“That’s Our Two Satoshis” — The Crypto Rally - Are These Parabolic Advances Good or Bad?

“Let’s just be frank: equity markets have become manic, hanging on every word from POTUS or Chairman Powell. Chairman Powell’s communication should have been no surprise, but it is somewhat disheartening that the Fed has come to consider itself as the guardian of infinite expansion rather than as an entity designed to smooth the natural course of business cycles. Without business cycles, capitalism loses its identity.  We expect the Pavlovian response for global equities to be a rally on any dovishness as investors continue to lack context about what this dovishness really means. Perhaps, real economies don’t really matter anymore and the eventual move towards central bank ownership of all assets by the time our children are middle-aged gives market participants comfort. Moreover, a concept from Economics 101 seems to have been forgotten by bankers and investors alike: diminishing marginal benefits (not to mention unintended consequences). Central bankers have become a bit like a adolescents succumbing to peer pressure– daring each other at every turn - to implement the policies about which many wrote their PhD theses.”

What is perhaps most interesting in crypto is that many of the positive factors that we've been talking about for months, which certainly helped propel the market’s advances YTD, are now sitting plainly in the rear-view mirror.   

• Bakkt, Fidelity, and Facebook have now all officially set launch dates, and FB’s actual product is still 1 year away
• The Yuan has stopped depreciating towards the critical 7.00 level, and is now strengthening
• The trade wars are potentially coming to an end

This of course does not mean crypto rally price increases need to, or should, stop -- but it definitely makes us wonder what will be the next real catalyst for adoption.  And the longer term picture for digital assets is of course still as strong as ever. Mike Creadon at Drawbridge Lending pointed out some startling numbers over the weekend: There is more than 65 times more money in the world invested in negative-yield bonds ($13 trillion) than there is in bitcoin ($200 billion).  Every global Central Bank action that reduces purchasing power, adds debt, and increases systemic risk, is a net positive for Bitcoin and every other digital asset.  Further, the asset-light economy (AirBNB, Uber, Google, etc) tells you all you need to know about whether or not younger generations will substitute hard assets with digital representations (they will).  

But when it becomes a forgone conclusion that crypto markets are going higher, and every taxi driver and grandmother is talking about it, it becomes a bit unsettling.  Earlier in the year, bullish sentiment was offset by equal and constant skepticism, but we’re now entering a point of euphoria unseen since late 2017.  Prices are skyrocketing on low-volume, weekend algos gone wild.

For example, the popular MVRV ratio is increasing at a much steeper slope than during previous bull runs.  There haven’t been any pullbacks in the MVRV ratio, which is uncharacteristic compared to the last bull run.  Though not yet above the overvalued zone of 3.7, the slope of MVRV is similar to that of late Bitcoin market cycles.  

From a technical perspective, when Bitcoin first hit 10,000, Bitcoin continuously pulled back to the moving average. Compared to the most recent break of Bitcoin $10,000, throughout this advance we have not touched or pulled back to any significant Moving Average.

We’ll be watching metrics like these, and others, very closely over the next few weeks.  That said, our near-term hesitation does not at all take away from our long-term bullishness.  Those who can withstand high levels of volatility should rightfully ignore any near-term hiccups.  Those in the “protection of capital” business should probably heed these warnings.

Over Longer Time Horizons, Bitcoin has Been Hard to Beat