Here’s what should we be thinking about going in to 2020. There are several factors affecting the emergence of Bitcoin as sound money. In January, we’ve started off 2020 with Bitcoin trading as a safe-haven asset, more correlated to gold and oil than risk-on assets like the stock market. Moving throughout the year, it will be important to track when Bitcoin is trading like a risk-on asset and when it’s trading like a safe-haven, or risk-off asset.
Crypto and Looking Ahead
The crypto markets have tail winds, which is great for investors. Here are a list of factors:
- Fundamentals of the Bitcoin Halvening Event in May of 2020
- Reflexivity of the Crypto Markets is very positive for crypto in Q4 of 2019 and all of 2020
- Global macro events that are bad for the world are great for Bitcoin
- Trade tariffs
- Chinese capital flight
- Poor fiscal policy with no governments making the “tough” decision and the US raising the debt ceiling by $2T with debt now totaling $23T
- Poor monetary policy by easing in the US, more QE being considered in Europe and additional asset purchases in the form of Japanese equities from the BoJ
- Data privacy issues including Capital One financial data breach et al
- Pushback on Libra from governments globally
- At times, we see correlation between BTC and gold, CHF, negative rate sovereign debt & QE
- Global pandemics
Macro Analysis of Bitcoin
Many factors that are affecting the price of Bitcoin — low interest rates, unconventional monetary policy, and rising geopolitical tensions, as well as the degrading the integrity of our global fiat currency system. At times, we see Bitcoin trade like a risk-on asset and at times it trade like a risk-off asset. It happened mostly last July of last year, but bitcoin started to trade like a safe-haven asset. In January of this year, it began trading like a safe haven asset again. It was well-correlated to other safe haven assets like gold. This new way at looking at bitcoin will not happen overnight. It may oscillate between being considered a risk-on or risk-off asset for some time. However, it’s heading in the direction of being perceived as a risk-off, safe haven asset and this quarter was the first time we could really start to see some correlations to support this position.
In early January with the attacks on Iraq of Soleimani and Iran’s proportional response with rocket attacks at a U.S. base on Iraq, Bitcoin traded similarly to gold and oil. Bitcoin has been trading like gold at the start of 2020. All of these set Bitcoin up well in the future to be a hedge against fiat currencies and their managers, the global central banks.
Furthermore, other crypto assets will do well later in the bull market cycle. Bitcoin always moves first, then it starts rotation to other cryptocurrencies, then platforms and then utility tokens which rise late in the cycle.
From a technical analysis perspective, the next key trading levels we want to see are trends starting with new higher highs and higher lows. We’re starting to see that in mid-January. Then one thing we want to watch for on the way up are high levels of resistance at $11,000, $13,900 and $16,000 on the way to all-time high (ATH). On the downside, it appears $6,500 has held twice, so this appears to be a good level of support. A lot of buyers would love to get in bitcoin in the 5’s or 6’s but I don’t see that happening based on the current fundamental metrics. The 200-day moving average is around $9,000, so that’s a major level of support going forward. Any of these levels of support would continue a thesis of a continued uptrend for bitcoin and crypto in general.
The Tradecraft Fundamental Analysis (TFA) model has been guiding the investment plan here. Last year, the Fund traded out of its positions when the Mayer Multiple ratio flashed red in late June. We traded back into positions until we saw the network usage indicators, like the daily unique addresses indicator, falling in trend in September. When we saw the usage falling, we traded out of positions for most of Q4 until we saw a trend reversal of 2 key directional indicators we follow which happened in early January.
TFA Model on January 15th, 2020
At the end of July, we saw good relative value from the TFA Relative Valuation Ratios. Which means we’re only waiting for the usage trend to turn back positive before we re-enter the markets with the trading allocation of the portfolio.
Looking into 2020, we’ll have a close eye on whether bitcoin is trading like a risk-on or risk-off asset. Bitcoin has started the year trading as a safe haven asset. This means when I see bond and gold volatility spike, that’s actually bullish for a risk-off asset.
As well, I’ll be looking at the 2 main metrics from our fundamental analysis model: Daily Active Unique Addresses metric and the NVT Ratio to help guide decision-making from a fundamental analysis perspective. Then finally, technical analysis. First, I want to see bitcoin trading a prices that are higher highs and higher lows. Second, I’m waiting to see bitcoin hold above its long-term trend line. Third, I want to see trading volume continue higher.
The last factor to consider is the Halvening event and watching the stock-to-flow (S2F) model and how that will be cut in half in May of this year. This will be an important model to follow and confirm and a structural pattern that happens every 4 years. As history has shown us from the past 2 Halvening events, the price of bitcoin trades higher 1–8 months after the Halvening event. My best estimate is the Q3 is the magic quarter for Bitcoin this time around. We’ll see.
We’re off here in 2020, and I’m cautiously optimistic about the year. Bitcoin will drive the first half of the year and I think DeFi and the smart contract “Platform Wars” will drive the second half of the year as well as 2021. Having systems and tuning them for continuous improvement should help generate better returns for the year.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Please do your own homework.