It’s been a while since I have given a proper update on this mailing list. I have been focused on writing work for clients so this newsletter has taken a back seat in recent months. But my outlook for Bitcoin recently changed which deserves an update.
It’s been a long time since I have been this bullish on Bitcoin price prospects. While I have always been extremely optimistic on the long-term case for BTC price recording huge appreciation, I have not been convinced on the short-term to mid-term case for most of 2020. Until recently.
The 11% price jump on July 27th brought Bitcoin price above a paradigm-shifting level which drastically increased the odds of price reclaiming Q2 highs. In this update, I break down why this price rise likely shifted the tide in the Bitcoin market.
There are many narratives we can create and data metrics we can highlight to paint a bullish Bitcoin outlook. I will highlight some of these later in the article but these are secondary to another factor. Strong price performance is the primary fuel for future price increases. It is no surprise that the huge price increases observed in the latter end of 2017 came after a bout of record highs being formed.
Price increases act in a self-reinforcing manner. BTC price appreciation is Bitcoin’s best promotional tool. It spurs speculative activity, publicity, and talk. All the speculative activity, publicity, and talk lead to increased trading volume, interest, and on-chain activity which begets yet further speculative activity, publicity, and talk.
This cycle also highlights a fallacy which most analysts are unaware of. Many of the metrics that analysts use to paint a bullish picture only look bullish after price rises. For instance, Google searches for “buy Bitcoin” rise after Bitcoin price rises. Similarly, on-chain metrics will jump after Bitcoin price rises as the price jump will spark on-chain activity.
While this property is somewhat present in all markets (often referred to as the theory of reflexivity), it is particularly true of Bitcoin given that the market is still relatively new. The early-stage of the BTC market means that it is largely driven by speculative activity. Fundamentals will play a more significant role in moving price as the market evolves and attracts more and more capital. But as it stands – regardless of all the talk of fundamentals – Bitcoin is still a market which is dominantly driven by speculators.
That brings us to the ~11% Bitcoin price jump that took place on July 27th. The reason I believe that this increase was so important is that it brought price far above $10,500, a level which BTC had repeatedly failed to sustain valuations above.
Many bullish narratives and arguments have been made for Bitcoin this year. A bullish picture can certainly be painted with the data and we will do that below. But it all means little if price continuously fails to overcome a certain point. Bullish expectations related to the halving was a particularly potent narrative which failed to manifest in higher prices.
Any of the bullish narratives that were circulated quickly died away as Bitcoin sold-off several times after approaching $10.5k. Bitcoin significantly sold-off in Oct 2019, Feb 2020, and June 2020 at this level.
These repeated failures eventually took their toll on the market. Enthusiasm died off and trading for June and the majority of July reflected that. June recorded the lowest month of trading volume since March 2019 and July was even lower. It was only on July 27 that volatility was reignited.
In the lead-up to July 27th, a hype surrounding DeFi and a prolonged outperformance of altcoins improved sentiment for crypto investors. This unsurprisingly found its way into the Bitcoin market.
As price surpassed $10.5k, several data metrics indicated that the tide had clearly shifted in the BTC market. Sentiment data further improved and perpetual futures interest rates also jumped showing that most participants in the derivatives market started taking leveraged long positions.
The importance of $10.5k was further showcased by the market when price retraced to this level on both the 28th of July and 2nd of August. The sharp drop on the 2nd August came shortly after price surpassed $12k and catalyzed ~$147 million in BitMEX liquidations.
In summary, since BTC surpassed $10.5k, sentiment data improved and most of the market started taking leveraged long positions. This supports our viewpoint that the primary fuel for price increases is strong price performance. Furthermore, with price now trading above a key level, any bullish narratives that surface will have a higher likelihood of sticking and manifesting in further upside price action for Bitcoin.
Here are some of the narratives and metrics which analysts may bring up to anticipate further price increases in Bitcoin:
Key retracement levels overcome – Bitcoin has arguably been in a long-term downtrend since the ~$14k highs of Q2 2019. The recent price jump led to a weekly close above key retracement levels between the Q2 2019 high and the March 2020 low of the downtrend. From a technical analysis basics perspective, if over 66% of the downtrend is retraced, the odds that price will reclaim the highs of the trend drastically improve.
Demand-side dynamics improving – There have been some recent updates from major purchasers of Bitcoin. Square Crypto booked revenue of $875 million in Bitcoin sales through their Cash App during Q2*. This is a huge increase in their buying activity compared to Q1 when $299 million worth of Bitcoin was purchased by the firm. Square is not the only firm that has been ramping up BTC buying. Grayscale recorded inflows of $751 million into their Bitcoin Trust product (GBTC) in Q2. To provide a greater number of investors with exposure to Bitcoin price, Grayscale have increased their holdings of Bitcoin by over 125k this year. Another major purchaser has also emerged. Nasdaq-listed MicroStrategy recently announced that it has purchased ~$250 million worth of Bitcoin as part of a new alternative investment strategy.
*The Square Crypto Q2 report records that the firm spent $858 million purchasing Bitcoin to record this revenue. Their margin is the difference between the cost they acquired Bitcoin at and the price sold to Cash App users.
Supply-side improvements – Bullish adjustments in the demand-side of Bitcoin have been accompanied by bullish adjustments in the supply-side. With less Bitcoin being issued since the May 2020 halving, this puts upside pressure on the price to facilitate constant or higher demand levels. Furthermore, the amount of holders with unmoved Bitcoin for one year or longer is at record highs. ~63% of circulating BTC has currently been unmoved for 1+ years. With fewer holders willing to sell move their BTC, this could also be considered to put upside pressure on the price to facilitate constant or higher demand levels.
(Source: Glassnode Studio)
Macroeconomic developments – Many macroeconomic arguments have been brought up this year to make a bullish case for Bitcoin. The extraordinary monetary stimulus that central banks and governments have coordinated in response to the COVID-19 crisis has been a recurring theme. The USD M2 money supply has increased by over 19% year-to-date. Furthermore, Bitcoin has recently been recording historically high correlations with gold. As gold is a widely recognized risk-off asset, Bitcoin showing high levels of correlation with gold may make it a more suitable contender for serious macro investors.
A myriad of reasons to be bullish on Bitcoin have been brimming in 2020. However, any bullish reasons and narratives that surface have shown a poor ability to manifest in further price increases as BTC repeatedly failed to sustain valuations above a key level. After the recent price jump in late July, these narratives look far more likely to stick and result in further price increases.
It should be noted that none of the risks associated with Bitcoin have been discussed in this piece. Bullish developments need to be taken as part of a nuanced view which also considers key risks. Bitcoin remains an emerging and extremely experimentative technology that is subject to many risks.