Author: Joe Burnett, Vice President of Bitcoin Strategy at Strive
Compiled by: Jiahuan, ChainCatcher
Last quarter, when Bitcoin retreated more than 50% from its highs, I argued that bear markets are not a system defect but part of Bitcoin's early adoption process. At the beginning of this year, I explained why Bitcoin could potentially reach $11 million by 2036. I still believe this scenario is possible, but a more worthwhile question is: What path will Bitcoin take to get there?
Bitcoin's early cycles saw hundred-fold gains, but the returns in recent cycles have narrowed significantly. If this trend continues, Bitcoin will eventually resemble a mature asset more closely, with returns gradually normalizing.
The power law model aptly summarizes this change. (Referring to the long-term, relatively stable power function relationship between Bitcoin price and time.) As the asset's size expands, its returns also decline. For over a decade, Bitcoin has been moving along a highly stable long-term trajectory.
I acknowledge the explanatory power of the power law framework and believe Bitcoin may continue roughly along this trajectory for many years to come. However, I am no longer convinced that the power law sufficiently describes 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 capital Bitcoin can attract but also expand its uses within the financial system.
Lower volatility improves Bitcoin's risk-adjusted returns and makes it easier to obtain financing using Bitcoin as collateral. When Bitcoin becomes high-quality collateral in the global financial system, the scale of dollar-denominated credit backed by it could expand dramatically.
Diminishing returns suppress volatility, declining volatility attracts more capital, and expands the financing scale Bitcoin can support. Ultimately, these forces may conversely drive a reacceleration of Bitcoin's price, breaking upwards from the power law trajectory.
Diminishing Returns May Only Be the Prelude to the Next Phase
There is an interesting analogy in materials science.
Engineers studying metal fatigue observe how cracks propagate under repeated stress. An airplane wing bends slightly with each flight, and a bridge deck repeatedly compresses and unloads as vehicles pass over. Each stress causes minimal damage, but this damage accumulates, eventually forming expanding cracks. Engineers typically divide the crack growth curve into three zones.
Zone I is the crack initiation period, where propagation is irregular and difficult to model.
In Zone II, crack growth becomes more predictable, known in engineering as the Paris' law regime. Here, crack propagation approximates a straight line on a log-log plot.
In Zone III, the crack reaches a critical point and expands rapidly. The power law that described the intermediate stage no longer applies, and the material ultimately fractures.
I believe Bitcoin's monetization process follows a similar trajectory. In this analogy, the material under continuous stress is the dollar credit system.
Stage I is Discovery. Returns and volatility are extremely high. Large capital struggles to allocate to Bitcoin, and it is difficult to use as collateral for financing.
Stage II is Maturation. Both returns and volatility narrow. Bitcoin's risk-adjusted returns improve, allowing investors to increase allocations. It gradually becomes more attractive as collateral.
Stage III is System-Driven Monetization. Equity-driven and credit-driven buying begins entering the Bitcoin market on a large scale. A self-reinforcing cycle kicks in, price growth reaccelerates, and breaks upwards from the power law trajectory.
Most people see Stage II and assume diminishing returns will continue forever. But in my view, Stage II is precisely creating the conditions for Stage III. As Bitcoin matures, with lower volatility, improved risk-adjusted returns, and enhanced collateral quality, it becomes easier for existing capital to allocate to Bitcoin, and financing to buy more becomes more feasible.
Declining Volatility is Reshaping Bitcoin's Asset Attributes
Bitcoin's volatility has declined significantly.
In March 2014, Bitcoin's one-year realized volatility once approached 147%; as of the article's publication, data from Perplexity Finance shows this figure has fallen to around 44%. Fidelity also recently noted that Bitcoin's current volatility is lower than it was on 98.5% of its historical trading days.
With long-term returns still compelling, Bitcoin's declining volatility has increased its Sharpe ratio. This means Bitcoin can attract more capital simply by improving its risk-return profile, without relying on new credit. A similar sign appeared between 2016 and early 2017: volatility narrowed significantly, and strong performance began attracting more capital.
Volatility also acts like a hidden tax on position size. For an investor with a fixed risk budget, if Bitcoin's volatility halves, they can theoretically double their allocation without increasing their portfolio's risk contribution. Therefore, even without creating any new credit, declining volatility itself expands the capacity for existing capital to allocate to Bitcoin.
Historical maximum drawdowns illustrate the same point. Bitcoin's three previous major bear markets saw maximum drawdowns of approximately 85%, 84%, and 77%. In this cycle, Bitcoin fell from a high of around $125,000 in October 2025 to a low of about $58,500 in June 2026, a drawdown of about 53%.
NYDIG reached a similar conclusion around the June low: this drawdown was 52.7%, compared to 77.6% in 2021-2022, and between 84% and 94% in earlier cycles. Each cycle's decline has moderated, and bottoms have risen. NYDIG identifies this long-term decline in volatility as one of the most distinctive features of the current phase.
