In depth Bitcoin analysis. Macro series pt5For the 5th part of the macro analysis series, we are going to make a deep dive into Bitcoin. However, before we get into it, we would like to make a little summary of all the previous parts of our series, in regards to the way that the Bitcoin could be affected by factors outside of the crypto market.
In 2021 inflation rose significantly in the US, as it did in the rest of the world. It actually rose to the highest level in decades and it has been heavily affecting most economies negatively. At the moment the one country whose economy is in a significantly better shape than most of the developed world and has also had a higher inflation rate YoY is the US. In 2020 the USD got hit very badly, however it has been recovering ever since and has recently gotten back to where it was in Jan 2020. There are several reasons on which we could attribute the rise of the USD, but one definitely is the fact that US bond yields have been rising. This is potentially because the Fed has been one of the very few Central banks that have the room and willingness to raise rates and the date for them to start raising is getting closer. On the 26th of January the Fed held a meeting and then Powell answered questions, showing a significantly hawkish stance, more than what people had been expecting. Yet despite all the hawkishness, the markets rebounded nicely and showed strength, an indication that the drop might be over for now and that there is more upside in the short term. At this stage it is pretty much certain that on the Fed meeting in March they will raise rates by at least 0.25%, however until then they will keep on buying bonds and will stop on that date. These two factors could leave some room to the stock market as some rate hikes are priced in, while at the same time the real sell the news event could be when they stop buying bonds. What is uncertain though is how many more times will they raise this year, as there are clear signs everywhere that the economy is slowing down and inflation won’t be as big of an issue. Many are speculating that they won’t be able to do much, as markets are already showing significant weakness on the potential of the Fed raising rates multiple times. Essentially the Fed will have to choose between inflation or the markets, although the truth is that they don’t/can’t control either. Maybe they could get lucky if inflation starts coming down rapidly on its own and markets don’t actually panic as they raise rates. The problem though is that the global economy is in a terrible shape, as there is too much debt and the world can’t sustain higher interest rates or a higher dollar. At the same time the stock market is clearly overvalued and is showing all sorts of signs of weakness. Therefore, the Fed is cornered as on the one hand they have a weak economy and inflation is caused by factors they don’t control, and on the other they have an overvalued market that they don’t want to be explicitly deemed that they are propping up.
Like we mentioned above, stocks bounced very nicely and might have bottomed, while at any point the USD and yields could roll over. It is clear that the market was complacent when Bitcoin was above 40k and the SPX above 4500, and then became extremely fearful once Bitcoin reached the 32-35k support and SPX the 4250 support. There are several different indicators that showed and still show that the markets were and still are cheap and fearful, without of course this meaning that a huge rally is going to occur and both markets will break their ATHs soon. It is possible, but at the moment it is more reasonable to expect the bounce to continue, maybe a short squeeze/bull trap, and then go lower. We do think that lower prices are quite likely in 2022 and we expect them to come before Bitcoin makes new ATHs, without that meaning that we expect a major bear market. Our assumption is that the stock market has some room to the downside, while Bitcoin has actually been trading in a range since January of 2021, a range that has had several distinct bull and bear phases. This assumption basically leads us to believe that at some point the range lows around 29k have to be swept and potentially fill the gap at 24k. Hence the same way the market broke above the ATHs and failed miserably to trend higher, the same way we expect the market to break the lows and then move higher. There are several important reasons as to why we think this will happen thus we will number them, and will back it all up as well as expand later on:
1) Too many people bought easily at 28-31k and they need to be shaken out. Quadruple/quintuple bottoms aren’t sustainable as they essentially allow for too many weak hands to stay in the market.
2) From 18k up to 25k there are several untested breakouts / unfilled gaps on CME, most of which tend to be filled. The reasoning is similar to the one above, as rapid rallies allow many weak hands to stay in the market. Going down there allows for the market shakeout the weak hands while also finding the best place, where demand outstrips supply.
3) 20-28k is where Bitcoin is most valuable. There are several indicators/metrics which are indicating that we Bitcoin is currently in a bear market/phase, and the same metrics or other metrics are indicating that at the potential bottom lies somewhere between 18-28k.
For 1) & 2) we’d like to add a very interesting fractal that support our thinking, where BTCUSD over the last 16 months looks a lot like SPX500 from 1995 up to 2008. The fractal basically consists of a huge rally up with few pullbacks, big move down, >triple bottom, another rally that’s slower/weaker, two failed attempts to break ATHs, raid of the lows, retest of a breakout… and then moon.
Now we’d like to outline several different points that make the case for why BTC could have a short-term rally from here and why it is relatively cheap, and then later on we are going to offer counterpoints to each point. That’s because Bitcoin is currently cheap or at least it was very cheap at 33k, yet there is a lot of evidence that it could get a lot cheaper in the not so distant future. Essentially by going through several different points and by using different types of analysis, we want to precisely outline our thinking around our short term bullish, medium term bearish, long term bullish thesis. So, let’s get into it!
