Sound Money

In the past we used to write more detailed and opinionated pieces on market conditions. We are veering away from that to a short and succinct monthly market comment. We’ll keep opinions more thematic in nature and release those separately.

What has happened in the month of August?

• After reaching a low of $29,800 in late July, BTCUSD has recovered to almost $50K, to mark a 61.5% gain.
• As expected in the latter stages of a bull-market ETHUSD has outperformed bitcoin during the recovery, gaining 72% from its lows below $2K.

We remain in the latter stages of a bull-market

As I have already mentioned, we are in latter stages of bull-market. The parabolic price rise expected to continue into early 2021. We provided our rational for this stance in May 2020

• BTC was still at a cheap valuation, encouraging knowledgeable people to accumulate
• While some old holders were profit taking at the time, they were not selling aggressively, which is usually a clear signal of the end of a bull-market
• We hadn’t yet experienced a fully blown retail frenzy, which usually burns so many fingers that new entrants are wary again for another 12-18 months and creates the extended bear cycle

Network health improving after challenging June/July

Network health took a hit in June and July but it is improving, confirming suspicions that the bull-market is not over

• Hash rate, which is a measure of bitcoin security, is up 20% since low, still 28% below peak

• Transaction volumes have exploded higher. The mempool is clear, encouraging on-chain transactions again

• Daily active addresses have risen 9% after falling 30.5%. Suggests old/existing users are executing transactions on-chain currently, while mempool is clear.

25% undervalued with price risks tilted to the upside

Bitcoin is approximately 25% undervalued at the end of August, which are historically attractive purchase prices with contained downside potential and large upside price potential.

It’s a fool’s errand to try and pick prices over the short-term, we prefer to assess where the risks lie.

Short-term drivers of supply and demand will always fluctuate and rarely all point in the same direction, but there is a fair amount of illiquidity of supply and reduction in profit taking, which creates a more encouraging outlook for price over the shorter and medium term.

Cheap valuation, recovering network health, illiquidity in supply and a reduction in profit taking suggests that the slight pairing back in the BTC price from $50K to $47K is unlikely to unravel much further. If it does, strong support would likely emerge well before the $42K mark, which is not far away. The upside price potential is substantially higher given the metrics suggested earlier.

Traditional financial markets pose some risks to consider with central bank liquidity injections not quite as high as they were in the latter half of 2020. We’ll continue to monitor those changes, but do not view them as severe enough to cause a less constructive shift in positioning.

As always, let us know if you have any questions. Have a great September. Chat soon!