A weekly news and trading piece by Scott “Shooter” Henderson covering crypto currencies. Read my Future Of Money Primer and Using Crypto Trade Shots for the basics to follow along.
It’s time to seriously consider what percentage of your portfolio should be held in the Cryptoverse. Crypto is still very speculative, but, the risks and rewards are unprecedented. Travel with me as I navigate crypto, NFTs, DeFi and the Metaverse.
Shooter’s & Kirk Spano’s Crypto Thesis
The short story is that most cryptocurrencies are going to zero, but there will be survivors that rise to much higher price ranges. This is a journey of separating winners from losers.
We expect Bitcoin and Ethereum to be among the biggest, if not the biggest, winners. Along the way, we can trade the larger moves for added gains.
We also agree that NFTs and the Metaverse will have multitrillion dollar flows. That’s a total addressable market worth getting to know very well.
Are we forming a back-test for another leg lower?
The Bitcoin count tightened up time-wise, which implies a move is coming. The question here is whether it is a deeper back-test to 50% back or another flush lower towards $15k. My bias for the CPI to continue to weigh in on Shrimps buyers. So still lower!
Crypto News Bytes
Here’s what caught our attention this week…
SEC Delays Decision on Cathie Wood’s ARK 21Shares Bitcoin ETF
In a Tuesday notice, the SEC said the ARK 21Shares ETF would get an answer on August 30. “The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change and the issues raised therein,” the notice said. (decrypt.co)
Celsius Pays Off Last DeFi Loan, Reclaims Nearly $200M of Wrapped Bitcoin From Compound
Celsius Network, the embattled crypto lender that is facing liquidity troubles, fully paid off its remaining debt to the decentralized finance (DeFi) lending protocol Compound, freeing up nearly $200 million of pledged collateral. (coindesk.com)
Texas bitcoin miners halt operations to save energy during heat wave
Bitcoin miners in Texas have suspended operations and answered the call to conserve energy and spare the Lone Star State’s fragile power grid as demand has soared during an intense heat wave. (nypost.com)
Ethereum price risks technical breakdown
The ETH/BTC chart has been forming a bear flag since early June 2022 on the three-day timeframe.
In detail, bear flags are considered bearish continuation patterns that form as the price consolidates higher inside a range defined by two ascending parallel trendlines after a sharp decline. They resolve after the price breaks below the lower trendline, i.e., in the direction of its previous downtrend.
As a rule of technical analysis, a bear flag’s downside target comes to be at a length equal to the size of the previous downside move. Lately, ETH/BTC has been eyeing a similar breakdown, with its profit target sitting around 0.0439, down almost 20% from the price on July 13. (cointelegraph.com)
Bitcoin is facing an ‘enormous amount of systemic risk’, says billionaire venture capitalist
Chamath Palihapitiya, the founder and CEO of venture capital firm Social Capital, has warned that Bitcoin is facing an enormous systemic risk that might turn consequential in future.
Palihapitiya stated that the risks are a result of several challenges affecting the cryptocurrency sector, mainly the lack of regulations, he said during a recent episode on his All-In podcast.
He warned that the risks could negatively impact Bitcoin’s future if something is not done now from a regulatory perspective. According to Palihapitiya, Bitcoin needs to have a common set of parameters like the ability to monitor risks around the asset. He stated that stakeholders need to focus on this aspect to safeguard the future of cryptocurrency. (findbold.com)
More Good Reads…
The Complete Guide to Crypto Tax-Loss Harvesting less than 30 minute read
Bitcoin Halving Cycle Resumes less than 5 minute read
How Black Thursday Decimated Cryptocurrency Order Books Less than 10 minute read
What is Cryptocurrency Less than 10 minute read
Digital Assets / Investor.gov Less than 1 hour read (The Fed’s Opinion on Risk)
SEC Expands Alternative Trading Systems Definition (25 day to a vote) Less than 15 minutes
Internal Revenue Service (IRS) and Staking Less than 5 minute read
The Future of Crypto Banking Less than 10 minute read
Avoiding FOMO & FUD Less than 5 minute read
Regulation of Exchanges and Alternative Trading Systems Less than 1 hour read
Research: Supporting Evidence
Wealth Redistribution
This week Glassnode compared market structure of this bear market to late-2018. Which we can see in the Drawdown from the ATH metric. The following compares the current 2022 bear, with the 2018 bear market:
- December 2017 – March 2019: The fallout from the 2017 parabolic top extended for almost 15 months, culminating in a 85% drawdown from the ATH. The $6K area can be seen as the base level breakpoint before the ultimate capitulation, where an additional -50% was wiped from the market over the course of 1-month.
- November 2021 – July 2022: The current Bear Market has experienced a peak drawdown of 75%, with the $29K floor acting as a similar breakpoint base level. The latest capitulation in mid-June saw prices tumble -40% to $17.6k in just two weeks.
Glassnode noted that one of the outcomes of a lengthy bear market is the redistribution of wealth among the stakeholders who remain. This progressive changing of hands can be analyzed by tracking the UTXO Realized Price Distribution (URPD).
