative attack in macro finance (borrowing relatively weak currencies to buy assets that are harder to dilute, thus forming a self-reinforcing trading mechanism).

Credit expansion may arise from multiple paths. Banks can issue Bitcoin-backed loans, and as explained by the Bank of England in its Money Creation in the Modern Economy, commercial banks create deposit money concurrently when issuing loans. Companies can also issue convertible bonds and perpetual preferred stocks to use the proceeds to buy Bitcoin. Both paths expand dollar-denominated credit while removing more Bitcoin from circulation.

The Moment of Breaking Through the Power Law

So, what will be the endpoint of this process?

The adoption of new technologies typically follows an S-curve: initially slow, then rapidly popularized, and ultimately approaching saturation. Many people believe that Bitcoin's price will follow the same curve and gradually approach flattening. However, this overlooks the fact that the dollar side of BTC/USD is not static: the dollar funds and credit available for buying Bitcoin or financing it will continue to expand.

The supply of Bitcoin is fixed, but the dollar funds and credit available for purchasing Bitcoin have no fixed upper limit. The lower the volatility, the more existing capital can be reasonably allocated to Bitcoin; the higher the collateral quality, the stronger the financial system's capacity to expand dollar credit based on it.

Even if the adoption rate of Bitcoin eventually approaches saturation, the scale of funds willing to hold Bitcoin directly or purchase it through financing may continue to expand. The dollar-denominated price of Bitcoin might also accelerate again, breaking upward through the previously described power law trajectory of the second phase.

This is the third region in the metal fatigue curve. Cracks will not expand forever at the pace described by the Paris law; rather, they will accelerate and ultimately cause fracture once a critical point is reached. The decline in volatility first broadens the space for capital allocation and credit expansion; as these forces begin to compete for Bitcoin, which has a fixed supply, returns and upward volatility may rise in tandem.

In this analogy, the material under continuous pressure is the U.S. dollar credit system; the so-called "fracture" is the moment when Bitcoin's dollar price breaks upward through the power law.

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