BTC Still bearish — our view is unchanged since 3/31 with robust pipeline of negative data coming that will force BTC to retest $6K support

Jon P Horvath
5 min readMay 26, 2018

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Technical analysts are getting bullish, but when are they not? Fundamentals trump TA and we’ve identified a robust pipeline of negative data points that will continue to hit crypto pressuring these remaining support levels

We have seen many a positive trend with expressions of interest in Blockchain/crypto adoption (or at least more positive commentary) by many companies and countries however this is still early stages

BTC Price = $74xx range at the time of this writing

Technical Analysts are getting bullish, however they are always finding a bullish pattern and fundamental shocks always trump technicals. TA only works in the absence of fundamental data, it is a good predictor of price in the absence of a fundamental shock. Fundamental data ultimately determines where price is going, and technical analysis we believe is like observing the tail of the dog to figure out where it is going — it works well on the shorter time frames. We will show you that there is a very robust pipeline of negative fundamental shocks coming. We can’t predict the timing of these negative data points however we have pretty high certainty that enough of them will materialize. Our confidence stems from our belief that even if we bounce off technical support levels (like $7300 or $6K in the near to medium term) we believe there is enough negative fundamental data points to drop that will eventually push us through support levels.

Fundamental dataflow has been mixed however mainstream adoption of Blockchain/crypto is accelerating. Seems like every day we hear about relatively high-profile folks at legacy financial institutions leaving for a crypto startup or spearheading the crypto strategy for the institution. Norway’s central banking is evaluating creating it’s own cryptocurrency and the IMF and US Federal Reserve seems to be warming up to crypto currencies. We don’t think the negative commentary out of Bill Gates or Warren Buffet really had a sustained negative impact on crypto price. The volatility of BTC has also been declining now for some time which is a positive for adoption.

However, there are many shoes still to drop on the regulatory front. In our Mar 31st note we talked about the overhang from the 80 odd SEC subpoenas that were served. We believe enforcement actions could take up to a year or longer however in the 3rd week of May several ICOs received a cease and desist order from NASAA (and/or possibly other regulatory bodies). We think this is just the beginning and creates an overhang in the space for some time. Another shoe to drop is the largest crypto exchange in South Korea, UpBit, was raided 5/10–11 on suspicion of fraud. The SK prosecutor’s office is analyzing the evidence that was seized however the exchange has continued operating and assured customers their assets are safe.

To add to regulatory body involvement in the US the Justice Dept 5/25 announced they had launched a bitcoin price manipulation probe. Longer term I think this is very positive for the space in light of all the thinly veiled manipulation and co-ordinated trading that we are seeing. We have to believe that crypto exchanges are complicit in some of these price manipulations — especially wash trading comes to mind. Folks being arrested and sent to prison for price for price manipulation certainly can have a cooling effect on the market however the bigger risk IMO is a large exchange gets raided and shut down. And, while it’s shifted to the backburner the Bitfinex/USD Tether situation has not been resolved. Bitfinex seems to be one of the “dodgiest” exchanges so this is a pretty good likelihood of being another shoe to drop. There seems to be a lot of stable coins making their way to market so hopefully they can replace the reliance on USD Tether. Finally, I think there are some risky business models employing leverage whose “robustness” has not been tested in all market environments. These are not a source of systemic risk however small companies blowing themselves up isn’t a positive for the nascent space.

A wave of 3 different 51% attacks most notably an $18M theft of Bitcoin Gold 5/18. A 51% attack is where miners control more than half the network and are able to push through phony transactions. It’s very expensive and processing intensive however these smaller alt coins (especially those with low hash rates) require much less resources to attack. We don’t think there is a risk of this happening to BTC and many folks are now focused on fixing these security holes but still plenty of headline risk going forward. If these 51% attacks are the start of a trend this would obviously be very negative for crypto in general.

What are we looking for as an indicator that BTC/crypto has bottomed?

1- Time- a deflating asset bubble is a slow and painful grind downwards full of head fake bear rallies. It takes a long time to work through all the sellers. I’ve seen two of them in my Wall Street career — the dotcom and 2008 MBS bubble. It took the Nasdaq 3 years to bottom after the dotcom bubble burst and over 16 years to get back to its dotcom peak price level. I’m not saying it will take 16 years, but I don’t think the excess has been worked through in 5 months. And, these bubbles, once pricked, never really reflate. Even if the price level of the Nasdaq has recovered it will likely never see the 170+ PE multiple that occurred in 2000. Just ask someone who bought Tulip bulbs at historical peak prices.

April 12, 2018 — BTC jammed up 1000 points

2- Fear and Loathing — the bubble has been pricked and we are seeing some fatigue from Bitcoin bulls/HODLERs however there is always folks ready to step in and buy the dip. Ideally, we would like to see no buyers at all leading to a large violent panic downdraft that will mark a hard bottom along with despair and disgust with the whole crypto asset class. We’ve been seeing large upwards spikes that look like short squeezes but are more likely concerted efforts by whales to jam up the price and fix charts. These upward moves are very unconvincing and we would rather see a slow and steady accumulation where folks are trying not to impact the price. The chart is the April 12, 2018 Bitfinex chart showing how BTC was jammed up 1000 points in about an hour’s time which was the start of a bear market rally that almost got BTC to $10K over a 3 week time frame. We would like to see less of this type of price action.

While we are seeing some fatigue from Bitcoin bulls/HODLERs we believe that the BTC correction has at minimum a few more months to go. We are in the profit taking/capitulation phase with the final phase being despair/bust. We likely have a few months left to go until we have bottomed out in the despair phase.

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Jon P Horvath

Former Wall Street analyst/investor (Lehman Bros, Neuberger Berman, Sigma) turned macroeconomist. Passionate about crypto and forecasting trend change.