Commentary
Digital Assets -11% hit hard this week as Western investor sentiment caught up with Coronavirus economic implications. Most of the big dips down this week looked to have hit the market overnight Asia time, implying largely US led selling. Exchange inflows looked to support this theory with Bitstamp (Western exchange) seeing a US$138M Net Inflow of BTC this week (users send to the exchange to sell).
News flow was a mixed bag. The theme of the week was probably increasing institutionalization with 1) JPM publishing a 74 page Cryptocurrency report, 2) Canada preparing a Digital Currency prototype, and 3) Korea still looking at taxation implementation and 4) SEC Commissioner Peirce publicly disagreeing with an SEC decision to reject another BTC ETF application.
BTC dipped below its 50 day moving average to end the week just off a 31 day low. Alt Coins -15% were also broadly lower with ETH posting its first weekly decline after 9 consecutive weekly gains.
BTC looks on pace to end the month with one of the worst Februarys in years. I suppose that’s par for the course given much better than seasonal performance in January (+30% vs the 5 year median January gain of -14%). Looking forward, March has consistently been a down month, with BTC falling 4 of the previous 5 Marches for a median decline of ~ -5%.
I was a bit surprised to see BTC drop straight through $9,000 support this week. I had anticipated better support at this level given the convergence of the 50D MAVG ($9,200), the 200D MAVG ($8,800) and the 2020 VWAP ($9,100) all clustered around this level. I think we can probably reference previous crosses below the 50D MAVG to get an idea of what the next couple of weeks will look like.
Since 2016 we’ve had 36 drops below the 50D MAVG. The average duration is 16 days. The average 10D price drop is ~ -6%, which should translate to price support at around $8,500. Interestingly, that still leaves us above the Stock to Flow implied fair value of $8,300 and actually puts us more inline with price performance leading up the 2016 halving.
Thoughts
Why isn’t BTC acting like a safe haven?
BTC is a very unique asset. It has very little correlation with anything else. Most of the time it behaves like a risk asset, but at times has shown safe haven characteristics: Cyprus Haircut, Grexit, Brexit, First CNY revaluation, US China Trade War, and the recent US Iran Conflict.
Adding to the confusion, I think investors in different geographies use, trade and view it differently. In Asia, BTC is very sensitive to CNY devaluation. I think BTC’s initial rally around the Coronavirus was driven in part by CNY weakness and the fact that Asia took the virus a lot more seriously a lot earlier than most Western investors did. In the US, BTC is probably seen more uniformly as risk asset. When US investors dump risk, it probably makes sense that they also sell BTC.
The correlation between BTC and Gold is very low. They are very different assets in terms of use, ability to evolve, size, investors, etc. But I think the fundamental long term drivers of gold are also long term drivers of BTC. The price of both will probably go higher. Over time… lots of time…I think the correlation between BTC and Gold probably continues to increase.
Anthony Pompliano of Morgan Creek Capital also gave a pretty good interview this week on BTC. One of the key ideas addressed was the difference between a safe have asset and a low correlation asset.
News
- JP Morgan publishes 74 page cryptocurrency report
– Institutional participation is now ‘significant’
– Have yet to demonstrate usefulness for macro hedging
– Volatility is coming down, but still 5x core markets - SEC commissioner Peirce files dissent against SEC’s ETF rejection
“This order is the latest in a long string of disapproval orders that the Commission has issued regarding bitcoin-related products. This line of disapprovals leads me to conclude that this Commission is unwilling to approve the listing of any product that would provide access to the market for bitcoin and that no filing will meet the ever-shifting standards that this Commission insists on applying to bitcoin-related products — and only to bitcoin-related products.” - Bank of Canada prepares for Digital Currency
– Deputy Governor: at the moment there is “not a compelling case”, but wants to prepare a prototype
– Sovereign digital currencies serve governments, not citizens
– The end goal of cryptocurrencies is to decentralize power, not to bolster existing centers of authority - S Korea proposes 2 step approach to crypto taxation
– Tax experts have recommended implementation of trading tax
– Followed by a 20% income tax at a later point
– Article mentions how difficult an income tax is to implement, I think implementing a nominal trading tax is probably the easiest and most executable means of taxing crypto transactions - FTX to raise $15M via equity sale
– Token tranches to be made available at $250k a clip, non token at $2.5M
– Values the exchange at US$1B
– Tokens not available to US residents, requires extensive KYC - $257M ICO project, Filecoin, expects 3Q20 mainnet launch
– Filecoin was a very high profile ICO project in 2017
– Filecoin is a decentralized cloud based storage system
– Gemini said to provide custody solution - Finland’s seized BTC are now worth > $15M
– BTC was originally seized as part of a drug bust
– At the time of seizure value was estimated at US$760k - Billionaire investor Tim Draper reiterates $250K BTC price target
– Has been very consistent on this call, which he’s had for past few years - Judge gives green light to AT&T SIM hack lawsuit
– A very well known incident in which a users’s exchange account was hacked for US$24M worth of Digital Assets
– SIM hacks have been a constant problem for US users - Tagomi said to join Libra Association
– Tagomi is a US$28M funded crypto Prime Broker startup
– Facebook Association membership is expected to cost $10M
– Formal announcement is expected next week
– Seems a far cry from Mastercard and Paypal
Charts
- Chart 1. Weekly % Change
– Some steep drops this week in smaller coins and tokens
- Charts 2. YTD % Change
– BTC still up +22%
- Chart 3. RSI — Lowest, Tip 20 by Volume
– ETC into oversold territory after a big run over the past couple of weeks
- Chart 4. Position in 52 Week Range
– BTT just off a 52 week low
- Chart 5. % vs 50D MAVG
– Lots of smaller coins well below their 50 day moving averages
- Charts. 2016 Halving Cycle vs 2020 Cycle
– 2020 now back inline with the 2016 pattern after Jan outperformance
– If we follow the ‘16 pattern, implies a near term high of ~ $15K in April
- Chart 6. Drops Below The 50D MAVG
– Since 2016 there have been 36 BTC crosses below the 50D MAVG
– Typically the last about 16 days and are followed by a -5% 10 day drop
- Chart 7. BTC Stock to Flow
– Implied fair value price = $8,300
- Chart 8. Exchange BTC flows
– Bitstamp saw noticeable Net Inflows this week of $138M
– Meaning that users sent BTC to the exchange, probably to sell
– Bitstamp is also one of the more regulated exchanges, so I think is likely one of the primary execution venues for quasi institutionals trading crypto
- Chart 9. BTC Seasonality
– BTC on pace for a 5.5% drop in Feb, one of the worst Febs on record
– Hopefully that takes some of the sting out of Mar, normally a -ve month
