Bitcoin Bulletin: healthy trading despite speculative phase

In the 2021 outlook, we said that the year ahead “will be a wilder ride than 2020…” Well, it has not disappointed thus far! The market is clearly speculative in nature, but investors need to get comfortable with the speculative nature of global financial markets. In this note, we update a few indicators and touch on recent news items to get a feel for the phase on the bull-market. I don’t see anything that changes my opinion that the bull market will continue into Q4 2021. Each individual needs to manage their risks judiciously, but I’m not taking risk off the table yet. [10-minute read]

Note: The Bitcoin Bulletin is an investment and trading related report (not advice). Its suitable for existing holders. It does not include a motivation for holding the asset, other than price appreciation.

Summary

Nerves after a baby correction?
Pent-up demand on dips
Tesla blows open institutional FOMO
Retail interest has emerged buy not extreme
Grayscale premium challenged by an ETF
Exchange balances falling into cold storage

Warming up with a baby correction

Bitcoin corrected 24% between January (peak to trough on a daily chart) but rebounded 47% in February (at the time of writing). Yes, you heard correctly, almost 50% in one month. Bitcoin gained 16% on one day alone, Tesla Day! More on that in a moment.

A 24% correction is small relative to previous bull-market corrections, which range between 25% and 40% (the 70% and 53% corrections in 2013 and 2017 were larger, uncharacteristic bull-market corrections).

Take-home: Investors tend to become more accustomed to the volatility over time, but if you panicked during the January correction, perhaps you need to restrategise. Look at the total portfolio impact (including your other investments), stop watching the price on a daily basis or assess your position sizing. Volatility will only get worse in the coming months so you need to take pre-emptive action.

A relatively small correction after a massive rally in 2020 tells me that there’s pent-up demand for bitcoin. Investors have bought bitcoin dips aggressively over the last few months – highlighted in the red circles below. This suggests they have constructive longer-term price expectations because they’re willing to buy bitcoin despite the falling price. If more big players like MicroStrategy and Tesla get into the market, we can expect more of this price action. This doesn’t rule out bigger corrections in the future, but I reckon there’s still more steam in the bull-market as these big players allocate sizeable capital.

Institutional wave ratchets up

We said in October 2020, “Numerous corporate treasury’s will have noticed Square and MicroStrategy and will be under pressure to follow. Granted, MicroStrategy and Square are both tech savvy, but they’re not alone in this knowledge base. The truth is, any corporates sitting on large cash stocks should be asking themselves the same questions and investigating the possibility of allocating lazy cash into bitcoin.”

Tesla, one of the world’s most well-know companies, allocated $1.5bn worth of bitcoin onto its balance sheet in Q4 2020. Bitcoin’s institutional wave is well and truly upon us. Similarly, to MicroStrategy, Telsa is probably more receptive to bitcoin than peers. Elon Musk is an aggressive CEO who is willing to take risks and put his neck on the line. However, he’s not the only tech-savvy CEO and he won’t be the last to allocate to bitcoin. Every corporate Treasurer is being asked about bitcoin by their board, shareholders and the media. They’ve all got have an opinion now. Some will have a negative opinion, but some will have a positive one. If they’re positive, they will have to act.

Consider for a second…some corporate institutions are probably going to FOMO buy bitcoin because of competitive pressure. Taking this thought a step further…What if this bitcoin cycle repeats similarly to past cycles with a boom-bust bubble, but with institutional greed and FOMO rather than retail?!? I don’t know how this will all turn out but it’s interesting to consider.

Take-home: Tesla opens the gates for a host more corporates to allocate to bitcoin and for new retail investors to be interested.

I’ve written a longer article where I untangle the differences between the bitcoin and Tesla narratives so please read THIS ARTICLE if you’d like to find out more (LINK).

The Grayscale premium has narrowed very quickly during this cycle. Takehome:

Institutionalisation of bitcoin. Some trading institutions are now able to arbitrage between GBTC and on-chain bitcoin through GBTC shorts via relationships within institutions like Blockfi. This did not exist in previous cycles.
Given this improvement in trading sophistication, it is questionable whether this GBTC premium metric is as useful today as a sell-indictor as it has been in the past. I certainly don’t expect the premium to reach the levels we saw in 2017. A bitcoin ETF should negate the premium altogether.
Despite the institutionalisation of this asset, the premium still exists and it has fluctuated as high as the 40% in December 2020. One could argue that those levels revealed peak enthusiasm but the subsequent bitcoin price increase and narrowing in the GBTC premium doesn’t corroborate. Seen differently, he market is in a reasonably healthy place with the premium below 10%.

