Author: Joe Burnett, Vice President of Bitcoin Strategy at Strive

Translation: Jiahua, ChainCatcher

In the last quarter, when Bitcoin fell over 50% from its peak, I suggested that the bear market is not a systemic flaw, but a part of Bitcoin's early adoption process. Earlier this year, I explained why Bitcoin might reach $11 million in 2036. I still believe this scenario could occur, but what is more worth questioning is: what path will Bitcoin take to get there?

In its early cycles, Bitcoin saw hundredfold returns, while the returns in recent cycles have significantly narrowed. If this trend continues, Bitcoin will ultimately resemble a more mature asset, and returns will gradually normalize.

The power law model summarizes this change well. (Referring to the relatively stable power function relationship between Bitcoin price and time in the long term) As the size of the asset expands, its returns gradually decrease. Over the past decade, Bitcoin has followed a highly stable long-term trajectory.

I agree with the explanatory power of the power law framework and believe Bitcoin may still roughly follow this trajectory for years to come. However, I am no longer convinced that the power law is sufficient to describe Bitcoin's ultimate outcome.

As Bitcoin matures, returns are decreasing, and volatility is also decreasing. The decline in volatility will not only change the scale of funds that Bitcoin can absorb but also expand its use in the financial system.

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

Decreasing returns reduce volatility, and as volatility declines, more funds are attracted, thus expanding the scale of financing that Bitcoin can support. Ultimately, these forces may drive Bitcoin's price to accelerate again, breaking through the power law trajectory.

Decreasing Returns May Just Be an Overture to the Next Phase

There is an interesting analogy in materials science.

Engineers studying metal fatigue observe how cracks propagate under repeated stress. An aircraft wing bends slightly during each flight, and a bridge deck experiences repeated compression and unloading as vehicles pass over. Each instance of stress causes minimal damage, but these damages gradually accumulate, eventually forming a continuously expanding crack. Engineers typically classify the crack propagation curve into three regions.

The first region is the crack formation phase, where propagation is irregular and difficult to model.

In the second region, the crack propagation begins to exhibit patterns, known in engineering as the Paris law interval (Paris law is used to describe the power law relationship between the fatigue crack propagation rate and stress intensity), where the crack propagation on a double logarithmic plot approximates a straight line.

In the third region, the crack reaches a critical point and rapidly propagates, and the power law that previously described the intermediate stage is no longer applicable, leading to material failure.

I believe that Bitcoin's monetization process follows a similar trajectory. In this analogy, the materials under continuous pressure are the U.S. credit system.

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

The second phase is maturity. Returns and volatility narrow simultaneously, Bitcoin's risk-adjusted returns improve, and investors can increase their allocation, thus becoming a more attractive collateral.

The third phase is monetization driven by the financial system. Own funds and credit-driven buying begin to enter the Bitcoin market on a large scale, initiating a self-reinforcing cycle where price momentum accelerates again, breaking through the power law trajectory.

Most people see the second phase and believe that decreasing returns will continue indefinitely. However, 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, available funds are more easily allocated to Bitcoin, and using credit to finance purchases becomes more feasible.

Declining 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 text, data from Perplexity Finance shows this figure has dropped to about 44%. Fidelity also recently 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 decline, and the Sharpe ratio is rising accordingly. This means that Bitcoin does not need to rely on new credit, as improvements in risk-return characteristics can attract more funds. Similar signs were observed from 2016 to early 2017: volatility significantly narrowed, and strong performance began attracting more funds.

Volatility also acts like an "invisible tax" on position size. For investors with fixed risk budgets, if Bitcoin's volatility drops by half, they can theoretically double their position size without increasing their contribution to portfolio risk. Therefore, even without creating any new credit, the decline in volatility will expand the capacity of existing funds to allocate Bitcoin.

Each historical maximum drawdown illustrates the same issue. Bitcoin's previous three major bear markets had maximum drawdowns of approximately 85%, 84%, and 77%. In this cycle, Bitcoin fell from about $125,000 in October 2025 to about $58,500 in June 2026, a drawdown of approximately 53%.

NYDIG provided similar conclusions near the June low: this drawdown was 52.7%, while from 2021 to 2022 it was 77.6%, and in earlier cycles, it ranged between 84% and 94%. The magnitude of each cycle's decline has narrowed, and the bottoms have risen. NYDIG regards the long-term decline in volatility as one of the most prominent characteristics of the current stage.

