Fundamentals Report #119

December 11, 2020  |  Issue #119  |  Block 660,940  |  Disclaimer

Written by Ansel Lindner and Jeff See

Bitcoin in Brief

This week's Bitcoin & Markets content

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• (Member) Speculative Attacks - Bitcoin Pulse #93
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Market Commentary

The institutional FOMO is starting. MicroStrategy and Square have set the tone for adding bitcoin to corporate balance sheets. Now, in the last 24 hours, news broke that Mass Mutual, a 170-year old insurance company with $235 billion of investments, has added $100 million in bitcoin to their balance sheet as well. The flood gates are opening.

This bull market has a unique character compared to previous cycles. In the past, bitcoin (and especially altcoins) were a retail driven phenomenon. Retail attention has yet to show up this time around (which is to be expected during the economic disaster we are living through) and might never return to 2017 levels.

The prevalence of institutional demand this time around could be interpreted as a signal that worse economic conditions still lie ahead. Demand is coming from those who have proven they have knowledge of the markets. If they are feeling a need to own bitcoin, something very negative might be in store for the global economy.

If we look around at those global markets, things look quiet. Too quiet. Many commodities have rallied over the last few months, the dollar has weakened relative to other major currencies, and things seem stable on the currency front. But this will not last. A strong dollar and slowing economic growth will always return, that is just how the global financial system is programmed now. To fix the financial system, it must be replaced or revised (most likely to a bitcoin standard).

Despite the dramatic interest for bitcoin by institutional investors, if trouble returns to global markets in the next month in a replay of March, bitcoin will not be immune, but it will fair much better than everything else. 2021 is setting up to be a very good year for bitcoin. Buy the Dip!

Quick Price Analysis

Weekly BMI |  -1 : Slightly bearish

We can't get ahead of ourselves yet. Mass Mutual has already bought, so, their demand is baked in the price already. Micro Strategy's bonds-for-bitcoin move won't start for at least a couple of months (I'm assuming that timeframe, though traders could be attempting to price in another $550 million in demand). Whales will size their buys appropriately.

As predicted the huge bearish divergence was a great signal to end the big rally. Network fundamentals are slowing, like traffic, fees, GBTC premium, CME open interest, etc. All these things say price is cooling off, not getting ready to break out to new highs.

Bitcoin could possibly visit support at $13,500 before bouncing, but we don't think price will get that low. A test of, at least, the $15,500 area is likely.

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We've seen the below chart floating around again. Many people are claiming this indicates bitcoin is coming off the exchanges and into long term hoards, and if demand stays the same but supply decreases price will increase. There are several problems with this chart. First, the most likely explanation for the dramatic change seen here is exchanges moving coins to a new cold wallet but being counted as moved off the exchange. Second, it doesn't tell the story of liquidity on the exchanges very well. The USD value of the bitcoin on the exchange must be considered, and that is increasing steadily even if this chart is accurate. We are skeptical.

Mining

Hash rate is the measure of total computer power on the bitcoin network. It has recovered from its October decline due to the end of cheap rainy season power in China, but has not regained its typical incline. We know mining is healthy, there has been several news items in recent weeks about bitcoin mining booming in the US and Russia. So why is hash rate not growing?

In 2019, hash rate had a slight decline throughout November and December as well, then spent the first few months of 2020 fairly stable. This would correspond to the price action during that time as well. Eventually, if the economic theories we use to predict hash rate are accurate, it should more closely mirror price over time. During a consolidation in price, therefore, it is not unexpected to see hash rate also consolidate.

Bitcoin network traffic is slowing since the ATH on Dec 1st. Below is a chart of unconfirmed transactions (transactions on the network waiting to be included in a block). The number of transactions in a block is limited by the maximum size in bytes a block can be. If the number of transactions spike, they begin to back up and wait to be included.

Stablecoins / CBDC / Altcoins

Tether Dominance: 10.42% (+0.8%)

Miscellaneous

ChartsBTC does fantastic work. Here he aligns prices for each bitcoin cycle by halving. The gray line is the first cycle and it rallied 93x from the halving price. The green line is the second cycle and it rallied 30x from the halving price.

We expect this cycle to be similar to these cycles. Two things to notice, 1) price is above the previous cycle at this time, so a pull back right now still fits into this model; 2) if this cycle splits the difference between these previous cycles (50x), the price of bitcoin could hit $425,000 in 2021.