Commentary
Digital Assets -2.6% this week on lighter volume. Trading was down about 5% from the previous week. Breadth was skewed heavily to the negative with only 26% of the top 200 coins and tokens up this week.
BTC and Digital Assets have started the year off with a bit of a fizzle — ignoring start of year strength in most other major asset classes. Though perhaps that’s fair given that BTC significantly outperformed other asset classes in 2019 and returned 9,000,000% over the previous decade.
BTC hash rate this week hit a massive 120 EH/s. An increase of +180% from last year’s 43 EH/s and new record high. Mining is still profitable at this level for miners with a low enough cost of production and miners are trying to squeeze as much as they can out of their hardware before the upcoming halving cuts their block reward revenue in half.
News flow was pretty slow this week with much of the Western world still off for holidays. A lot of this week’s press was focused on 2019 reviews and 2020 predictions. Top stories this week included 1. Bitmain reportedly looking to axe half its staff (again), 2. Chinese miners being told to scale back electricity usage, 3. BitMEX’s insurance fund growing to 0.2% of BTC in circulation, 4. Ripple moving 200M XRP out of escrow, 5. a failed attack on the ETH network and 6. a data breach at Poloniex.
Crypto sentiment, while improving somewhat over the past few weeks, continues to be very fearful- a big divergence from the extreme greed seen in traditional markets at the moment. I think that BTC price over the past 6 months has been dictated more by flow dynamics than underlying fundamentals or real investor demand; specifically selling from the Plus Token unwind and from miners trying to get every last BTC out of marginal equipment that will be made obsolete post the May halving.
Looking forward, BTC remains stuck in a low volatility, low volume consolidation just south of the 20 day moving average. As highlighted before the holidays, these low volatility consolidations typically resolve themselves with a sharp move in price. From a support / resistance perspective, BTC remains wedged between 2 big volume peaks (see chart 1 below); one at ~ $6,500 and another at $8,000. I continue to think that there will be strong support at the $6,500 — $6,800 range because of how much volume traded at this level in 2H18. Despite still very bad sentiment, strong support at $6,500 implies that risk/reward may be skewed more to the upside in the short term.
Thoughts
BTC was the best performing asset of 2019
Is the BTC halving priced in?
After wrapping up 2019 and as we draw closer to BTC’s 4th reduction of its issuance schedule (6.25 BTC mined every 10 minutes from the previous 4 year cycle’s 12.5 BTC), there has been an uptick in speculation recently about wether this halving is already factored into the current BTC price.
The argument suggests that this halving is much better flagged to the market than previous halvings (which is definitely true) so price is unlikely to move higher like it has post previous halvings.
I think the problem with this analysis is that it focuses exclusively on the demand side of the equation and ignores changes in supply dynamics. Miners currently produce 1,800 new BTC every day (12.5 BTC block reward * 6 blocks every hour * 24 hours). At the volume weighted average price of the current 4 year cycle ($8,400) that amounts to $5.5B of BTC mined annually — most of which is sold to run businesses and reduce exposure to BTC price volatility.
If demand for BTC remains constant, but supply is cut in half it seems likely that the next halving should be price accretive.
2020 price prediction?
The consensus view looks to be continued consolidation in 1H20 before halving driven strength in 2H20 and new highs in 4Q20 or 1H21.
- Stock to Flow Model
– Stock to Flow implies a year end BTC price of $30,300. Stock to flow has been a strong predictor of previous BTC price action with an R2 of 95% - Dave The Wave — technical analyst
– dave the wave is a technical analyst that has been pretty spot on in calling BTC price moves. In a recent tweet, Dave said he expects price consolidation in 1H20 before a breakout in 2H20 and new all time highs (> $20,000 level) in early 2021. - Travis Kling — CIO of Ikigai Asset Management
– Looks for BTC price price to reset new highs late 2020, early 2021
– Travis’ price analysis is based largely on stock to flow predictions - John McAfee — computer security pioneer
– $1 million by the end of 2020…not holding my breath on this one
– Good tracker here of where BTC is relative to McAfee’s prediction
News
- Poloniex forces password reset after emails / passwords leaked
– Last Nov Bitmex inadvertently leaked 23,000 client email adresses
– Poloniex said last week that users could trade $10k/day without KYC - Bitmain thought to plan 50% headcount reduction before halving
– This is the second time since 2018 that Bitmain has done a 50% cut
– I think this is probably more a reflection on Bitmain’s dismal corporate governance than a reflection of profitability at large miners - BitMEX insurance fund grows to 0.2% of BTC in circulation
– Users are increasingly wondering why BitMEX needs such a massive fund
– Total increased 13,000 BTC last year to 33,491 BTC. ~ US$2.4B
– The fund’s largest drawdown since inception was just US$5M - Chinese miners pressured to scale back on electricity shortage
– This follows the end to seasonal rains in Sichuan province
– Chinese miners — with marginally efficient equipment — appear to be mining as much as they can before the May 2020 halving
– Hash rate this week spiked to a record high 120 EH/s
– Hash rate is expected to fall sharply after the halving when mining with marginal equipment becomes unprofitable - Google lifts ban on MetaMask
– MetaMask is a Chrome extension used for running ETH Dapps
– Google looks to have banned MetaMask as part of crypto clean up executed at the end of last year that also saw the demonetization of a number of prominent crypto Youtubers - XRP transfers 200M XRP from escrow
– Translates to ~ $38M
– Really tough to be bullish XRP when Ripple keeps dumping - DEX volumes hit $2B in 2019
– The rise of DeFi in 2019 was a big driver
– Top exchanges by volume: Idex, Oasis, Kyber, Uniswap, Ox - Fake Ledger extension steals seed phrases
– Google has pulled down a number of the fake Chrome extensions
– Ledger launched ‘Ledger Live’ more than a year ago - US Congress drafts law to keep ‘Big Tech’ out of finance
– New law is backed by house Democrats
– Clearly targeted at Facebook and it’s Libra project
– Includes provisions for a $1M/day fine for breaches - ETH network fights off Parity node attack
– Some concern that ETH could be vulnerable to attacks in the future
Charts
- Chart 1. BTC’s low volatility consolidation continues
– The current price is wedged between 2 big volume peaks
- Chart 2. BTC vs Other Assets
– BTC -4.8% underperformed over the past 5 days:
– Gold +1.6%
– Emerging Market Equities +1.6%
– S&P +0.6% and Crypto (not including BTC) -3%
- Chart 3. Fear & Greed — Crypto vs Traditional Markets
– Crypto market sentiment still very bearish (though improving)
– Traditional market sentiment is maximum bullish
- Chart 4. 7 Day price performance
- Chart 5. Bitcoin Average Daily Volume, by Month
– Jan 2020 off to a slow start
– Volume on pace for the 2nd consecutive monthly decline
