A Time of Extreme Testing | April 2020
2020 has been a unique and interesting time for all markets, and especially for Bitcoin and cryptocurrencies. The reason is very simple: This is the first time that cryptos have been subjected to such extreme market conditions. The current crisis has put many myths and assertions to the test, the most important one being that digital currencies are safe-haven assets that share features with gold.
However, reality has cruelly shown that that assertion is not true. And if it is not, how might Bitcoin behave in the longer-term? Should we expect an explosive rally or something completely different?
In an attempt to answer these questions, let’s look at some data:
The cryptocurrency space has been affected by the coronavirus outbreak and other macroeconomic events, but things are not as bad as they seem.
Yes, the crypto market has seen a drop in activity, but so have all other markets. Its struggle to attract mainstream investment continues as global fundraising and deals have dried up. According to PricewaterhouseCoopers “PwC Global Crypto M&A and Fundraising Report” for April 2020:
“The rise in the price of Bitcoin in Q2 and Q3 2019, and the associated interest in crypto assets, did not yet materialize by way of increased new capital into the industry. […] The crypto industry is not immune to the global headwinds, and the number and value of crypto fundraising and M&A deals may be impacted in 2020.”
The report goes on to say that traditional and crypto-focused venture capital funds, incubators, and family offices remain the greatest source of funding. Consolidation is also the biggest driver of M&A, with nine out of the top ten deals being strategic in nature and driven by crypto companies or digital currency-focused funds.
“We expect to see more APAC and EMEA based family offices looking at the market turbulence as a good time to invest in promising crypto companies. We expect to see further consolidation in 2020,” the authors of the report wrote.
The above assessment corresponds to the view that we expressed in January’s report:
“The crypto mining sector will likely see consolidation through closings, pooling, or takeovers of small companies. A geographical restructuring is also possible, that is to say, moving operations to locations with lower energy costs.”
Analysis giant PWC suggests starting to bargain-hunt on the M&A market, investing in crypto companies, and consolidating. This indicates that the interest in crypto is more alive than dead.
Also, since cryptocurrencies are not “immune to the headwinds,” we can conclude that they are not considered safe-havens. This is in line with our report for March:
“At this moment of collapse, BTC shows a high correlation to an equity index, the S&P 500, in particular. This means that investors are treating it like an ordinary asset, stock, or currency, not as a safe-haven or value-store like gold.”
Despite that the safe-haven claim seems to be more of a myth than a reality, other statistics indicate a resurrection in the industry.
As the following chart shows, open interest is rising on all exchanges, including Bakkt and BTC futures on CME.
As the following chart shows, hash rate is rising again, slowly but steadily:
According to The Block, cryptocurrency volumes on spot exchanges saw an increase of 22.4% in March, reaching a nine-month high.
New data collected by Block Research shows that Bitcoin miners brought in an estimated $380.1 million during March, a 25% decline compared to February. That figure is drawn from the daily close price of BTC and is based on the assumption that miners sell their Bitcoin holdings immediately. The vast majority of that revenue was in the form of block reward subsidies, which is 12.5 BTC per block at this time. That number will drop to 6.25 BTC with next month’s halving.
Now we come to the most interesting information, namely a recent report by Glassnode.
The main idea presented is that whales (i.e., entities with at least 1000 BTC) are accumulating Bitcoin in the same manner as in 2017, in anticipation of the coming supply contraction.
In the first week of April, on-chain fundamentals saw growth, especially in volume, in the range a 23% increase from the week before. However, when in-house transactions are deducted, the increase is only 7.5%. Even so, the total number of active entities has increased by 4.7%, indicating an overall on-chain activity increase.
The Number of BTC Whales At The Highest Point in Two Years as Investors Accumulate
The number of whales increased leading up to last month’s crash; it also accelerated during and after the crash. This is a positive sign because it suggests that larger market players are accumulating BTC.
