Sound Money

I wrote in this article that the bull-market is not over, but what if I am wrong? What would this look like and what can we learn from it as we navigate the coming weeks and months? TLDR: There is strong price support at $20K and I see an absolute price fall at $10K. I would be surprised if the price fell further than 10% below the stock-to-flow prediction which would take us to $26K, another 16% decline. Whatever level we reach, these are incredibly attractive prices for a profound technological innovation that is in an institutional adoption process.

Stock-to-flow predicts bottom at $26K.

Historically, bear markets saw price deviate sharply away from the stock to flow (S2F) model. I.E. Bitcoin’s market capitalization fell notably below that which was predicted by the scarcity of the asset. During the 2011 bear-market the price fell 20% below the S2F prediction and during the 2015 and 2019 bear markets price fell 7% below the S2F predication. We have also experienced one large downside deviation, which was outside of a bear-market - during July 2017 (the previous bitcoin bull-market) price fell 10% the S2F prediction.

It is clear from the graph that the deviations from S2F during the 2011 bull and bear markets were unusually large. Bitcoin was in its infancy; we had not even experienced the first halving yet and no one was talking about stock-to-flow. I think we can rule out those extremes as potential scenarios for this cycle. The other scenarios are certainly possible though.

If the bitcoin price falls to the 10% deviation mark, that would imply a price of $26,500. That is another 16% decline from today. With bitcoin’s volatility a 16% correction could easily take place in a matter of days and it is certainly a possibility.

Realized price predicts bottom at $20K

Realized price is based on the realized capitalization, which measures the price at which coins were last moved. It suggests that price could fall as low as $20K.

CVDD predicts bottom at $10K

Cumulative Value-Days Destroyed (CVDD) is the ratio of the cumulative USD value of Coin Days Destroyed and the market age (in days). It generally provides the absolute market floor on the price. You can see that in the past the price barely touched this indicator. If you waited for the price to fall below CVDD you may never have bought at the previous market bottoms. I.E. There is almost zero chance that we reach $10K. $10K is an almighty decline from $30K so I am not taking this lightly, but it is good to know where the absolute price floor sits.

Realized price distribution supports uncertainty in $20K-$30K range

The distribution of prices at which coins have last moved provides another lense to view the previous indicators. Substantial price support exists around $11K so I am confident that the price will not fall below there. Reasonably strong price support exists in the $19K mark so I think it would be challenging for the price to fall below that level. But between $19K and the current $32K the data suggests that anything is possible.

Retail transferring holdings to Institutional?

While institutions may have started this month’s sell-off, evidence suggests that retail investors are the major driver of the price capitulation. There has been a shift of coins onto Binance, which is the world’s biggest exchange and tends to be dominated by retail. I.E. retail traders have moved coins onto exchange to take profits. By contrast, Coinbase, dominated by US corporate flows, has continued to experience outflows.

These contrasting flows between Coinbase and Binance suggests that capital could be shifting from retail investors to institutional. The thesis is supported by the sharp reduction in transfers out of OTC Desks during each BTC price decline over the past few months.

Corporates and institutional investors are far less prone to the vagaries of emotional trading. Yes, many of them might have taken profits near the price top above $55K, but they will not merely capitulate on their holdings during price declines. It is more probable that they will purchase on dips. I expect their presence will limit the price decline.

Extended bear unlikely

It would be foolhardy to rule out any additional price downside from here so I have laid out the potential scenarios. If you gaze back towards the charts in this piece, you will notice that it its truly rare for the bitcoin price to fall 10% below stock/flow, to its realized price or to the cumulative coin days destroyed value. All the previous bitcoin bear markets took place when the price was above the stock to flow valuation for pretty much the full period. While the bitcoin cycle could be morphing due to the introduction of institutional capital, I hold a strong conviction that we have not entered into an extended bear-market. More likely we are experiencing a noteworthy bull-market correction, similar to 2013. I think that this large correction and washout from alternative crypto currencies is probably going to create an even stronger base for this bull-market to surpass expectations over the coming months.

Buy when assets are on sale

Most investors have executed a buy and hold strategy with a long-term time horizon. They should not be trading, and they should not look at the price daily. The emotional pressure of extreme volatility is difficult to digest and leads to terrible decision-making. I strongly dissuade this type of investor from trying to time this market bottom. I have remarkably high confidence that Bitcoin will be substantially higher in the years ahead. There is little doubt in my mind that these individuals should hold the line and ride out the volatility. While it is challenging, if you understand the revolutionary nature of this technology, the price decline should be viewed as the sale of 2021. Whether we drop another 10%, 20% or 30% in the next couple of weeks will matter little in the coming months.