Instead of intro
This month Bitcoin behaves quiet, too quiet – as was not seen for too long. And this “silence” makes worry market investors. Sometimes this worry leads to different forecasts and expectations.
The second moment – correlation between Bitcoin and S&P 500 has increased significantly, and according to market consensus – this is not a good sign for the market. Some other technical indicators have changed as well – spot market trading volume, derivative market activity, and others.
As the overall background stands moderately positive, as we estimated last month, technical nuances differ. And this report, we dedicate to these technical nuances that could become important for market direction on a short-term perspective. We hope they help us more or less in catching the course of the market.
But first, we would like to start with our chart, which indicates why the overall situation is tricky in the Bitcoin market. This is a monthly chart, and we have two side by side bearish grabbers. Until the market stands below the top – the hazard of collapse is present, and we can’t relax. This situation keeps the whole market in tension. And this is the curtain-raiser to the report…
Why investors are worried?
Recent Arcane Research points on few moments:
#1 As we’ve mentioned above – BTC shows extremely low volatility that has not been seen since 2018:
The 7-day volatility just dropped down to levels not seen since October 2018. Back then, the bitcoin price crashed down 50% from $6,000 to $3,000 when the volatility came back. Which direction will the price move this time?
Skew reports that bitcoin ten days realized volatility is 20%. Last time we reached that level, we had the great sell-off of November 2018 shortly after:
#2 Trading range is also narrowed dramatically:
With only 11 days left of July, we’re currently seeing the tightest monthly price range (currently 6%) in bitcoin’s history! The all-time low was seen back in May 2015, at 9%.
#3 In period of “difficulty” and indecision correlation of Bitcoin and major stock indexes (DAX 30, S&P500) was rising. Often this is also accompanied by VIX index jumps. Now as “panic index” gradually is turning to normal levels we see rising divergence of BTC and DAX30 action:
#4 Correlation with S&P 500 has reached 78%:
And opposite relation is growing not only with stocks but with Gold as well:
Conclusions that are made
Phi Deltalitics warns about possible drop on BTC market due contraction of net long position on CME futures:
CME institutional traders’ net position remains similar to the level in mid-February 2020, and it has been dropping significantly. Be careful on the short-term bull side!
They also have money flow index on BTC markets that now drops below 30 (the range is 0-100) that points on significant outflow of investors’ money. Last time this happened in Feb 2020 when BTC has dropped for 40%:
By Unfold release – CFTC also reports that net short position has reached 2046 K contracts – the level that very close to the value of recent drop to 4K price:
All these moments tell that we, at least, should be careful when we consider any Bitcoin purchase for medium and long-term.
Forecasts of different terms
In our June report, we have discussed a few forecasts from very respectable authorities, such as Bloomberg analytics and JP Morgan. Bloomberg provides a longer-term fundamental outlook that is positive in general and suggests growth to the 20K area in the long-term due to slowing mining and growing demand for coins. While JP Morgan was focused on the fair value of BTC that currently approximately equals market value.
This week we have reported that more or less confirms conclusions of Bloomberg and JP Morgan.
Thus, SEBA Switzerland bank introduces math model for estimation of fair BTC value. According to this model, currently Bitcoin is slightly undervalued as estimated fair price stands around $10’670. Here is the dynamic of calculated price and real price of Bitcoin:
Stock-to-flow analysis (S2F) focuses on the broad shape of future prices. Although based on a different methodology than the one used by the Weiss Cryptocurrency cycles model, it is widely respected in the crypto world. And it now points to a ferocious rally over the next 12 months or so. S2F is based on the common-sense notion that the scarcer a commodity is, the more valuable it becomes. And it measures scarcity by comparing annual production to the amount available for buying and selling (circulating supply).
Gold has an S2F of 62 — the number of years of current production required to match global above-ground holdings.
By contrast, it takes only 22 years of current silver production to equal above-ground supplies. The relative lesser scarcity of silver is a key factor that makes silver less valuable than gold.
After the May 2020 halving, 6.25 new Bitcoin are now being created every 10 minutes. That means it would take an estimated 56 years for new mintage to match Bitcoin’s circulating supply.
Notice how close that is to the S2F number for gold, which makes sense because Bitcoin is fast becoming a major rival to gold as a safe-haven investment.
(Halving refers to the 50% cut in the rate at which new Bitcoins are created. This occurs roughly everyfour years. And historically, it has been a harbinger of explosive price gains over the next 12 to 18 months.)
As you can see from the chart above, previous S2F predictions line up quite well with Bitcoin’s actual price performance. Now, based on the history of the halving, current S2F analysis says Bitcoin should reach $70,000 by — sometime around mid-2021.
Overall news background
In general we could treat it as neutral. This month as positive as negative events are present but all of them are of moderate importance:
Cryptocurrency exchanges experienced a 14% decline in their web traffic last month and total web traffic hit a five-month low.
Exchanges saw 98.1 million website visits in June, according to data gathered from web analytics firm SimilarWeb and compiled by The Block Research.
In Q2 2020, total cryptocurrencies market cap grew by 44.5%, but spot trading volume declined by 55%.
Historically, market cap and spot trading volumes have been positively correlated, but the trend seemed to have shifted in Q2 2020. Besides, Bitcoin’s average trading volume in Q2 were 20% lower compared to Q1.
According to a job posting on its website, Fidelity is hiring for the role to help design, build, and maintain the infrastructure to run and scale its bitcoin mining operations.
“Over the past couple of years, we have expanded our mining efforts to ramp up our knowledge of the space. We have explored optimal locations, hardware procurement, mining farm setups, and the economics of the mining industry as a whole,” a Fidelity spokesperson told The Block.
Earlier Fidelity acquired 10.58% shares of Hut 8, Canadian mining company.
In IIQ 2020 Grayscale Digital Asset Investment Report highlights investment activity across the Grayscale family of products this past quarter. Inflows stand for Mln 905.8$. Total cumulative inflows reach $2.5Bln:
As a result, the Company’s aggregate hashing power capacity will increase by 45% from current levels to approximately 357 PH/s and consume 12.8 megawatts of power. This level of energy efficiency is the result of Riot’s continued efforts to build its operations with the highest performance mining hardware on the market.
The bottom line
Now, in July, we see quite a different view on the short and long term perspective. As in the short-term, BTC still keeps the door open for the plunge, as volatility has decreased significantly, institutional investors have cut their positions, and overall trading range and volume stand small, while price correlation to stocks increases. This makes investors worry. It is clear that Bitcoin stands in the “energy building” process, but someday this energy has to be released, and investors fear that it could be released to the downside.
In a longer-term horizon, the situation is the opposite. Fundamental factors and overall news and events background shows stable interest and demand for cryptocurrency. The Crypto business segment shows progress as big whales, such as Mastercard, Paypal, Fidelity, International banks, gradually are stepping in.
Combining these two moments and taking into consideration fair value calculation, we conclude that bitcoin stands at attractive price levels for accumulation in the long-term. We have confidence in fair fundamental value as JP Morgan and SEBA Bank show approximately the same amount. It means that while BTC stands below it – it is undervalued, hence, it is good for accumulation.
At the same time, we should not ignore short-term worries. If technical factors indeed trigger substantial retracement on the BTC market – the accumulation process will be more attractive. We’re not occasionally put the monthly chart at the beginning of this report. $10’500 level is technically vital for BTC as it is a barrier for a long-term bull trend continuation. But as we have an excellent fundamental background, we could accumulate while price stands below it, as the overall fundamental forecast is up.
Thus, we provide you with two major blocks of valuation – technical and fundamental with clear common conclusions. Now you have everything to prepare good trading plan…