1) There is less BTC sitting on exchanges compared to any other time over the last year
2) There are a lot more stablecoins in the market, as well as on exchanges compared to any other point over the last year.
3) The illiquid supply on Bitcoin keeps growing, while more and more coins haven’t moved for more than a year.
4) The market is as fearful as it was in May-July and it is mainly short-term holders taking losses.
5) This is the first period since May-July that funding remained so negative for so long and that the long/short ratios on both Binance and OKex are actually at or below 1.
6) GBTC discount is at 27%, Korean premium around 1-2% and futures annual basis at 1.5% all of which indicate fear and that there is no froth in the market.
7) Stock to flow ratio, Mayer multiple, MRVR ratio, NVT signal & NVT price all showed that the price is either historically pretty cheap, or simply cheaper than May-July. (There are several other useful models/indicators out there that are indicating similar stuff)
8) The Daily Bollinger bands with a standard deviation of 3.4 that use a 20 DMA, as well as the Daily Bollinger bands with a standard deviation of 3 that use a 50 DMA, indicated that the price was very cheap.
9) The Daily RSI bottomed exactly where it had bottomed in May, while the Weekly RSI got to the same level it had gotten on the March 2020 crash (wasn’t oversold) and is lower than the level it got at in May. Both could potentially be seen as oversold conditions + hidden bullish divergence.
10) Most key support levels that the market broke on its way down haven’t been tested. Neither did all the death crosses untested breakdown levels on the way down.
11) The market filled a major CME gap and retested several key support levels, tested the Volume Profile High volume node at 32-35k. The volume we’ve seen in the last leg down and bottom, has been the highest volume since June.
It’s clear that all of the above are bullish or at least provide evidence that the market is cheap/fairly valued, though they aren’t giving us the full picture. There is more depth to all of these and we need to dig deeper. It is important to understand that a market can get from cheap to very cheap to insanely cheap, and that past successful signals don’t guarantee future success. Many investors fall in the trap of assuming that because something is cheap that it has no downside and is guaranteed to go up at some point relatively soon, ignoring the fact that for something to be cheap there has to be some major reason in the first place. So, what is the current structure of the price telling us? What other indications are pointing lower and how could we position ourselves so that we can benefit from the fluctuation of the market in both direction with the least amount of risk?
1) There is less BTC on exchanges, but there is a lot of liquid/illiquid BTC sitting elsewhere like in ETNs/ETPs/ETFs (i.e GBTC), exchanges not included on calculations and even major custodians / bitcoin banks (i.e Nexo, BitGo etc), as well as wrapped BTC on other chains that is traded on DEXes.
2) Stablecoins have a lot of different use cases (not all are for trading), some are sitting idle on some treasuries of crypto projects, others are for chasing defi yields only, lot of it is accumulated from major players who are dumping tokens on retail or sucking their money through trading, and so on.
3) In 2018 we saw the inactive supply grow, but demand was so low that eventually the market crashed. The 1+ year inactive supply growing isn’t always a good thing as it now consists of many investors who bought above 40k, and who just haven't been shaken out yet.
4) The market can stay fearful for quite some time. We have seen periods where the market has been fearful for many weeks and the Fear & Greed index went multiple times down to 10 or lower. Long periods of euphoria could be matched by long periods of fear.
5) Funding is actually slowly becoming less negative, yet the market hasn’t pumped yet. Usually, we want the market to go up significantly as funding is negative and stay negative. When funding turns positive on its own it’s an indication that people are starting to go longing again. In terms of the long/short ratio, being at 1 indicates that there is a balance and it is true that this is a great buy signal historically. However, like funding or fear & greed index, getting to neutral or slightly below neutral after such a long period of the ratio being above one doesn’t mean the ratio can’t get all the way down to 0.5 before the market bottoms. What these currently indicate for sure, is that a big crash is unlikely and that shakeout of bears is more likely than ever before.
6) The continuously dropping GBTC premium is a sign of lack of demand and that a spot ETF being approved any time soon is unlikely. Although the Korean and futures premium indicate no froth and a healthy market, we still haven’t seen them truly collapse which historically has been the case after long periods of frothiness.
7) The stock to flow model has clearly been broken, MRVR is at 0.78 while all previous bottoms where at 0.4-0.52, MRVR is still above 1 and we’d expect the final bottom to be in at least after they go below 1 (Realized Price is at 24k), while based on NVT alone the price could bottom anywhere between 30-60% lower from here
8) In May we had a major crash and after that every time the price touched the bottom of the Bollinger bands, it bounced. The problem now is that every time it touches the bands the bounce is very weak and keeps trending lower. This is an indication that we could get a bottom once the price gets significantly outside the bands.