For Bitcoin holders, this change might be disappointing: bull market gains are smaller, bear market losses are smaller, and overall returns are declining.
But in the eyes of lenders, the same trend is highly attractive because Bitcoin is becoming higher-quality collateral.
Lower Volatility, Larger Credit Scale Bitcoin Can Support
From a lender's perspective, the most important question is: How much can Bitcoin fall before the collateral value approaches the loan balance?
Suppose someone holds $100,000 worth of Bitcoin and borrows $20,000 against it, with an initial loan-to-value ratio of 20%; when the LTV rises to 80%, the lender liquidates the collateral.
The smaller the worst-case drawdown Bitcoin might experience, the higher the loan amount a lender can safely issue against the same collateral. With unchanged liquidation rules, if the expected worst drawdown falls from 80% to 50%, the safely issuable loan amount increases 2.5 times.
The same logic applies to borrowers. Financing structures adopted by companies like Strategy and Strive can increase Bitcoin exposure through financing without taking on short-term liquidation risk; shallower drawdowns strengthen these structures' resilience. Therefore, lower volatility can support larger financing scales while reducing credit risk.
Price increases further amplify this effect. If the Bitcoin price doubles while the corresponding dollar debt remains unchanged, the LTV halves. The same amount of Bitcoin can thus support more borrowing, providing funds for subsequent buying.
Even as Bitcoin matures and annual returns no longer reach 100%, this financing logic may still hold, and the expandable credit scale could remain substantial.
Suppose Bitcoin's expected annual return drops to 30%, and the financing cost for Bitcoin-related preferred shares is around 13%, leaving an expected return spread of about 17 percentage points.
As extreme drawdowns for the collateral continue to narrow, such a return spread remains sufficient to support large-scale financing. As the market's assessment of collateral risk decreases, lower-cost financing channels may gradually open, including bank credit lines, investment-grade bonds, and securitization of Bitcoin-backed loans.
This mechanism is already beginning to show in public markets. Strategy published an illustrative credit model that uses assumed Bitcoin volatility to derive credit spreads for its preferred shares.
Under the same assumptions, when Bitcoin volatility is 60%, the model yields a STRC credit spread of 360 basis points (1 basis point equals 0.01 percentage points), falling into non-investment grade territory. When volatility decreases to around 40%, near current realized levels, the spread rapidly narrows to 56 basis points, entering investment-grade territory. When volatility further drops to 30%, the spread is only 6 basis points. Concurrently, the model's probability of collateral failing to cover the claim also drops from about 26% to less than 0.5%.
Declining volatility makes the same instrument exhibit lower credit risk; lower credit risk typically leads to more capital the financial system is willing to provide.
The starting point is declining returns and volatility, but the result may be a reacceleration of returns.
The Capital and Credit Flywheel Drives Price Reacceleration
These factors combine to form a self-reinforcing cycle.
Bitcoin continues to grow and mature, volatility decreases; improved risk-adjusted returns allow investors to commit more capital; enhanced collateral quality makes financing cheaper and more abundant. Existing capital and buying supported by newly created dollar credit begin competing for the fixed supply of 21 million Bitcoins, driving up prices. Higher prices increase collateral value, releasing more financing capacity, perpetuating the cycle.
From a credit expansion perspective, this cycle resembles a speculative attack in macrofinance (borrowing a relatively weaker currency to buy assets more resistant to dilution, forming a self-reinforcing trading mechanism).
Credit expansion could come from multiple paths. Banks can issue Bitcoin-backed loans, and as the Bank of England explained in "Money Creation in the Modern Economy", commercial banks create deposit money when they issue loans. Companies can also issue convertible bonds and perpetual preferred shares, using the proceeds to buy 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 end of this process?
New technology adoption typically follows an S-curve: slow initially, rapid adoption, then saturation. Many thus assume Bitcoin's price will follow the same curve and eventually flatten. But this overlooks that the dollar side of BTC/USD is not static: the pool of dollar capital and credit available to buy or finance Bitcoin can still expand.
Bitcoin's quantity is fixed, but the scale of dollar capital and credit available to buy Bitcoin has no fixed upper limit. Lower volatility allows more existing capital to allocate to Bitcoin rationally; higher collateral quality enhances the financial system's ability to expand dollar credit against it.
Even if Bitcoin's adoption rate eventually saturates, the amount of capital willing to hold Bitcoin directly or finance its purchase may continue to expand. The dollar-denominated Bitcoin price may reaccelerate, breaking upwards from the power law trajectory that previously described Stage II.
This is Zone III in the metal fatigue curve. Cracks don't propagate forever at the speed described by Paris' law but accelerate upon reaching a critical point, ultimately causing fracture. Declining volatility first broadens the space for capital allocation and credit expansion; when these forces compete for the fixed Bitcoin supply, returns and upside volatility may rebound simultaneously.
In this analogy, the material under continuous stress is the dollar credit system; the so-called "fracture" is the moment Bitcoin's dollar price breaks upwards from the power law.
