Play The Long Game
Directionless and low volume conditions continue across the cryptocurrency landscape
This Week in Crypto
In recent weeks, Bitcoin and the wider crypto complex has shown greater weakness, with price action for BTC failing to make sustained moves into the upper end of its recent 30–40k range as the market continues to absorb two primary bearish drivers: (i) the enormous disruption occurring to the mining industry as China bans practically all mining operations within its borders; and (ii) increased signs of regulatory pressure threatening various pockets of the industry.
Selling pressure from Chinese miners liquidating holdings to fund the closure and possible relocation of operations is certainly a valid reason for the current price action, so too is the concern that market participants have with these lower prices and halving of hashrate, leading to the perceived reduction in network security that such hashrate provides. Both of these factors are sure to fade out over time, and we fully expect hashrate to rebound as supply chains re-organize and facilities in more favorable jurisdictions are brought up to capacity.
Interestingly, the majority of losses in recent weeks have come from the impatient short-term holders who are selling at losses, as shown by the above Short-Term Holder — Spent Output Profit Ratio (SOPR) chart, which calculates the USD value of when a UTXO is created compared to when it is then subsequently spent. Losses are indicated with the output ratio is below 1. Losses in recent days are on a par with the massive March 2020 Covid liquidation event. Warren Buffet famously once said, the stock market is a device for transferring money from the impatient to the patient…… We would argue that the same applies to practically every asset class, crypto included.
Overlaying the above narratives and onchain indicators (which haven’t performed so well in recent months) with some traditional technical analysis, then we can see that both the RSI and LMACD are both still trending downwards. Extrapolating the trajectory for these indicators one could expect a continuation of the current weakness to persist throughout the summer, potentially setting up an interesting Q4 as the market properly tests the validity of the stock-to-flow model. Not until momentum has been broken to the upside (green trend lines below) will bull market conditions potentially re-establish themselves.
So, in summary, it appears these recent weeks of suppressed prices are being driven by short-term holders realizing losses and capitulating combined with the background of China-related mining news. From a TA perspective, this bearish cycle doesn’t appear to be exhausted yet, and the calls for ~$20k bitcoin may still be answered, however, we remain somewhat more constructive than this and expect there to be significant support around the key 27–29k range.
A considerable challenge to the aforementioned Short-Term Holders and, indeed, many newcomers to the market is that most lack a deep enough understanding of what is at play here. Technology adoption is an investors’ game and requires the ability to look beyond hourly charts to form independent opinions and views on the progress of how the technology is being adopted and its likely future. Moreover, true conviction requires a deep understanding of the drivers of value — something that is difficult to accomplish from technical analysis alone, much less the rabid short-termism we observe in the digital asset space today.
NYDIG acts as a prime example of a company that understands the investment case for Bitcoin. We have discussed before in this Weekly how NYDIG has made positive moves building out a Bitcoin-only platform for institutional investors, and the recently published developments that are focused on opening their platform to the enormous US retail market are extremely bullish. It is worth following NYDIG’s moves as this type of development within the industry has the very real potential to affect not just current sideways price action but long-term adoption and price.
Whilst we certainly do not doubt Michael Saylor and MicroStrategy’s contribution to the market, such concentration of shareholder value-focused on being long one asset combined with an often-religious feel to Saylor’s views can be a significant turnoff to conservative capital and service providers. It is hard to look credible in institutional circles when your company is almost 100% exposed to the rise and fall of one of the most volatile assets in existence. Zealots are oft-considered persona non grata traditional finance.
NYDIG are acting out their long-term Bitcoin conviction and have been quietly building out the backend infrastructure that is required to access the entire US financial markets and beyond. Their aim doesn’t appear to be an educational one with a stream of public appearances evangelizing Bitcoin and its many ground breaking characteristics à la Saylor. Much like the majority of institutional investors, they would not preach to the market about how investors should use leverage to buy Bitcoin or advertise their investment positions. Companies like NYDIG and Fidelity have the institutional credibility to engage with parts of the financial system that can make a real difference to how (initially) the US traditional financial system can access Bitcoin seamlessly and without having to move out of their traditional bank infrastructure. From an investment perspective, the actions of long-term institutional capital allocators are good signals to follow.
Traders and speculators should take note of the most recent NYDIG collaboration with Q2 Holdings, a US-listed company that provides secure, cloud-based virtual banking solutions to approximately 30% of US banks and credit unions. NYDIG’s institutional clout is critical to pulling these collaborations together, which will unlock mass adoption in the US and beyond. Once integrated, NYDIG and Q2 will provide 18 million new users the ability to buy, sell, and hold Bitcoin within the existing financial system. Seen another way, this is approximately 1/3 of Coinbase clients all given access to Bitcoin services should they want it, direct from their bank accounts.
Not long before the Q2 announcement, NYDIG also quietly started integrating with Fiserv, who, much like Q2, will now be offering Bitcoin investment services to large swaths of the clients that the Fiserv technology stack services. As well as allowing customers using Fiserv technology access to Bitcoin this collaboration will aim to bring Bitcoin rewards-based programs to their clients. Interest paid in Bitcoin? Cash back in Bitcoin? As we have seen recently with Coinbase’s USDC interest accounts, the yields that can be generated in the crypto ecosystem are finding their way into traditional finance.
Both of these news stories are significant for retail adoption within the US and could potentially trigger the demand shock needed to shake crypto out of its current funk, but stories like this do seem to go underreported. Back-end technology integration is simply just not sexy….. Saylor’s $1bn USD VWAP orders or Elon’s perennial shilling of dog-themed meme coins offer far more tempting clickbait, so naturally this tends to be what the market talks about by the water cooler. But make no mistake, the real value being added is, to many, largely hidden from plain sight.
The progress of the integration of Bitcoin and crypto-related services into traditional finance is, of course, encouraging to see and welcome news for bullish price action, however, crypto purists will rightfully be concerned with the walled garden that could be constructed as more value is pulled into the regulated existing financial system and held by regulated custodians rather than individuals. We don’t doubt that Robert Guttmen and Ross Steven of NYDIG understand Bitcoin very well, but we encourage Saylor’s swarm of cyber hornets to hold them accountable to the freedom-based ideologies of arguably the greatest technological invention of the 20th century. Cryptocurrency must empower the sovereign individual, and we best be careful not to accidentally rebuild a replica of the existing financial system.
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