Strive Executive: Reinterpreting the Bitcoin Price Flywheel

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

Compiled by: 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 rather a part of Bitcoin's early adoption process. Earlier 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's early cycles saw hundredfold increases, while the returns in recent cycles have clearly narrowed. If this trend continues, Bitcoin will eventually resemble a mature asset more and more, with returns gradually normalizing.

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

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

As Bitcoin matures, returns are declining, 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 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 a high-quality collateral in the global financial system, the scale of dollar credit backed by it may expand significantly.

Diminishing returns lower volatility, and declining volatility attracts more funds, 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.

Diminishing Returns, Perhaps Just 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. Aircraft wings bend slightly with each flight, and bridge surfaces are repeatedly compressed and unloaded as vehicles pass. Each instance of stress causes minimal damage, but these damages gradually accumulate, ultimately forming increasingly larger cracks. Engineers typically divide the crack propagation curve into three regions.

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

Upon entering the second region, crack propagation begins to follow a pattern, known in engineering as the Paris law interval (Paris law describes the power law relationship between the fatigue crack growth rate and stress intensity). At this point, crack propagation appears as a straight line on a double logarithmic graph.

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

I believe that Bitcoin's monetization process follows a similar trajectory. In this analogy, the material continuously under stress is the dollar credit system.

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

The second stage is maturity. Returns and volatility narrow simultaneously, improving Bitcoin's risk-adjusted returns, allowing investors to expand their allocation, and gradually making it a more attractive collateral.

The third stage 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, accelerating price increases, and breaking through the power law trajectory.

Most people see the second stage and assume that diminishing returns will continue indefinitely. However, in my view, the second stage is precisely creating conditions for the third stage. As Bitcoin matures, with declining volatility, improved risk-adjusted returns, and enhanced collateral quality, existing funds find it easier to allocate 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 this article, data from Perplexity Finance shows that this figure has dropped to about 44%. Fidelity recently pointed out that Bitcoin's current volatility is lower than 98.5% of its historical trading days.

While long-term returns remain prominent, Bitcoin's volatility continues to decline, and the Sharpe ratio rises accordingly. This means that Bitcoin can attract more funds based solely on improvements in 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 funds.

Volatility also acts like an "invisible tax" on position size. For investors with fixed risk budgets, if Bitcoin's volatility is halved, 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 expands the space for existing funds to allocate Bitcoin.

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

NYDIG also provided a similar conclusion near the June low: the current drawdown is 52.7%, while from 2021 to 2022 it was 77.6%, and in earlier cycles, it ranged between 84% and 94%. Each cycle'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 gains are smaller, bear market losses are smaller, and overall returns are declining.

But from the lender's perspective, the same trend is highly attractive because Bitcoin is becoming a higher-quality collateral.

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

From the lender's perspective, the most important question is: how much of a 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 worst-case drawdown that Bitcoin might experience, the higher the loan amount that lenders can safely issue against the same collateral. If the expected worst-case drawdown decreases from 80% to 50%, the safe loan amount will increase to 2.5 times the original.

The same logic applies to borrowers. Financing structures adopted by companies like Strategy and Strive can expand Bitcoin exposure without bearing the risk of short-term forced liquidation; the shallower the drawdown, the stronger the resilience of these structures. 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 will be halved. The same amount of Bitcoin can thus support more borrowing and provide funds for subsequent buying.

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

Assuming Bitcoin's expected annual return drops to 30%, while the financing cost of Bitcoin-related preferred shares is about 13%, there remains an expected return gap of about 17 percentage points between the two.

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

This mechanism has already begun to manifest in the public market. Strategy has released a schematic credit model that derives the credit spread of its preferred shares based on hypothetical Bitcoin volatility.

Under 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 points), falling into the non-investment-grade range; when volatility drops to near 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%, the spread is only 6 basis points. Meanwhile, the probability that the collateral cannot cover the debt in the model has decreased from about 26% to less than 0.5%.

A decline in volatility makes the same type of instrument present lower credit risk; the lower the credit risk, the more funds the financial system is typically willing to provide.

The starting point is a simultaneous decline in returns and volatility, but the result may be a resurgence in returns.

The Capital and Credit Flywheel, Driving Prices to Accelerate Again

When these factors combine, they create a self-reinforcing cycle.

As Bitcoin continues to grow and mature, volatility decreases; improved risk-adjusted returns enable investors to allocate more funds; enhanced collateral quality makes financing cheaper and more abundant. Existing funds and buying supported by new dollar credit begin to compete for the total cap of 21 million Bitcoins, driving prices up. Rising prices further increase collateral value, releasing more financing space, and the cycle continues.

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

Credit expansion can come from multiple paths. Banks can issue Bitcoin-backed 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 shares to purchase Bitcoin with the proceeds. Both paths will expand dollar-denominated credit while taking more Bitcoin out of circulation.

The Moment of Breaking 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 proliferating, and finally approaching saturation. Many people believe that Bitcoin's price will also 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 number of Bitcoins is fixed, but the dollar funds and credit available for purchasing Bitcoin have no fixed upper limit. The lower the volatility, the more existing funds can reasonably allocate 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 approaches saturation, the scale of funds willing to hold Bitcoin directly or buy Bitcoin through financing may continue to expand. The dollar-denominated price of Bitcoin may also accelerate again, breaking through the power law trajectory that previously described the second stage.

This is the third region of the metal fatigue curve. Cracks will not forever propagate at the speed described by Paris law but will accelerate upon reaching a critical point, ultimately leading to failure. The decline 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 in tandem.

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