Economic Lockdown/House Arrest… Beneficiaries: Bitcoin, Gold, Stocks
By Dr. Chris Kacher of Hanse Digital Access, KJA Digital Asset Investments and Virtue of Selfish Investing on The Capital
The (R)Evolution Will Not Be Centralized™
Second and Third Order Consequences
As I’ve written in prior reports, second order consequences of the economic lockdown are numerous. Demand shocks across various industries are inevitable. On Monday, we saw crude oil make pricing history. Storage capacity of oil went to virtually zero along with a demand shock for oil caused by the economic lockdown. Many of the world’s major economies have sent crude demand tumbling by as much as a third, leaving the industry facing what Jefferies analyst Jason Gammel called “the bleakest oil macro outlook” he had ever seen.
Bitcoin Whipping Boy
Mainstream media loves to jump on bitcoin when it comes to price moves as if they are equivalent to moves in the major averages. A log plot shows how a 46% correction in the S&P 500 is massive relative to its prior uptrend, while a 50% correction in bitcoin is a tiny blip.
A recent report by Bloomberg shows how bitcoin is gaining adoption and starting to correlate more closely with gold though I would add bitcoin has asymmetric upside to gold since bitcoin has a history of exponential growth.
Bitcoin Bathwater Babies
When everything, including gold and bitcoin, plunged in March, it was reminiscent of late 2008 when gold lost one-third of its value. But some of my metrics signaled at least an intermediate low in bitcoin on March 13 which was the first to rebound compared to gold and stocks as I wrote on March 17.
First, what helped bitcoin bounce was the bitcoin miners energy ratio hit an extreme buy zone. This is the ratio between bitcoin’s market cap and its energy consumption. This was the first time it had done this since 2016.
Second, the bitcoin hash ribbon started to recover while the weaker miners were put out of business, leaving only the stronger miners. This reduces selling pressure.
The bitcoin difficulty ribbon is a metric that shows miner selling pressure pushes the price of bitcoin lower. When network difficulty reduces its rate of climb, this means there is less mining competition as the weaker miners are going out of business. The remaining stronger miners need to, therefore, sell less of their coins to remain operational, which leads to less selling pressure. This metric’s buy signal comes when the ribbon compresses. The ribbon consists of simple moving averages of bitcoin network difficulty so the rate of change of difficulty can be easily seen.
Another bullish metric I use is the unspent transaction outputs of bitcoin. A chart shows how this had a steep uptrend in 2017 into the climax top. It has steadily increased since late 2018.
Underscoring this is the number of bitcoin addresses with a non-zero balance is near all-time highs. The number of bitcoin active addresses shot higher in the first half of 2019, eclipsing the prior peak in 2018 despite the price of bitcoin still well off its highs.
The bitcoin halving event is also coming this May. In prior times, this was bullish before and after for bitcoin. It is simply illustrative of the law of supply and demand. Supply halves, but overall longer-term demand continues to grow.
Meanwhile, bitcoin’s hash rate continues to trend higher overall.
Bitcoin’s volatility is also near lows which have traditionally provided a floor of support for bitcoin as shown below.
A recent report illustrated how bitcoin is maturing, slowly but surely. Indeed, an increasing futures open interest is another indicator of adoption despite the bear in 2018, then another correction in the second half of 2019.
So while the global economy sets all-time record lows across various metrics, the virtual QE-money printing machines continue at supercharged speed which will continue to be bullish overall for bitcoin, gold, and stocks.