The month of September continued its decline from August as we saw a break in market structure with the price of Bitcoin ending the month at 8294 for a loss of -13.8%. We noted in our August letter that the “price of Bitcoin continues to consolidate, its price is putting in a series of lower highs and higher lows, squeezing into a bearish descending triangle that should reach a decision point towards the middle to end of the month.” It was our belief that the price of Bitcoin needed to break out of the bearish descending triangle it had been consolidating in since June and that “The bottom end of this range is critical for Bitcoin to hold. Should Bitcoin break support as illustrated below, and price falls below 9,000 we would consider this a break in market structure and believe a larger correction will likely follow.
Indeed, price action for Bitcoin tested the upper boundary of the bearish descending triangle in the early part of the month, with Bitcoin getting firmly rejected at the top end of the downtrend line and bleeding until Sept 24th, when heavy volume and selling pressure after the disappointing launch of BAKKT broke through support, dropping spot price almost -20% before ending the month down around -14%. As we illustrated in our August analysis, the setup for this breakdown experienced in September was several months in the making.
As we open the month of October, the YTD bull market in Bitcoin is barely hanging on. We’ve retraced over 50% of the move from Jan 1, with price sitting below the 200 day MA (8575) and 21Week EMA (9008). By these measures, the uptrend has been broken with the potential for continued weakness ahead. The strength of price action in the coming days and weeks will be crucial in determining whether we are still in a bull market or a deeper correction is in store before resuming the uptrend.
Of note, it’s important to mention the broader risk market backdrop as it pertains to Bitcoin. While we believe the case for Bitcoin as a non-sovereign, hard-capped fixed supply, global, immutable, decentralized, digital store of value is wildly bullish, we must recognize Bitcoin is still a risk asset and it has never existed in a recession. Should we experience a recession and global slowdown, we would expect the price of Bitcoin to suffer initially in a risk-off environment. Given that Central Banks have committed to accommodative monetary policies and governments have committed to accommodative fiscal policies we would expect any significant slide to be a generational buying opportunity.
What We are Watching
A key theme that we are watching over the next few months is the performance of Ethereum relative to Bitcoin. It is our expectation that Ethereum, a decentralized platform for money and applications, will make a final bottom and present a buying opportunity. To date, we have recommended to clients to be 100% invested in Bitcoin. Since January 2018, Ethereum has lost over 85% in value relative to Bitcoin. As we look ahead, we are beginning to see positive developments that Ethereum is in the final stages of relative underperformance to Bitcoin and will present an attractive opportunity for our clients to have exposure in their digital asset portfolio, with potential outperformance of 50-100%.
-Bakkt Launches Bitcoin Futures with First Week Volumes of Only $6mm
-Trading volumes on the CME were down in 3Q vs 2Q, but open interest remained the same, a positive sign, especially with the pending options launch in Q1 2020
-While Bitcoin spot market volumes for the first three quarters of 2019 are 27% ahead of where they were in 2018, the monthly volume is down 58% on Coinbase and 48% on Binance from their peak year-to-date values. The three sequential months of lackluster volumes are the longest stretch since the first half of 2018 in which all six months had declining month-over-month volume
-Hash rates continue to hit new highs for bitcoin, but have plateaued for Ethereum.
-Bitcoin network transactions declined for the fourth straight month, down 15% from May’s high but are up 20% since the beginning of the year. Ethereum’s network transactions follow a similar trajectory, down 20% since June’s high but increased 20% for the year.
-Bitcoin had its 3rd worst quarter since 2012, down 23.8%. Historically, the 4th quarter provides the most upside for cryptocurrency so there may be a rally into year end.
-Binance Launches US Platform with Seven Crypto Assets
-Block.One Settles with SEC For $24mm Stablecoin Project on R3 Blockchain
-France and Germany Announce Intention to Block Facebook’s Libra
-IMF Releases Article Supporting “Synthetic Central Bank Digital Currencies”
Going forward we will always see a mix of good and adverse news regarding digital assets due to a globally connected world where anything can be turned into a headline. We ask you to stay focused on the facts and long term performance of these assets. In the short to medium term it’s not going to be institutions that drives prices higher. The whales have control and when they move they show their direction by continuing to build their holdings.
If you are looking for investment advice call 949-298-7582 or email Bryan at [email protected]
Credit is due to Adam Pokornicky for the core of this letter. If you have any related questions you can reach him at [email protected]