June 24, 2021

Still Bearish…

Bullish Bitcoin social media blabber ungrounded in data.

Disclaimer: Nothing in this piece is financial advice. It is strictly educational information. Take responsibility for your own financial decisions.

Crypto Twitter has recently been inundated with rally cries insinuating to Bitcoiners that they would be outright foolish to sell some of their exposure in response to recent market movements. I disagree. Just check the below tweet from Mister McCormack as a shining example of such one-sided optimism.


One more for good measure…


The prevailing narrative on social media is that the recent declines are the final leg of such bearish activity and those that sell some of their holdings will ultimately regret it. Before I present my own analysis, I need to point out that the prevailing narrative could indeed be correct and I could be wrong in my outlook. However, such prevailing narratives are based on little other than popular belief and the majority of statements are not supported by even a single data point. I should also highlight that I am heavily long Bitcoin but I take leveraged short positions and adjust my exposure when I anticipate declines, as I have done recently.

So let’s look at what the data suggests to me. Firstly, as highlighted in my last analysis, there is no denying that the medium-term Bitcoin market trend is downwards and it has been since mid-May. Since then, Bitcoin has recorded some significant daily downside movements, including a 12% and 14% on May 12th and May 19th respectively, both catalyzed by comments from Elon Musk. Bitcoin price has also found seller liquidity in the low $30ks on several occasions, knocking on the door to say, and succeeded in entering through the door briefly on the last test. The next knock is more likely to be followed by a firm entry, as the recent tests have diminished some of the buyer liquidity resting around the $30k level.

(Source: Tradingview.com)

Such chart analysis is rudimentary and certainly does not give anyone an edge. However, it does highlight the predominant trend and that is useful. It is useful because if you understand the dynamics of trends, everything currently works against Bitcoin price appreciating. Levels that were previously areas of buyer liquidity are now areas of seller liquidity. Bearish news developments are more likely to cause downward price movements while bullish news is more likely to have no impact. Such a trend either requires a bullish development to change market dynamics (which nobody can forecast) or it requires the market to reach a point of capitulation so that healthy demand-supply dynamics can be established.

Given that no catalyst happens in the intermediate-term to change dynamics, how do we know when such a point of capitulation is reached? We can never know for certain but there are some signs. At market tops, a strong signal that the market is overheated is when retail capital is taking excessive risk. When fresh retail capital leverages heavily, it is a sign that the capital inflow to the market has reached its maximum and that the market may be setting itself up for a change of dynamics. In the words of the late Matt D’Souza, capital inflow and capital outflow is what determines the long-term trend.

Similarly, at a point of capitulation, there will likely be signs that capital outflow has reached its maximum. When previously avid Bitcoin holders are liquidating significant shares of their holdings, that is an indication that the market may be approaching capitulation. In the March 2020 capitulation that brought Bitcoin prices to sub-$4k, I was legitimately surprised by some of the people who lost belief in the asset and sold significant shares of their holdings. Such a point of capitulation does not need to be so severe but there will likely be some signs that capital outflow has reached its maximum and capital inflow is starting to accumulate. At the moment, all the signs indicate to me that it is still the weak hands that are selling their holdings. My outlook will be reassessed if I get signs that semi-strong or strong hands are selling their holdings.

Corroborating this outlook is the fact that the smart money in the CME futures market remains short. Leveraged funds, entities that specialize in speculation such as hedge funds and money managers, are heavily short.

The retail participants of the market remain long. This a collective position of the entities that don’t meet the minimum order size requirements to be included in the CFTC COT report.

It is also worth noting that perpetual derivatives funding rates have remained negative for over a week, showing that leveraged short-side positions are piling up the perpetual derivatives market. This clearly shows that there are fewer speculators with a bullish outlook in the derivatives market.

(Source: theweeklyupdate.substack.com)

So how am I poisoning myself in response to the recent market developments? I fully exited the short-side position that I outlined in the last piece in the low-$30ks. For the moment, I have no position in the derivatives market but if the price rises to the high $30ks, I believe this will be an attractive risk-reward tradeoff to enter a position. I would seek to exit at a loss in the low $30ks and seek to partially take profit in both the low $30ks and high $20ks. I will readjust this outlook if I get an indication that price is setting up to dump significantly below the $30k level. I give high odds of this eventually happening but as it stands, I will only enter a position if Bitcoin rises to the high $30ks. I emphasize that this is only my outlook and I could easily be wrong.

What evidence is there that I may be wrong in my outlook? Well, MicroStrategy has completed a debt issuance to purchase another 105,085 BTC, advancing the evolution of the company into a proxy Bitcoin ETF and further demonstrating Michael Saylor’s commitment to purchase in all market conditions. Ark Invest has also been increasing its exposure, after buying over 1 million shares of the Grayscale BTC Trust and roughly 215 thousand shares of Coinbase. These are two extremely pro-BTC institutions so it is unsurprising that they continue to flow capital into the market during current conditions. However, there seems to be fewer releases about institutions investing. It would be cool to see some form of web scraper quantitative analysis that assesses this.

On-chain analysts William Clemente III and Willy Woo both have highlighted data that they interpret increases the odds of a bullish reversal. They point to bullish divergences in the Bitcoin Liquid Supply Ratio and the Spent Output Profit Ratio. While on-chain analysis is interesting, I believe that most on-chain data points have little predictive power and I view them certainly as secondary information pieces to the prevailing trend. More interestingly, William did point to data highlighting that Bitfinex whales recently closed a significant short position and also presented data showing that OTC outflows have generated a buy signal. I would attach more significance to this data but it ultimately does not change my current outlook. William’s summary was “These metrics may not predict immediate (next few days) price action, but I highly suspect a reversal is coming over the next few weeks”. Maybe, maybe not…

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