Blockstream Markets Weekly — Jan 14, 2022

Fidelity adds BTC exposure to portfolio funds and predicts accelerating sovereign adoption, Rio de Janeiro to buy BTC, Jack Dorsey plans to build an open Bitcoin mining system, Cash App integrates the Lightning Network, and 68% of Swiss private banks intend to offer Bitcoin to clients

By Jesse Knutson

Macro headwinds

Bitcoin is on pace to end the week little changed after two weeks of declines.

Inflation concerns and tighter monetary policy continued to drive choppy trading with US tech stonks hit hard yesterday and most of Asia down again today.

December’s +7% YoY CPI reading came in at a ~ 40 year high while continued weakness in the USD put it on pace to finish around a nine-week low. Thursday also saw the highest annual producer-price index increase in the history of the index at 9.7%.

Macro headwinds saw Bitcoin give up mid-week gains to finish the week flat despite on-chain signals that we’ve already entered oversold territory.

Infrastructure and adoption

Newsflow this week continued to be positive.

Top stories this week included Fidelity adding Bitcoin exposure to portfolio funds and predicting an acceleration in sovereign Bitcoin adoption, Rio de Janeiro announcing plans to use 1% of its treasury to buy Bitcoin, Jack Dorsey aming to build an open Bitcoin mining system as Cash App integrates Lightning Network and reports that 68% of Swiss private banks intend to offer Bitcoin to clients.

Are we there yet?

In this week’s on-chain analysis report, Glassnode highlighted a number of interesting charts that suggest Bitcoin could be in for a bounce.

In a nutshell, they see the market crowded to the downside, massively leveraged with on-chain metrics flashing oversold.

I think maybe the most interesting chart is the Entity-Adjusted Dormancy Flow, an indicator that has only signaled six times in Bitcoin history (chart below).

Dormancy Flow is the ratio between Bitcoin’s market cap and the annualized value of all coins spent. Low readings, like the current one, indicate that Bitcoin investors are not keen to sell at this level.

This is an interesting metric with a solid track record. It could still go lower though. If it bottoms and reverses out of the buy zone, I think that’s a pretty high conviction indication the bottom is in.

Green shoots

Bitcoin is still trading very heavy and is teetering on the edge of its third consecutive week of declines as macro headwinds continue to weigh. I think it makes sense to have bids stacked low in case we make another leg down.

That said, I do think we are starting to see signals of a positive inflection point; on-chain metrics like Entity-Adjusted Dormancy Flow, negative funding rates on Bitcoin perps, and a record weekly outflow from digital asset investment products.

We’ll see in the coming weeks if positive news flow, improving on-chain metrics, and potentially peaking inflation are enough to reestablish upward momentum.

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Bitcoin markets news

Fidelity to add Bitcoin exposure to portfolio funds

  • The firm’s all-in-one balanced and growth funds are looking to add a small allocation to Fidelity’s Bitcoin fund
  • The all-in-one balanced fund will have an allocation of approximately 2% to the Bitcoin fund, while the growth fund’s Bitcoin allocation will be around 3%
  • The all-in-one growth fund currently is about 85% invested in equities and 15% in fixed income, while the balanced fund is split about 60% to 40%
  • The new allocation reminds me of this calculator which shows how a small investment in Bitcoin can be beneficial to a traditional equity/bond portfolio

Rio de Janeiro will buy Bitcoin for city reserves

  • The city is planning to invest 1% of the Treasury in Bitcoin and is investigating the possibility of offering a 10% discount on taxes when paid in Bitcoin

Fidelity sees sovereign Bitcoin adoption accelerating

“We also think there is very high stakes game theory at play here, whereby if bitcoin adoption increases, the countries that secure some bitcoin today will be better off competitively than their peers. Therefore, even if other countries do not believe in the investment thesis or adoption of bitcoin, they will be forced to acquire some as a form of insurance”

SEBA Bank CEO: Bitcoin will hit $75,000 in 2022

  • Thinks that increased institutional investment will be the primary driver

“Our internal valuation models indicate a price right now between $50,000 and $75,000…I’m quite confident we are going to see that level. The question is always timing.”

Jack Dorsey is building an open Bitcoin mining system

“For most people, mining rigs are hard to find. Once you’ve managed to track them down, they’re expensive and delivery can be unpredictable. How can we make it so that anyone, anywhere, can easily purchase a mining rig?”

  • The reason mining rigs have been difficult to find over the course of the past 12 months is a lack of chip allocation from TSMC and Samsung. It looks like that will ease significantly in 1Q, but the big bottleneck in mining remains at the foundry level. It will be interesting to see what Block’s solution to this is

Bitcoin mining saves Costa Rican hydro plant

  • A surplus of power saw the plat shut down for nine months
  • the company has three plants valued at $13.5 million and a three Megawatt capacity

Cash App integrates Lightning Network for faster BTC transfers

  • The feature has reportedly already been rolled out to a handful of users
  • Will allow for faster, cheaper Bitcoin transactions on the app

Billionaire investor Bill Miller now has 50% of wealth in Bitcoin

  • Miller said he personally started buying bitcoin at around $200 in 2014 after hearing a talk by Wences Casares
  • Miller started buying again at $30,000

Strike launches Bitcoin payment services in Argentina

  • Strike says that users will be able to make bitcoin remittance payments, receive Bitcoin tips on Twitter and use Strike’s peer-to-peer transaction services starting next week
  • Strike’s Latin American expansion will include Brazil, Colombia, and “other Latin American markets”

68% of Swiss private banks intend to offer Bitcoin to clients

  • An Ernst & Young survey of 90 executives from different Swiss banks found that 55% of Swiss banks plan to launch crypto investment offerings to their clients
  • 68% of private banks are planning to offer crypto investment services


How much will hashrate grow in 2022?

  • Galaxy Digital thinks hashrate will increase between 72% and 113% to end the year somewhere between 300 and 370 EH/s
  • They say the current average total cost of Bitcoin production is $29,619
  • Galaxy’s analysis focuses on hardware orders from listed miners. It looks like the foundry side is starting to open up from 1Q22, but I wonder if there’s enough energy available to absorb 200 EH/s of mining demand…especially with China removed from the picture and given the context of a global energy crunch

Chart credit: Galaxy Digital. Bitcoin Mining 2021 / 2022

Will Bitmain dominate mining hardware in 2022?

  • The chart below implies Bitmain market share at something like 65% and MicroBT to fall to #4
  • The big question is to what degree hardware providers will be able to deliver on these orders
  • Channel checks indicate a significant TSMC 5nm allocation to Bitmain from 1Q22

Chart credit: Galaxy Digital. Bitcoin Mining 2021 / 2022

Funding rates turn negative

  • Aggregate funding rates have turned negative on Bitcoin perpetual futures, an indication of sentiment turning bearish
  • While the reading doesn’t look particularly extended at the moment, it probably indicates a reasonable entry point
  • A flip back to positive would indicate a positive reversal of sentiment

Chart credit: Cryptoquant

Entity-Adjusted Dormancy Flow

  • Entity-Adjusted Dormancy Flow is an indicator that has only signaled six times in Bitcoin history
  • Dormancy Flow is a ratio between Bitcoin’s market cap and the annualized value of all coins spent and indicates that Bitcoin investors are not keen to sell to at this level.
  • Probably want to see it bottom and cross out of the buy zone as a high conviction signal that the bottom is in

Chart credit: Will Clemente

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