Release the Bulls

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Aug 4 . 6 min read

Volatility is back with a vengeance as the crypto markets put in another solid performance last week. Total crypto market cap surpassed ~$330 billion with Bitcoin constituting a 62% share. BTC is now holding above $200 billion market cap for the first time since August 2019, and attention is picking up as mainstream media is taking note of the year-to-date ~60% return.

There is regularly excessive focus on crypto prices within the media and new investors often have a psychological barrier of the cost of one single Bitcoin — now trading comfortably above $10,000. As hard as it may be, new capital should try to disregard price per BTC and align focus on the market capitalization of crypto and Bitcoin when weighing up investment decisions.

This a more appropriate and comparable measure of many digital assets and ought to become the emphasis for new investors entering the space as well as existing investors adding to positions. BTC’s $200 billion market cap is comparatively tiny when considering the broader spectrum of financial assets in existence and should Bitcoin follow gold, then possible upside from a base of $200 billion is unquestionably substantial. With $50k — $100K per Bitcoin, in our opinion, more than achievable if we enter a full bull market, investors should consider justifying these lofty numbers by 1) the speed at which Bitcoin and digital asset technologies could potentially be adopted via the simplicity and ubiquity of a smartphone and an internet connection vs the barriers to entry for acquiring gold and 2) gold’s established ~$10 trillion market cap which shows that the demand already exists for non-sovereign stores of value outside the reach of governments. The possible reason for gold’s price action front running Bitcoin is simply that it is more widely adopted, has more access products available to invest it, and has been used as a store of value for millennia.

All of this bullish news and narrative is currently in play before we even discuss the creeping reality of real negative rates in the bond markets. Will bondholders keep capital locked up in treasuries as inflation bites, and the Fed is not even ”thinking about thinking about” raising rates in the immediate future? If this market starts to unwind, then there is enough fuel here to propel the Bitcoin rocket meme high enough that even Elon Musk would be jealous.

Looking at the derivatives market, positive funding rates that have largely been absent during the period of accumulation between May — July has unsurprisingly returned, indicating trading firms are starting to pay for the leveraged long positions they are building in anticipation of a continuation of the current bull market conditions. It is worth noting that the below positive funding rates are still 2-3x less than the peak bull market in December 2019.

As the democrats and republicans fight to pass another bumper round of stimulus for the struggling US economy — a package in the region of $1-3 trillion — institutional investors are certainly taking note. Traded volume is picking up in spot and derivative markets as well as regulated NYSE owned Bakkt posting record volumes, reflecting more institutional demand for digital assets as these inflation concerns ripple through the global markets.

Of the large caps, Ethereum continues to outperform the market and saw a ~23% increase over the course of the previous week as the DeFi boom continues to attract headlines and fresh capital. Liquidity farming, as we have discussed in previous weeklies, has resulted in an enormous uptick in trading volume on Decentralized Exchanges [DEXs]. As the trading month closed out last week, we can now see that July has proven that the incentive-driven liquidity programs, ethical or not, are hugely successful in driving volume to the various DEXs hosted on the Ethereum protocol. This was led by Uniswap which has commanded the most volume at an impressive 40% market share of the +$4 billion in traded volume in July alone.

The below chart shows trading volume across all DEX’s and a ~150% increase in trading volume in July, a testament to the success of yield farming, with August already getting off to an impressive start. We see little sign of the liquidity/yield farming trend abating, as total value now locked up across all DeFi is holding above $4 billion and climbing. Surely this will only attract more investment to this new and developing market.

As we enter August and the second half of 2020, Bitcoin saw its 3rd highest monthly close of all time at $11,356 and, more importantly, closed above the descending triangle formation that has been in play since the previous all-time high of $19,666 — highlighted in the red circle on the below chart. We will watch this week to see if this major resistance line can hold and turn to support, as is often the case with these types of resistance breaking moves in BTC. A period of consolidation now would be a healthy market setup, and allow many of the momentum indicators to cool down a little. Tracking sideways along this new potential support line (akin to the previous break of resistance in May through to July) would make sense if bulls can’t take this market higher in the weeks ahead.

Despite the overtly bullish week, more than 72,000 traders (source @ByBit) were liquidated to the tune of $1billion in notional value across derivative exchanges as Bitcoin crashed over 12% in just 15 minutes on Sunday. These types of liquidations are not uncommon in bull markets when prices accelerate too fast, with too much leverage, and serve to remind traders of the dangers of a market that can all too easily be moved around by large offers, should miners and whales want to sell. It comes as no surprise that this latest drawdown occurred on the weekend when liquidity is reduced because many traders are not at their screens to manage their positions and leverage.

Setting so-called ”stink bids” at points of resistance as the bull market takes shape is a sensible way to buy the dip and was shown to be a profitable strategy during 2017’s parabolic price action when BTC exhibited regular quick 15% drawdowns on its way up to $20K. Selling put options on significant dips continues to be a popular trade amongst our clients when expectations are for bullish continuation and can generate high yields for investors in the process.

Looking ahead, it would not surprise us if BTC recovered much of its 15% loss and moved back towards $12,000 as professional momentum algorithms continue this move up and BTC potentially follows in gold’s bullish path towards all-time highs, albeit lagging behind. Volatility is the name of the game at the moment as leverage has re-entered the market, especially on the weekend when volume drops. Setting bids at the new (tentative) support line ~$10,500 makes sense to catch a possible dip. A break of this new support line will allow greater value to be found for the dip buyers as we enter the end of the year and the expected significant price gains in 2021 and 2022.

Crypto weekly performance: 4th August 2020. Source

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