11 Jan 2021
Bitcoin’s price reached ~$41,350 this week — double that of previous cycle’s all-time high of ~$20,000 in 2017. There was heavy selling overnight, with price now 20% off the highs. ETH led alt-complex’s catch-up, which outperformed Bitcoin. With the aggressive price action, we have been asked by fomo by-standers on whether it is still a good time to buy and by anxious hodl-ers on whether it is the time to take profit. This week’s letter seeks to address the current state of Bitcoin.
Bitcoin’s price indeed looks like a bubble if viewed from a linear scale. However, it looks a lot more rational if we look at long-term logarithmic chart (Chart 1) as it relates to Bitcoin’s 4-year halving cycle. Every 4 years (or 210,000 blocks), supply rate of new bitcoins generated every 10 minutes (block rewards) gets cut in half. Each dot represents the monthly bitcoin price. Since May, we have been in Cycle 4 and the stock-to-flow model suggests terminal stock (Bitcoin) price of $288K.
Not only is the supply limited, big chunk of the existing bitcoin is in strong hands (Chart 2). Based on the movements in the wallets, % of Bitcoin held in wallets that have never sold more than 25% of Bitcoins they have ever received has been increasing. Bitcoin held in illiquid wallets are at ~78%, leaving only 4.2 million bitcoins in constant circulation.
On the black magic side (also known as technical analysis), the monthly RSI remains at ~84 (Chart 3), which is still below the 95 level that has signalled cycle’s market top in previous cycles. However, when we adjust to weekly charts, Bitcoin did see frequent corrections within bull-runs. In previous post-halving bullish run in Cycle 3, bitcoin price often corrected more than 20–30% once RSI was overbought to 80. However, so far in this round’s bullish run, bitcoin has been one-time framing higher on weeklies since October, although RSI is currently overbought at 95, so today’s correction seems well-deserved.
On the macro side, Democrats won the Georgia Senate runoffs, and the Democrat control in the 50–50 margin environment suggests fiscal goldlilocks in which additional fiscal support is likely, but not tax raises. Risk-on continued with supportive fiscal backdrop with US equities market closing at record-highs and 10s finally breaking above 1.00%. The storming of the US Capitol by Trump supporters in an effort to disrupt the electoral college vote was insufficient to dampen investor sentiments, and if anything call volumes soared on Wednesday. Week ahead, market attention will remain on prospects for further stimulus with Biden set to detail his economic proposal on Thursday. Inflation will also be a market driver in 2021, and we have core CPI coming out on Wednesday.
What is Happening?
The United States Office of the Comptroller of Currency (OCC) announces banks can participate in blockchain networks and issue payments with cryptocurrency. By allowing cryptocurrencies, especially dollar-pegged stablecoins, settlement on blockchain, OCC is implying that blockchains effective have the same status as other global financial networks such as SWIFT, ACH, and Fedwire. OCC Chief Brian Brooks formerly worked at Coinbase, and FTX’s CEO, Sam Bankman-Fried, was the second largest individual donor to Biden campaign; Paul Tudor Jones, Stanley Druckenmiller and the likes have Bitcoin exposures too. These all point to digital assets breaking into mainstream, and powers-that-be gradually having vested interest in digital assets.
Bitcoin’s weekly price has been framing higher in an accelerating manner since October, and the correction we are seeing today to start the week looks healthy and well-deserved. It is worth noting that the holiday rally since December has been driven by large buyers chasing very limited supply, as evidenced by declining small bitcoin withdrawals vs. increasing high value withdrawals heading to whale wallets. Given the nature of the rally, we do not see the fundamentals/narratives of Bitcoin to have significantly changed, and prefer to load up on our longs in times of 20–30% corrections in this bull run. Next support lies in $34,300 and $29,600, and unless these levels break, we will continue to be long. Good Luck!