Monday Market Outlook #6
The Good, the Bad, and the Ugly
The past week in the cryptocurrency market set new records across the board, and not in a good way. Most single participants liquidated, highest gross volume in liquidations, highest outflow from exchanges, largest NRPL capitulation in history etc. After a devastating hit to many portfolios, many are left wondering how the hell we got here? Let's break it down.
Bitcoin had been range-bound between 48-60k for multiple months, setting less convincing higher highs, indicating slowing momentum. As momentum began to slow and make higher highs more demanding of market participants, the doubt started setting in. Doubt can manifest itself in many ways during a bull market and tangibly affect the course of the market. As you may remember from my previous Market Outlook, speculators are constantly looking for sell signals during a bull market, and advanced traders can use this for exploitation. First, we had poorly-informed doubt from Elon Musk on the efficacy of Bitcoin's impact on the environment. This lead to Elon announcing Tesla would no longer accept Bitcoin as payment for their vehicles.
I strongly contend that this was a publicity stunt to drum up interest in the idea of an American-based mining operation that deals in renewable energy Bitcoin mining. Tesla is the best positioned to accomplish something like this and incentivize a number of corporations – whose ethics boards refuse to allow Bitcoin on the balance sheet because of its environmental impact – to begin holding Bitcoin as a reserve asset. Regardless, this sent the initial shockwaves through the market.
Right after that, the news started to roll in relentlessly. Next up was the United States Treasury Department ordering the Internal Revenue Service to track all cryptocurrency transactions over the valuation of $10,000 under Biden's new tax plan. This would employ over 87,000 more IRS agents over the next 10 years and increase the efficiency of cryptocurrency audits, raising privacy concerns.
The final big news event that really sent the markets into extreme fear and capitulation was Beijing's Chinese mining operations ban. China accounts for nearly 70% of Bitcoin hashrate across various entities. This puts a lot of speculative emotion on the life force of Bitcoin mining operations in China. This cause the market to react and sent Bitcoin tumbling even further down, which triggered liquidations and compounded the selling even quicker. You can read about how liquidations work in one of my earlier articles here.
In a bull market, participants look for reasons to sell, and with the amount of important news that came out within a few days of each other coupled with the slowing momentum of Bitcoin price action, it is of no surprise that we got here. Where the hell do we go from here? I'll give you 3 scenarios that could play out.
Let's break down the best case for Bitcoin going forward during this bull run. I have long contended that this bull run is very similar to the 2013 bull run more than 2017.
The above chart is the price action of Bitcoin during the 2013 bull run with the current run overlayed above. There was two distinct tops within this cycle with a mid-cycle bear market for re-accumulation and consolidation before the last blow-off top. This is shown more clearly in the NUPL (Net Unrealized Profit/Loss) chart.
As you can see from the two red arrows, the 2013 bull run had two distinct tops in the blue, indicating peak market euphoria. After the first top, there was a steep correction back into the .25-.5 range before heading back to new highs towards the end of the year. Looking at our most recent cycle, we have not yet peaked above the .75 range into euphoric levels. However, we have ranged in the .5-.75 levels for a while and are now entering into the .25-.5 levels as well.
The RSI on the monthly chart also shows much more similarities with the 2013 cycle, where 2 distinct dips took place. In our current, we look as if we are going through our first.
The Bad & The Ugly
This scenario is not necessarily bad as it is likely just hard to swallow for most investors, as most investors probably have short time horizons for their investments in cryptocurrency. There is a possibility that Bitcoin puts in a few more lows and ranges sideways for the next 4-6 months around the 27500-40000 range. This would effectively move the cycle peak somewhere into mid-2022, which most investors were not counting on.
This is a possibility because this most recent run looks similar to the 2019 mini bull cycle. If price action continues to decline, it would confirm that we are entering an accumulation phase instead of a trend reversal back towards all-time highs and above. I took a fractal from the top of the 2019 run and positioned it at our current top ($64,000). The fractal extends out to mid to late 2022 and shows a target of around 300-400k per Bitcoin.
From my experience, the most money is made being bullish when the market is bullish. The further you zoom out the more bullish it gets, but also the longer it require an investor to be patient. These are unregulated markets during a time in which information is the easiest it has ever been to spread, this is a powerful combination that can move markets when big players are involved. By not being informed that this is the reality in which unregulated markets work, you are much more prone to selling at first sign of danger. The fact of the matter is the global financial backdrop remains the same; investors are looking for a hedge against inflation risk. In front of this backdrop, the Bitcoin narrative continues to thrive more than it ever has, and since inception has been the provable king of inflation hedge assets. The time frame may be pushed out, or the mid-cycle bear market may play out like 2013, either way, the macro is bullish and you should be too.