Record Low Volatility..
If you've been following the cryptocurrency market at all, you've surely noticed this simple fact: not a whole lot of price movement is happening. This is relatively atypical for cryptocurrency, and especially true in the context of global economic volatility. Something fishy is going on, and this blog will serve as an investigation into current market conditions, my personal predictions, and an outlook into 2020 and beyond. We will first dive into the technical aspect of Bitcoin, investigate the fundamentals of cryptocurrency in context of modern banking, and tie all of them together into one cohesive long form analysis. I hope you enjoy!
Technical Perspective of Bitcoin
Following the Great v-shaped every that occurred in May, BTC has rebounded from lows of 3200 to recent highs just above 10,000 dollars. This price point could not be sustained, and this failure to break above 10K was the start of this long run out consolidation that has been going on since May. This is one of the most precarious situations I have seen in cryptocurrency because it has been so highly correlated to a largely speculative bubble: The stock market.
Here is a long term Monthly chart we can observe the long term macro trends.
I have highlighted the having events with the green X, and their recent highs with the green circle. These having events represent a macro shift in supply/demand and play a very important role in the net trend for Bitcoin. Less supply entering the market exerts an upward force on the price and how it is valued. With the last having being 2 months ago. This is another reason why I am fundamentally bullish on bitcoin. More reasons will be explored when we discuss sound money later in this blog.
However: we are now in a situation where Bitcoin is highly correlated to the rest of the stock indices. This is atypical for Bitcoin, and has important implications because the rest of the market is in a very large debt fueled bubble. In the short-term, I am expecting Bitcoin to stay correlated with the rest of the market because fear and uncertainty are in the back of people's mind. In the long-term, I am expecting a de-correlation of these assets and indices, because ultimately they have very unique fundamental factors influencing how they can be valued, and overall their inputs to their evaluations are very different.
Here is a Weekly chart we can investigate the technical factors affecting market confidence.
First lets talk about the downtrend. This resistance line has deflected the price many times since it began off of the highs in 2017. This connects the higher lows formed by the wicks on the weekly chart. Itis an important factor in the overall trend that has occurred since the last having fueled market cycle in 2017. Overcoming this line is one of the major factors I am considering when looking at the long-term perspective of Bitcoin. We have never trended above this trend line, simple as that
Second, lets talk about the value zones. Value zones are areas where investors are buying into an asset. In the context of Bitcoin, these are the areas where you see wicks but the candle does close because it rebounds quickly. Ideally, as a long-term crypto investor, these are the areas you want to buy in. It's easier said than done, is very profitable when done correctly. IMO the major value zones relevant in modern context are 8k, 6k, and 4k.
Third lets talk about the major resistance zone ahead of us: 10k. It has been highlighted in the green circle and is a convergence of two factors. This is the major Zone I am watching as a key resistance level for Bitcoin. This is where the long-term downtrend and the horizontal sell zone converge. Similar to how value zones are where investors buy, supply zones are where they are selling. It's visit confluence that create such an important area for the long-term end of Bitcoin. If and when we cross this point, there is a major shift in supply/demand dynamics on the macro frame.
Now lets look at a Daily chart with some moving averages to provide context to the relatively low volatility we have been observing.
The Big Squeeze.. There is a net compression of the trading range Bitcoin is currently in. There is an uptrend supporting the higher lows and a downtrend suppressing the higher lows. This volume is being compressed into a more narrow trading range, and eventually it will have to break up, or breakdown.
Decreasing Volume.. The further we go into this wedge, the lower volume we have experienced. Lower volume in cryptocurrency is usually a function of low volatility. When it comes to this unique asset, the two are intimately linked. Without volatility you don't have volume and without volume you don't lower volatility. It's almost paradoxical, until you have a clear directional break out from these long-term trends that Bitcoin tends to form.
Moving Averages provide content text into what exactly is happening from the volatility perspective. We're currently in a situation where the 50-day MA is above the 200-day MA - this is typically associated with bullish momentum. However, because of the low volatility this isn't as important of a factor because we're not in a clear trend. Further, we're witnessing a narrowing of these two statistical indicators as the relative volatility continues to flatten. Divergence of these two will have to be associated with a clear break in the trend. Upward movement will result in validation of the current status: Golden Cross. If we break down and form a death cross, where the 50-day drops MA below the 200-day MA, this will be significant because it will have to be associated with an aggressive move down. These are useful tools for macro identification, but I do not use them on anything below a daily chart.
Fundamentals of Sound Money in 2020
Sound money encompasses currencies which are not subject to external manipulation. This includes precious metals and cryptocurrency. This post is focused on cryptocurrency, but the following dialogue is equally applicable to metals - but this asset class deserves a blog post of its own.
One of the fundamental downsides to fiat currency is the rate of expansion which is required to ensure effective operation. Here is a chart of total monetary supply since 2020. I specifically want you to notice the two green dots highlights on the graph..
JPow and the Fed
Two strategies are used to manipulate and control the monetary supply. First is QE programs where they modulate the interest rates offered to businesses. Low rates encourage business activity, and are found during times of economic hardship. High rates mean it is "expensive" to borrow money. Lets look at a long term chart of interest rates..
Here you can observe the natural booms and busts of the economy. The Tech Bubble in early 2000s. Real Estate Bubble in 07/08. Covid in 2020. Do you notice anything different?
Tech Bubble: Interest rates were high going into this crash. This provides leighway for the government to work with. Lowering rates allows for sitmulation of the economy. This is exactly what happened: we made debt cheaper. Interest rates heading into the crash were ~7%.
Real Estate Bubble: Same picture as before. Crash happened because of aggressive speculation and cheap debt. Rates lowered, and the government effectively encourage borrowing and purchasing their way out of the recession. Interest rates prior to the crash were 5.25%.
Covid/2020: What makes this different is we are now in a funny situation where the rates never jumped back up prior to the crash. Heading into this market depression, we peaked at 2.5% base interest rates. The Obama administration never readjusted these QE rates, and needed the market stimulus to get out of the real estate bubble.
Now the consequence of this is that we have no leighway, and our economy is arguably in the worst position it ever has been, Unemployment is high. UBI Programs are in full force. Sovereign exports like oil are poorly valued. Intrinsic manufacturing is fractions of previous levels. The list goes on!
Negative Interest rates are a matter of when, and not if. Now lets talk about the other tool the Fed has: Repurchase operations.
This is the idea that the government can create money from thin air, and invest it into the stock market. This is typically done with Sovereign bonds and mortgage-backed securities. These two kinds of assets have an important role in regulating the economy from the consumer's perspective.
Click this link, if you want to see the history of repurchase operations within the context of the American economy. Here, you can see what assets they're buying, how much they are buying, and tie the two together within the context of what niches/sectors are requiring the most amount of federal assistance.