9) Being oversold and being weak while oversold isn’t a great sign. The hidden bullish divergence could lead into a short term move up, but doesn’t guarantee a reversal that would lead into new ATHs. Getting the RSI on the weekly to be oversold is pretty much the only guarantee for a reversal to be close. Again, we are coming out of a period of extreme froth and the momentum is still pointing down.
10) At the moment we are seeing the price rise while CME is closed which could lead to another gap, therefore getting right at the diagonal at 39.6k or slightly above it before the CME open could be a perfect level to see the price get rejected. Even if it breaks higher, the area of 45-50k has a ton of confluence. That’s where all the major moving averages are, the Yearly and Monthly Pivots, horizontal resistance (support turning into resistance), as well as the Volume profile high volume node. That area is very important as these moving averages have formed several death crosses, that never got tested. The truth is that the perfect death cross is one where the market bottoms when the cross occurs, bounces into the cross and then dumps lower. In mid-2021 what we saw was the market form death crosses when it had already crashed, and every cross was near a local bottom. Of course, this is something we’ve seen before in Bitcoin too, as usually the first death cross or golden cross after a major bull or bear market is a ‘failure’, but the second one isn’t. This time around, we basically got the 50 & 200 DMA, as well as the 50 & 300 DMA happen almost at the same time, and the market started going down (from 44k down to 33k) almost immediately. Another interesting observation is that we closed below the 400 DMA after bouncing on it twice in this bull market, while historically any time we closed below the 400 DMA for a sustained period of time, the market dropped by at least 50% from the point it broke below the moving average.
11) The market is still in a downtrend. The main diagonal is intact and the price is still below the closest key support area (39.7-42.5k). So far, every bounce has been weak and hasn’t been able to even test the broken support, something that could continue to occur. Now even though this current bounce looks much stronger than the one at 40k, it is happening off much stronger support so it’s normal. What is interesting is that the way the market bottomed was pretty similar to all the previous bottoms. Big move down, slow down, make an SFP, bounce. Like we've seen so far in this move down, we get a red weekly candle and the next green candle is an inside candle
12) At the same time the volume is much lower compared to all the previous bottoms we’ve seen in Bitcoin, plus we’ve never seen a >50% drop with a slow bleed be the final bottom. The only time we saw the market bottom like this, was in Dec 2019, where the market went from 6.4k up to 10.5k and then down to 3.8k. Although it is true that Covid played a huge role, the reality is that the Market was going to go down there at some point. The rally from 3k up to 14k was unsustainable and the market was overleveraged at 10.5k before the crash. 3.8-4.2k was an area with a lot of confluence, that was waiting for the market to go there. The reason we mention this is that the rally from 20k to 28k is fairly similar and we expect the market to visit that area again.
13) Yet another similar occasion that could probably be seen as more similar to the current situation than the 3-14k reversion, is the rally from 5k to 20k in late 2017, where the market never retested 5k on the way up. That made 5k an area that everyone expected to get hit and it indeed was an area that the market ‘wanted’ to test, but it took many months until that happened. BTCUSD ranged above 5.8k for almost 10 months, until eventually it collapsed from 6k all the way down to 3k. Hence the case we are making is that the multiple tests at 28k are like the multiple tests above at 5.8k, with 24k being like 5k, with the key difference being that this time BTC doesn’t have to collapse down to 18-20k although it could definitely get there. Essentially many know it can come, many have expected it to come as it is very obvious, and therefore it takes much longer to get there.
To close things up and to add a few final notes, we'd like to remind everyone that we are bullish on Bitcoin long term. It is just that at the moment, the buy the rumor sell the news on both the futures ETF and inflation are playing out. The ETF created some sort of fake hype as it was pretty much useless and it only benefited those who had inside information, while at the same time a lot of people bought Bitcoin as they expected high inflation. The market rose as it expected inflation, so when inflation came in hot, everyone was already in and there wasn't anybody left to buy. Not only they were in, but they had to sell assets to cover their extra expenses due to the high inflation. At the same time inflows in the market had started slowing since mid-February 2021, as several ETFs/markets had started slowing down after the extreme speculative mania. What is interesting is that GBTC actually topped pretty much at the same time as some major indices/ETFs that we mentioned on pt3 of the macro series, like SPAK, ARKK and Shanghai Composite. GBTC recently filled a major gap and swept the only double bottom that it has, hence another sign that maybe the market is ready to bounce. Another major factor that many seem to forget, is how Chinese citizens aren't allowed to trade cryptocurrencies, neither are they allow to mine it, something that has definitely negatively impacted the demand side. Finally, what we'd like to say is that despite all the negativity and issues the market is facing, it is very hard for us to imagine that we won't see new ATHs in the next 12-18 months. There will be a point where central banks will be forced to cut rates again and governments forced to print money, and we don't think that this point is far from here.
