Is bitcoin setting up for another significant drop? 🤭

Crypto S&L, Powerful Podcasts, and Scary Trendlines

As with every week in the crypto world, a lot has happened. We cover the biggest developments and draw our attention to a scary dotted trendline from 2018…

Key Developments

One of the biggest developments during the week was the announcement that crypto-lending company BlockFi will be launching an interest-earning deposit account. The accounts are available for bitcoin and ether and interest will be paid in crypto. The interest is paid monthly and compounds with an annual percentage yield (APY) working out at 6.2%. The interest payments will come from institutional borrowers. This is essentially your standard S&L operation. Get money from entity one by paying interest and loan it to entity two at a higher interest. Profit the difference.

The crypto community had mixed feelings about the launch of this account as they should. It does seem attractive at face value. Good interest rates compared to those in the boring fiat world. Funds are also held in custody by Gemini which is regulated by the New York Department of Financial Services and FDIC insured. Seems pretty safe. But before throwing your crypto in, ask yourself something first. What is crypto for? One of the key value propositions of bitcoin is censorship resistant money that you own. If you deposit it into any sort of account, you give up that ownership. The chances are it will be okay. But you are also giving up one of the key reasons to even have it in the first place.

Interesting Bits 🤓

Off the What Bitcoin Did Chain

Two interesting podcasts to note that were released during the week were the Off the Chain podcast with Ric Burton @ricburton and the What Bitcoin Did podcast with Andreas Antonopoulos. Firstly, you will hear Burton doing great Vitalik Buterin and Winston Churchill impressions but apart from this, both Burton and Antonopoulos are deep thinkers and their thoughts on how cryptocurrencies are going to mature both as an industry and as a technology deserve attention.

It was interesting to hear both Burton and Antonopulos making a case for bitcoin not being the only cryptocurrency that will survive going forward. Antonopoulos did admit that he believes the vast majority of gains will go to one cryptocurrency. This is a natural winner-take-all effect that occurs in markets. We recently published a blog post on that topic here. However, he noted that even if bitcoin has a dominant position, it doesn’t eradicate the need for others. Similar to how we can have one dominant language or one dominant religion but it will not eradicate the need for other languages and religions existing.

Burton’s argument for multiple blockchains to coexist was simple. If trillions of dollars of value are to move onto these protocols, the value should not be confined to a small number of protocols. Burton sees it as much more secure if the value is spread across one hundred blockchains as opposed to 2–3. A counter we see to this is that an optimal blockchain can incorporate all of the security features of a suboptimal one. For example, if one hundred chains coexisted and the most secure chain was successfully attacked, the attack could be successfully repeated across all of the less secure chains. However, this is more of a longer-term outlook. In the near-term, we can see the argument for having multiple chains to lower the risk of one having a bug exploited.

Price Analysis

All-in-all, it has been a good week for price performance in cryptocurrencies. The price of bitcoin closed the week with an overall gain after starting the week off with a drop.

However, the downward trendline which played a big role in 2018 has been brought back into our attention. Price is starting to exhibit similar patterns to those that it was showing in the months leading up to the almost 50% drop that took place in mid-November.

Price has been consolidating for almost two months with no significant movements taking place on the weekly chart since the start of January. It has also been forming a series of higher lows and lower highs.

Maybe the trendline is an arbitrarily drawn dotted line. Or maybe it puts higher odds on price dropping significantly in the following weeks. Either way, it is a line that we will be monitoring and as a result of it, we are placing increased odds on downward movements in the longer-term outlook 🐻.

In the shorter term outlook, if the price can continue its general upward trajectory which kicked into action on pancake Tuesday, then we will be looking at $4150 to $4250 as an area of seller liquidity. Price has entered this territory several times to find sellers willing to push the price down. A break above this point would very likely represent a significant change in market conditions. In this scenario, we will likely be seeking long positions on price pullbacks and monitoring $4625 as an area of potential resistance.

One other interesting thing to note with performance during the week is the relationship between price performance in litecoin and the price performance in bitcoin. Litecoin often acts as a leading indicator of price performance in bitcoin when it makes a significant move. The same took place this week where litecoin increased 4.4% at midday on Tuesday. Bitcoin increased 0.14% over the hour where litecoin was making this move but followed up with a 2.8% increase in the following hour.

Why does this matter? Well, it means that if litecoin has made a significant move in a short period of time and bitcoin hasn’t moved at all, there is increased odds that bitcoin will follow up with a significant move in the same direction. These are the kind of odds we like to take.

That’s a wrap.

“I would say bitcoin is the fifth evolution of money in its most abstract form coupled to a new governance model that delivers the purest form of network governance we have ever seen”

Andreas Antonopoulos on the What Bitcoin Did podcast

If we missed out on anything or there is anything you want discussed in the next newsletter, tweet at us on @AdaptiveIO. Also, don’t forget to subscribe to get the analysis straight to your inbox 😉.

Adaptive Analysis Newsletter

Disclaimer: Nothing in this newsletter constitutes financial or investment advice. You are completely responsible for your own decisions, obviously. Read full disclaimer here.