The number of whales is as high as it was at the top of the market in late 2017. However, at that time, the figure was reached during a capitulation phase (i.e., when whales were selling). The last time we saw this number of whales during an accumulation phase was in early 2016. This pattern becomes quite interesting when compared to the last halving event, as illustrated in the chart below:
This trend suggests that – despite market uncertainty – whales are confident enough to accumulate BTC and that they believe there is room for growth.
Looking at Net Unrealized Profit/Loss (NUPL), they question whether BTC has room to drop further before recovery, despite already being undervalued according to this metric.
Given that the price is recovering and whales are still accumulating, it seems that BTC is on the rise for now.
To summarize: Glassnode points to an accumulation by large BTC holders in anticipation of the halving when supply should contract. At the same time, there also seems to be room for a price drop.
To this, we will add our two cents: In order to predict BTC’s performance, we need to understand its place in global assets architecture and hierarchy. In other words, to which asset group do cryptos belong? Are they currencies, commodities, or stocks perhaps?
Our investigation suggests that BTC has no relation to safe-haven assets and does not share any of the features of gold. This is a big upset for idealists, but we just have to accept it. We have discussed this many times, even predicted it last year.
Currencies are also not a good correlation. Besides, they all move so differently. So, what are we left with? Stocks.
Some traders say that the correlation between BTC and stocks has increased in recent months. But this is not true. This correlation has existed since active trading of BTC began. In 2019, it stood around 70-80% – that is a very high level. Take a look at the following chart:
In recent weeks, when the collapse started, the correlation has been remarkable. This is a 4H chart of the BTC and DAX indexes. A comparison to S&P 500 gives the same result:
This means that investors treat BTC like a stock, and not even a primary, blue-chip stock. In the above charts, the only “curious” action – when BTC and stocks moved in opposite directions – was during the rally of 2019. Not only is this easy to explain, but it also proves that BTC is considered secondary quality in the hierarchy of “stock-type” assets. While investors were able to invest in primary, blue-chip stocks because they were relatively cheap, BTC was dropping. When they become too expensive, and the attractiveness of the stock market started to fade – in other words, when it became clear that the bubble was growing – investors started looking elsewhere. With no liquidity problem on the global markets due to massive QE injections, BTC seemed to be an attractive venture. This explains the rally at the final stage of the stock market’s upcycle.
When the virus crisis started, BTC positions were cut as quickly as stocks portfolios, since investors were treating it as a source of liquidity, not a safe-haven.
Based on the important features that we have discovered during this period of extreme testing, we can make the following long-term forecast:
- Bitcoin will face the same factors as the stock market – the shape of global economy recovery (V, U, or L), the course of the pandemic, the impact of supportive measures from Central Banks, the condition of the stock market and economy in general;
- Bitcoin’s recovery will draw the same recovery pattern as the stock market, but with some delay. Investors will buy the best stocks first, investing in more “traditional” assets because they understand them better. The rest of the liquidity will turn to BTC. However, this is not a bad thing; in fact, I would say that it is positive. When we see the stock market beginning to recover, that will be the time to buy BTC.
- Recent data indicates bullish activity among whales and improved overall statistics – hash rate, trading volume, etc. This means that some accumulation is taking place in the market, which appears to have survived in the crisis. This allows for hope that worst is behind us.
- The most important factors in the crypto market remain the same as they have been for some time, namely consolidation and expansion. As we have indicated in many past reports, crypto fans are too small to support stable growth. The market needs money from institutional investors to grow.
- As has been widely suggested and confirmed by Glassnode’s analysis, the coming halving should support the price of BTC as supply decreases.
Finally, our technical analysis: BTC’s chart suggests one last drop to the $3.5K area before the real reversal begins. At present, our basic long-term scenario is as follows:
BTC is nearing a real upside reversal, which should start in the second part of 2020, closer to autumn. This may change, but at present, we do not see any reasons to deny this scenario. We will keep our finger on the pulse and keep you informed every step of the way.