Bitcoin Correlations & The Bull Case For 2019!
by Dan Clarke, MAX Institutional Sales
DISCLAIMER; This post and its contents should in no way be considered investment advice.
The Bad News
Before I get into this, I want to admit that for the coming few days if not weeks I am finding it hard to be anything other than Bitcoin price bearish, in sharp contrast to fundamentals which I continue to think support the longer term view of a meaningful recovery. I hope in hindsight to look back on this time as another bottoming signal, given until very recently I have managed to stay largely price optimistic despite the destructive price action!
So in the near term having broken 3800~, a level I felt was going to hold into a pullback post last weeks 25%+ move, we now sit just below 3600~ (3600–4300 was the 3rd most active price zone over the last 3Yrs) & seem likely to test the 200 Weekly Moving Average of 3200~ which maybe be the last line in the sand before a likely sharp break lower to 2500~ (The 2nd most active price zone over the last 3Yrs). Should we hold 3200~ and manage to bounce back above 4200–4400~ zone we maybe able to more confidently say that we have seen the bottom in this cycle, however in the short-term I am not very confident in this scenario playing out.
The Good News
With the moves we have seen these last 3 months, correlations of BTC vs US$ & BTC vs S&P are back near zero. Should the recent trend continue (See the below chart from https://coinmetrics.io ) we look likely to be heading into the 1H of 2019 with +VE correlations against the US$ & negative correlations against the S&P which without wanting to sound optimistic, sounds very much like a defensive asset class!
The last time we saw correlations like that was April-Dec 2016, a period in which Bitcoin went from $400~ to $1200~ and before that in mid 2015~, another period that coincided with significant price gains. Whilst this optimism may seem misplaced given recent price action, the macro backdrop and an increasing likelihood of a global recession playing out in 2019/2020, this trend should it continue, would support the idea that Bitcoin at least has a chance to significantly outperform under this macro backdrop.
My Prediction For 2019!
The chart below (https://www.tradingview.com ) highlights the Bitcoin price (Blue line) vs MSCI Emerging Market ETF EEM (Candle Chart) from 2H 2013 through Q1 2017. I use EEM purely as a general risk indicator in traditional assets. The greyed out area shows a period of approximately 1Yr. I chose the timing of this area because I believe where Bitcoin stands today vs other traditional risk assets is equivalent to the start of this greyed out area in 2015~. Whilst the bottom in this cycle won’t be identical to this, I believe the overall trends will be very similar. So what does it mean for 2019?
I think Bitcoin right now is at a similar point to Bitcoin in Dec 2014-Jan 2015 (As marked by the beginning of the grey zone). Either we have seen the lows or we are likely to see the lows in the next couple of months. At this juncture a recent interview with Mike Novogratz comes to mind. When an asset is down 84% today, that represents an asset that fell 60% & then fell another 60%. The point is that if we are even just 1–2months from the bottom, the risk of significant price destruction remains a possibility. The other comparable is that the recent weakness in Bitcoin has coincided with a sharp sell-off in traditional risk assets like emerging markets, just as we saw in Q4 2014.
So what next? The reality is that nobody knows. My guess is as good or bad as anyone else's but I do have a view. It’s not investment advice but it is a view that I am using to help manage my own personal investment strategies both across traditional risk assets & in crypto. OK enough ramble, what’s the narrative?
Given the recent sharp sell-off in traditional risk assets, I believe similar to 2015 there remains high possibilty of some reversion back to mean i.e. a bounce in traditional risk assets that whilst messy, could play out over 3–4 months. Part of this bounce I believe plays out for no other reason than the consensus that appears to be building around a pending recession as we head into 2019. It’s not that I think this doesn’t happen, it’s just that I think markets typically don’t make it that easy & we may need to chop some people up out of their bearish positions before a resumption of the downtrend.
During this bounce we may initially see some positive correlation between Bitcoin & traditional risk assets which could drive a further short sharp rise in Bitcoin off the bottom, however I continue to believe this positive correlation won’t last long & Bitcoin will remain under pressure during the latter part of this bounce in risk assets in Q1 2019.
Moving into the end of Q1 and through Q2 I think the fears of a recession will start to escalate again & similar to the April-August 2015 period, Bitcoin will start to be negatively correlated to Emerging Markets and other traditional risk assets. I expect this negative correlation to pick up pace in 2H 2019 and especially into Q4 2019/early Q1 2020 by which time we could easily be 3x~ above the Q4 2017/early 2018 bottom. This will likely coincide with renewed optimism over the coming halvening in Bitcoin in May~ 2020~& a continued acceleration in Institutional interest which likely remains tepid through most of the 1H 2019 but starts to pick up in 2H2019. Moving into 1H 2020~ I would expect a possible bottoming in traditional risk assets & Bitcoin to become positively corrrelated with traditional risk assets again as we head into the next cycle peak in 2021/2022.
DISCLAIMER; This post and its contents should in no way be considered investment advice. We may individually hold positions in some of the assets we discuss. Any projections, conclusions, analysis, views are to be considered hypothetical & for informational purposes only & not meant as recommendations for investment. Anyone considering an investment in crypto should only invest what they can afford to lose. You alone are responsible for evaluating the risks & merits of our content.