For Bitcoin holders, this change may be disappointing: bull market gains have shrunk, bear market declines have softened, and overall returns are decreasing.

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

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

From the lender's perspective, the most important question is: how much decline can Bitcoin withstand before the collateral value approaches the loan balance?

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

The smaller the potential maximum drawdown for Bitcoin, the higher the loan amount the lender can safely issue against the same collateral. If the liquidation rules remain unchanged, if the expected worst-case drawdown decreases from 80% to 50%, the safely available loan amount would increase to 2.5 times the original.

The same logic applies to borrowers. Companies like Strategy and Strive use financing structures that allow them to expand Bitcoin exposure without assuming the risk of short-term forced liquidation; the shallower the drawdown, the more resilience these structures have. Thus, lower volatility can support larger financing scales 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 would be halved. The same amount of Bitcoin could subsequently support more borrowing, providing funds for future buying.

Even if Bitcoin gradually matures and annual yields no longer reach 100%, this financing logic may still hold, and the expandable scale of credit could still be considerable.

Assuming Bitcoin's expected annual yield decreases to 30%, while the financing cost for Bitcoin-related preferred stocks is about 13%, there remains an approximately 17 percentage point expected yield spread between the two.

As the extreme drawdowns of collateral continue to narrow, such yield spreads remain 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 collateralized loan securitization.

This mechanism has begun to manifest in the public market. Strategy released a set of illustrative credit models, deriving credit spreads for its preferred shares based on assumed Bitcoin volatility.

Under other unchanged assumptions, when Bitcoin's volatility is 60%, the model gives a STRC credit spread of 360 basis points (1 basis point equals 0.01 percentage point), falling into the non-investment grade range; when the volatility drops to around the current realized level of 40%, the spread rapidly narrows to 56 basis points, entering the investment-grade range; when volatility further drops to 30%, the spread is only 6 basis points. Meanwhile, in the model, the probability that the collateral cannot cover the debt drops from about 26% to less than 0.5%.

Declining volatility makes the same tool present lower credit risk; the lower the credit risk, the more readily the financial system is willing to provide funds.

The starting point is both yield and volatility decreasing, but the result could be yield rising again.

The Capital and Credit Flywheel Drives Price to Reaccelerate

When these factors combine, a self-reinforcing cycle forms.

Bitcoin continues to grow and mature, with decreasing volatility; risk-adjusted returns improve, enabling investors to allocate more funds; the quality of collateral increases, making financing cheaper and more abundant. Existing funds, along with purchases supported by new dollar credit, begin to compete for the total cap of 21 million Bitcoins, driving the price upward. Rising prices in turn enhance the value of collateral, releasing more financing space, thus continuing the cycle.

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

Credit expansion may come from multiple paths. Banks can issue Bitcoin-collateralized loans, and as explained by the Bank of England in "Money Creation in the Modern Economy," commercial banks create deposit money simultaneously when they issue loans. Companies can also issue convertible bonds and perpetual preferred stocks, using the proceeds to purchase Bitcoin. Both paths expand dollar-denominated credit while taking more Bitcoin out of circulating supply.

The Moment of Breaking the Power Law

So, what will be the endpoint of this process?

The adoption of new technologies usually follows an S-shaped curve: slow at first, then rapidly gaining popularity, and finally leveling off. Many people believe that Bitcoin's price will follow the same curve and gradually flatten. However, this overlooks the fact that the dollar side of BTC/USD is not static: the dollar funds and credit available for purchasing Bitcoin or financing it will continue to expand.

The quantity of Bitcoin is fixed, but there is no upper limit to the dollar funds and credit available for purchasing Bitcoin. The lower the volatility, the more existing funds can rationally allocate to Bitcoin; the higher the quality of collateral, the stronger the financial system's ability to expand dollar credit against it.

Even if Bitcoin's adoption rate eventually reaches saturation, the scale of funds willing to directly hold Bitcoin or finance its purchase may continue to expand. The dollar-denominated price of Bitcoin may reaccelerate, breaking upwards through the previously described power law trajectory of the second phase.

This is the third region in the metal fatigue curve. Cracks will not forever expand at the speed described by the Paris law; instead, they will accelerate after reaching a critical point and ultimately lead to failure. The decrease in volatility first broadens the space for capital allocation and credit expansion; when these forces begin to compete for the fixed supply of Bitcoin, returns and upward volatility may rise together.

In this analogy, the continuously pressured material is the U.S. credit system; the so-called "failure" is the moment when Bitcoin's dollar price breaks through the power law.

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