The Fundamentals Report #72 - 1/17/2020

01/17/20  |  Issue #72  |  Block 613,314  |  Disclaimer
~115 Days Until Halving
.977 on the Mayer Multiple


TOP STORIES

L2 Bundles

This week Blockstream announced BTCPay Server has integrated Liquid support. IMO this is huge news. 

Bitcoin Layer 2 is exploding with activity, but is still working to find the right mix of features and user experience to attract business and individual users. The growing L2 Bundle is

  • Liquid (L-BTC)
  • Confidential Transactions (CT)
  • Lightning Network (LN) both by itself and with L-BTC
  • Tether on Liquid (L-USDT) which can use CT
  • Other stablecoins like Canadian dollars from Bull Bitcoin (L-CAD)
  • BTCPay Server a self-hosted payment processor stack
  • Bisq is looking to add L-BTC with a pegged 1:1 trade

Some people are opposed to Liquid becoming the dominant L2 hub and I share a bit of sympathy with that view, since it is federated and not completely decentralized. However, many technologies are being built alongside each other in a exciting experimentation phase.

I’m excited for a synergy to develop amongst all these L2’s. LN capacity and features plus Liquid capacity and features can reinforce each other. I see a future where small transactions <$1000 being on LN, mid-sized transactions from $1000 to $100,000 or so will be made with L-BTC, and high value settlement >$100,000 will happen on chain.

Bitcoin Options are Coming of Age

The recent additions of Bakkt, FTX, CME, and OKex to the bitcoin options game are leading to massive gains in liquidity. Deribit is still the undisputed leader in this area, and are looking to extend their lead. It is interesting that the incentives favor one large leader.

DANGEROUS Situation in the Virginias

State Lawmakers Invite Virginia’s 2A Sanctuary Counties to Join WV
I’m not sure where to go with this latest development in the US grassroots revolution. If you are unaware of what has been going on, I’ll try and sum it up really quickly.

  1. Virginia switched democrat in an election on the 8th
  2. Virginia lawmakers quickly and drastically went after guns
  3. Nearly all counties and some cities in Virginia (almost overnight) voted to disregard the State legislature new gun laws
  4. West Virginia voted to allow Virginia counties into West Virginia if they want (first I’ve ever heard of this since the Civil War)
  5. Gun rights rally on the 20th in Richmond, very volatile situation
  6. The Virginia governor has declared a state of emergency, can call in National Guard

This is a highly dangerous situation, and I don’t say that lightly. I don’t vote and I don’t care for politics, but this could very well be the spark of an armed revolution. Washington DC is on the border of Virginia, so it is right in heart of the country. Gun grabbers know they are running out of time with the advent of printed firearms and the sanctuary counties giving them the big f*** you. This could be a huge event for markets.


PRICE

Weekly BMI |  1 : Slightly bullish 

We are slicing through several important price levels in this area of the chart, and overall everything is extremely bullish. There’s a chance to continue all the way up to $10,000, but I think it’s likely we see some retracement in the next week. 

On our in depth member newsletter I’ve been examining price movements in relation to some important moving averages and how these moving averages differ between new 24 hour bitcoin markets and the CME’s traditional trading hours.

On the 24 hour markets price cleanly broke daily 50 EMA and the weekly 20 MA, which has been a very important MA in bitcoin’s history. Today price wicked up to the daily 200 MA.

CME’s 200 MA is significantly different and the weekly 20 MA only covers 100 trading days vs 140 on the 24 hour bitcoin markets. CME has broken all three of these MA’s already.

The bitcoin price is entering heavy resistance between 9000 and 9500 on the chart, also bumping into the 200 day moving average.
A CME bitcoin futures price chart showing the price above all major moving averages.

MINING

Bitcoin makes up >80% of PoW income. The great altcoin bubble shows no signs in the fundamentals of coming back. “Since mid-2017, Bitcoin’s miner salary share has increased ~250% and is nearing pre-Ethereum levels.” Source

A colorful rainbow chart showing bitcoin's share of global Proof of work mining rewards compared to altcoins, it is recovering to over 80%.

The difficulty adjusted up 7% on Jan 14th and is currently on pace for another positive adjustment of approximately 5% in about ten days. These upward adjustments make mining harder and squeeze profitability which was already at an all time low in recent weeks. Miners seem to be expecting more price increases in the future and might be front running the halvening by mining as much as they can now.

Three part chart showing bitcoin difficulty, hashrate and profitability.

MACRO

There’s so much happening in the global macro arena, I think the next crisis is just around the corner. Here’s a few major news items.

Changing the Rules
A very big sign of a coming recession is the changing of rules. The Fed or the government will create new powers or modify old ones. In other words, they don’t play by the rules like they expect us plebs to do, they screw the market every chance they get. Bailouts for their cronies or Quantitative this or that. They create the problem and then change the rules. There is no market, it’s their game. Heaven forbid you evaluate the situation and try to short.

Anyway, that is the build up for this new rule change, where the Fed wants to lend (free) money directly to hedge funds to avoid the next crisis. The Fed cannot avoid the next crisis, so if they are doing this now, we know it’s already begun.

Print Baby, Print
This was an interesting chart from @Schuldensuehner on Twitter. You can see the two brief times that total central bank printing slowed in the last 10 years, in 2012 and 2018. Both have resulted in global financial troubles and a return to massive monetary expansion. We know what central banks will do, they can only do one thing, inject more money. The dirty secret is this tsunami of liquidity has an ever-decreasing marginal rate of return. Today, it takes $3 of printing for $1 in GDP “growth”. Pretty soon, there will be no net effect and the house of cards will collapse.

A composite chart showing the money printing by major central banks since 2005, highlighting two eras of relatively flat growth in central bank balance sheets.

“Shipment volume in the US by truck, rail, air, and barge plunged 7.9% in December 2019 compared to a year earlier, according to the Cass Freight Index for Shipments. It was the 13th month in a row of year-over-year declines, and the steepest year-over-year decline since November 2009, during the Financial Crisis.” Source

The big recovering in 2018 on the chart below is deceptive. It was mainly due to people trying to front run the trade war tariffs as they scrambled to increase inventories. Without that stimulation it’s possible we could be in a four year contraction in freight shipments in the US. Is that a sign of a strong economy?

A chart showing the Cass Freight Index or shipping in the US. It shows a shipping recession in 2015 thru 2016, recovery due to front running the trade war in 2017 and 2018, and a massive decline in 2019 to lows not seen since 2009.

MISCELLANEOUS

I released a podcast episode for members only this week discussing this blog post from Anthony Towns and his adoption funnel. Check it out.


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