Canadian bitcoin ETF could push the SEC over the line

Returning to the bitcoin ETF, Canada passed one this week. This is the first bitcoin ETF in North America (there’s an ETF in Sweden). Its 1% cheaper than GBTC, which has a 2% annual management fee. The ETF provides institutional investors with another vehicle to access bitcoin and its closer to Wall St than Sweden. Plus, this decision will place pressure on the US SEC to finally pass one of the many ETF applications on its table.

Take-home: Institutional interest could flood into bitcoin if an ETF is approved by the SEC in 2021, despite the $50K+ price tag.

Retail interest returns in earnest

Google searches for “bitcoin” have hit their highest levels since the December 2017 bubble peak so clearly this bull-market is in a frothy/speculative phase phase. I think nominal searches should increase during each cycle. As adoption grows the nominal number of new entrants should increase. That’s why I introduced the nominalised series, which normalises the data by the long-term average in searches. It was a much better indicator than the nominal data in 2017. By this measure, google searches have increased but remain below the 2013 and 2017 peaks.

Anecdotally, interest in bitcoin is increasing and I’m getting more questions. The Game Stop debacle pushed a few people over the edge into bitcoin positions. But I still haven’t witnessed anything ridiculous yet, comparable to Q4 2017 - when strangers wanted me to get them into bitcoin purely because their friends were making money. Another anecdote, our Santa Monica meet-up saw its highest turnout in months in the first week of Feb, but restaurants only recently reopened over here. And we haven’t topped 20 people yet! I expect attendance will grow substantially over the coming months as bitcoin’s number one marketing strategy takes hold. To summarise the argument in that article, I don’t encourage people to act on FOMO. I just think FOMO inevitable.

Take-home: the retail frenzy is building but not yet at Q4 2017 levels

Long-term holders are pulling bitcoin off exchanges

Last metric for this month: volumes of bitcoin sitting on exchanges (not trading volumes). Usually, a rise in volumes held on exchanges is a signal that long-term holders are preparing to sell. Whereas a reduction in volumes held on exchanges signals long-term holders are buying bitcoin and transferring into cold-storage with less intention of selling.

This chart shows the percentage of bitcoin balances on exchanges:

This chart shows the change in dollar volumes on exchanges:

Volumes on exchanges rose aggressively through the back end of the 2017 bull-market as long-term holders took profits and sold to new entrants. By contrast, volumes on exchanges have fallen steadily since early 2020 which suggests that by-in-large long-term holders haven’t taken profits yet. I.E. They’re waiting for the price to move higher. This lack of supply liquidity can become a self fulfilling prophecy, squeezing the price higher.

Take-home: I expect that we’ll see a reversal in holding volumes on exchange with more balances on exchanges before the bull market ends. I will use this change as a strong sell indicator.

In late 2020 I said that we’d probably hit $100K in 2021 – which will probably prove cautious in hindsight and is still a 100% gain away. The data shows signs that we’ve entered the speculative phase of the bull market, which is not for the faint-hearted. Despite the froth, we’ve only seen baby price corrections, normalised google searches are contained, tesla is about to lead a raft of new entrants, and funds continue to move off exchanges. So, the market is surprisingly healthy for a speculative mania. Moreover, historical cycles indicate that this bitcoin cycle should only peak in Q4 2021. I understand the need for some to take profits after the massive gains experienced in 2021. Others will never sell, which isn’t a bad strategy either. Whatever it is, its super healthy to stick to your strategy! For me, I’m trying to fully capitalise on the return potential of this asset class. Greedy, perhaps. But I genuinely believe this is a once in a lifetime opportunity. Plus, I’m receptive to the “never-sell” strategy. I expect the speculative mania to intensify in the next 6 months and I remain heavily invested. Everyone has to match their risks to their circumstances and knowledge. I elaborated more on the relationship between these variables and percentage allocation in THIS ARTICLE. I will continue to produce these reports to provide guidance. But please know in advance that if you hold the trigger on the buy/sell button, then only you can evaluate your circumstances and decide.

Good luck out there.

As always, let me know if there are any questions.

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