BTC — The bottom is in and the fundamental driver is new round of global bank easing !
Hard to believe that our last Bitcoin piece Is the bottom in for Bitcoin? Probably not, but we’re finally getting close! was published over four months ago. We noted in this piece that the 2014 downturn implied we had about 3 months left in the current bear market:
“September of 2015 is when BTC shook off the (2014) bear and re-started it’s upwards trajectory, which implies that we have about 3 months left in the current bear market.
Technically, we are now in a good place, with support below us and a clear path of low resistance above. We’ve been getting more constructive for some time now and as we said back on Feb 25, 2019 (please see Twitter post), breaking above $4,100 is key. Because we traded in this low $3,000s to $4,000 range for four months, that whole upper $3000 band (turquoise in the below chart) is now very good support. So we are setting stops around/below the $4,000 level at least in the near term and then we will move them higher. I don’t know that BTC holds the current $5,000 level off the most recent pump, however, we also have the 200 day moving average (orange line in chart) also as $4,600 as support. To the upside we will hit the next big resistance in the low $6,000s. Finally, the short interest in recent months has been very low, so short covering hasn’t been a big factor in this move.
Let’s go through all of the signs or elements for spotting the bottom that we laid out in our BTC- Sentiment is still too bullish, we’re going below $6K and here’s how to spot THE bottom piece below:
‘In summary, finding the bottom is a function of sentiment and time and we don’t think the bottom will be V-shaped without some game changing fundamental news.’ Check + as we have been in this bear market for over 15 months and there has been no sharp v-shaped snap back. Instead, Bitcoin has put in a very nice rounded bottom as you can see in the chart below.
‘1. Sentiment needs to get much more bearish (“fear and loathing”) along with violent panic selling as we near bottom.’
Check + crypto twitter (CT) is my best indicator of sentiment and it’s very quiet, many full time technical analysts that were on CT have just moved on. And, the remaining CT folks are tweeting more about altcoins these days, I think. In retrospect, it’s easy now to identify the plunge from $6K to $4K in November of 2018 as the “panic downdraft” capitulation (see chart on left).
‘2. This is followed by a period (could be months) of boring and steady consolidation at low volume with a few frustrating head fake rallies, that will cause most investors to lose interest.’
Check ++ months of very frustrating sideways “barting”, head fake rallies, and general apathy caused many (myself included) to at least partially disengage. CNBC, infamous contrarian indicator, has also had very little coverage of Bitcoin recently but of course that is bound to change.
‘3. Finally, when no one is paying attention, volume will sneakily pick up as price starts slowly and steadily increasing and the next bull market will be born.’
Check +++ as we saw volume bottom in October of 2018 and then build in the fall and then take another leg up in January. In terms of aggregate Bitcoin volume, as you can see in the chart below, currently at almost 2.5M/day we are running at almost 5x the 500K Oct 2018 bottom.
And, what I’m most excited about, is that fundamentally, the latest Fed actions and messaging is VERY bullish for Bitcoin. Bitcoin is hard money borne out of disgust with the financial system after the Great Recession of 2008 when the Wall Street banks were bailed out at the taxpayer’s expense. Not only has the fed raised their inflation target, but they have done a complete reversal on Quantitative Tightening (QT). As you know, the Fed had been buying MBS and other fixed income assets as part of it’s third Quantitative Easing program (QE3), which ended in 2014. As you can see in the chart below, the Fed’s assets peaked at about $4.5TR between 2014–2017, at which point the fed started letting the securities roll off as they matured in 2018. The Fed was set to continue raising rates and letting securities roll-off their balance sheet as they matured “on auto-pilot”, until the stock market sell off in December of 2018 after which the Fed reversed direction.
Politicians and policymakers know that you just don’t get “paid” to prevent a downturn. What I mean by that, is that it’s a lose lose situation- if you try and prevent a downturn and it happens you have failed and conversely you can’t claim credit for prevention, if the downturn doesn’t happen. For this reason, the Fed is now trapped on a path of continued stimulus, backstopping banks and equity investors at the expense of savers and the poor. The combination of a very weak stock market in December 2018 plus deteriorating global economic data led the fed to very quickly change their position from raising rates to holding interest rates steady for the foreseeable future, and there has even been calls to cut rates, albeit mostly from Republican pundits. And it’s not just the US Federal Reserve Board, this is concerted global easing.
The Fed will be “sneakily” buying securities again starting in May. In addition, the Fed is ending the roll-off of fixed income securities from it’s balance sheet in May. This means the Fed, while not expanding it’s balance sheet, is back in the market of buying enough fixed income securities to keep the balance sheet flat. I believe they will be buying US Treasuries as demand from foreign investors is waning as the US deficit widens. The Fed also recently signaled they are open to using negative interest rates as a policy instrument in the next downturn. This is presumably because with rates so low and being on a run rate for a $1TR deficit in 2019 there is not a lot of levers left that they can use in the next downturn. While the US M2 money supply has been increasing recently at a reasonable 3–4% annualized rate, we expect this to increase slightly in the near term and then accelerate. I expect continued and accelerated money printing from the fed to inflate away/monetize our crippling debt load. And, if Modern Monetary Theory (MMT) gains traction going into 2020 US elections, that provides an even better backdrop for sound money like Bitcoin!
We are near the peak of a long term debt cycle as US total debt is now over 250% of GDP and a handful of countries have significantly more! The problem is that once you are on this path, it’s very difficult to change course. As I noted, you don’t get any credit for preventing a downturn, especially if it causes some pain like a in a recession or depression. We will keep going down this path with increasing debt and increased risk taking behavior until eventually our creditors lose faith in the quality of our credit. There will be some kind of shock to the economy that causes rates to spike and this will lead to a liquidity crunch. Once rates tick up, we will see widespread bankruptcies, both at companies that gorged on cheap debt, but also capital consuming business models that only work in a low rate environment (WeWork?). Debt service costs will skyrocket and governments deficits will balloon at exactly the most inopportune time where they need fiscal stimulus and we will slide into a deep recession or depression. Ray Dalio has done an excellent job describing in detail the debt crisis facing us along with historical examples in his timely book “Big Debt Crises”, available as a free download on the Bridgewater web site.
However, it’s important to note that in a liquidity crunch the price of Bitcoin will go down also. In the event of a liquidity crunch not even Bitcoin will be immune as folks get margin calls and struggle to find cash to cover losses. The 2008 gold chart (see below) I think is a good proxy for how Bitcoin reacts to a liquidity crunch. As stocks weakened entering 2008 (orange line is S&P, red/green bars are gold) gold rallied, but when the liquidity crunch hit in the late summer and fall even gold dropped 40%. Gold did outperform stocks and recovered much faster and I expect Bitcoin to do the same.
A recurring bull call in 2018, that I was negative on, was that institutional investors were going to materialize and start buying Bitcoin rescuing it from the clutches of the bear market. As a former professional investor I know the process they go through and knew a professional investor would do their homework, look at the fundamentals, valuation, and technical’s and then determine, like I did, that Bitcoin was in a bear market and that there was no need to try and catch a falling knife. That being said, I assume they are doing the same work as I am doing today and will eventually turn positive and start buying. And, today we have a lot more infrastructure that caters to institutional investors (like the CME futures) and a lot more coming on-line like Fidelity and Bakkt. In addition, we now have tacit endorsements of crypto from some central banks and large blue chip banks that are working on their own crypto projects. So while I was bearish on institutional investors rescuing Bitcoin last year, I think as long as the chart remains constructive they will start putting money into Bitcoin. And, it really doesn’t take much in terms of the quantity of new incremental dollars to move the price of Bitcoin. And just to close the loop on this topic, I think the odds of a Bitcoin ETF being approved, which I addressed in this piece last year, are much higher this year than last year but I think there are so many on-ramps and vehicles to buy crypto today that it would not be as meaningful to price appreciation.
There is a very large crypto startup ecosystem that, besides wallets and exchanges, still has not produced anything that has garnered mass adoption. Don’t get me wrong, while I believe Bitcoin fundamentals are improving, fundamentals in the broader crypto space are still lacking. We still have not come anywhere near a “killer app”, Crypto Kitties, may have been the peak. A new trend seems to be giving away crypto for free to users to build a user base, a trend we believe is unsustainable. We have seen improvements in the supporting infrastructure around crypto such as custody and off/on ramps. However, companies like Cisco, all the big banks, and Fidelity have been investing in building out their crypto infrastructure which I view as a big positive.
What would invalidate our now bullish view? Like we’ve said before, the volume is very important. I can decrease from here while Bitcoin continues to rally but it can’t decrease substantially. It’s also okay for the price level to drop down below $4K again however if this were to occur we will be watching the volume very carefully and some stop losses would be triggered. Of course, putting in a new low below $3100 would be disastrous and likely signal that we are going much lower.