As highlighted in Week On-Chain 23, past bear markets, have had two distinct phases:
- Post-ATH Phase: Where the short-term investors and speculators (low conviction) gradually come to terms with the bear market reality and exit into a depreciating price trend. Moreover, some participants attempt counter-trading the macro trend leading to multiple temporary relief rallies (the dead cat bounce).
- Bottom Discovery Phase: Diminishing profitability and an extended period of financial pain results in declining new demand and creates favourable conditions for ultimate capitulation.
The HODLer-Capitulation Tracking
To reinforce this point, the number of addresses with a non-zero balance continues to grind higher, hitting a new ATH of 42.2M, and only minimally influenced by the recent capitulation drawdown.
Galssnode noted the consequence of capitulation events is an immediate redistribution of coins to new buyers, whom are often classified as Short-Term Holders at first. Over time, however, the dominance of Long-Term Holders amongst the supply tends to increase, as fair-weather speculators are flushed from the market.
Bottom formation is often accompanied by LTHs shouldering an increasingly large proportion of the unrealized loss. In other words, for a bear market to reach an ultimate floor, the share of coins held at a loss should transfer primarily to those who are the least sensitive to price, and with the highest conviction.
This is the result of two mechanisms:
- The exiting of entities with weak conviction (Short-Term Holders).
- The gradual transfer of coins to entities with strong conviction, whom are relatively price-insensitive (Long-Term Holders)
In the depths of previous bear markets, the proportion of supply that was held by LTHs, and at a loss, reached above 34%. Meanwhile, the proportion held by STHs declined to just 3% to 4% of supply. At the moment, STHs still hold 16.2% of the supply in loss, suggesting that freshly redistributed coins must now go through the process of maturation in the hands of higher conviction holders.
This indicates that whilst many bottom formation signals are in place, the market still requires an element of duration and time pain to establish a resilient bottom. Bitcoin investors are not out of the woods yet.
The Bitcoin network often sees a significant purge of wallets during major sell-off events and in early bear markets, as investors capitulate and spend everything.
Miner Capitulation
Finally, we will turn attention to the miner cohort, who often tend to become an influential source of selling pressure during late-stage bear markets. This is a result of the cyclical nature of their income, and current bear market has been no exception to this trend.
To track whether a Miner Capitulation is in play, we can consult a two-part model, which seeks confluence between implied income stress (Puell Multiple) and observed hashrate decline (Difficulty Ribbon Compression).
- The Puell Multiple 🟠 tracks aggregate miner income in USD, relative to the 1-year average. Here, we can see that presently Bitcoin miners are earning just 49% as much as the 12-month average. This implies miner income stress is a likely factor.
- The Difficulty Ribbon Compression 🟣 signals that hashrate is indeed coming offline, causing protocol difficulty to fall in a statistically significant way. This is an explicit observation that ASIC rigs are being switched off due to income stress.
- Miner Capitulation Risk 🟡 highlights periods where both metrics signalled meaningful lows and generally correlated with extreme bear market lows and an elevated risk of miner capitulation events.
Summing up the week!
Galssnode noted, the common component of previous bear market cycles is the expulsion of Bitcoin tourists. What seems a little different is the miners’ net position change.
Reading the chart above which implies that miners’ net position has only begun declining vs. prior price declines. Then, I can’t emphatically agree with Glassnode’s conclusion that we are in the later stages of a bear market and I’d conclude that pressure to fold has only begun because max pain from the Fed is likely 2-3% away vs. the concept that this will start waning soon seems short sighted. Then add in those institutions dependent on lending that must maintain an assets valuation to continue with those loans, placing their operations square in the cross hairs of failure. Yet, I have to concede that the fact that 44.75 of the supply is now held at a loss supports their claim. I’m an Elliott Wave guy who understands waves and when I add my metric of the Bollinger Band to those waves, we have a consolidating band, implying we have at least one count closer to $10k (see chart below).
My primary argument also includes the fact that no other bear market in Crypto has included a 9.1% inflation that is increasing with a Fed raising in 75 basis point blocks. I’m more in the camp that says max pain is closer to $10k vs. my count at $12.5K. In short, the deeper inflation bites, the lower crypto can go!
Shooter’s Crypto Picks And Sector Stocks
My conviction ideas on crypto and stocks with crypto exposure. Based on my AI assisted proprietary Elliott Wave technical analysis. Remember to follow along in chat if you are going to swing trade a portion of your account. I recommend trading no more than 20% of your account.
Make sure to adhere to a rules based approach to trading using technical indicators. And, we highly recommend trailing stops and/or stops at preset technical levels.
Crypto Elliot Wave Counts Major Pairs-Grayscale Trusts
XBT/USD (BTCUSD) The count has now tightened up. Supporting the flag pattern I pointed out in last week’s video. Maybe $22750 is our next lower high now. Unless we have some kind of fabulous news on regulation, I don’t think the $26k option for a lower high is on the table now.
GBTC (Bitcoin ETF)
Grayscale Bitcoin Trust (OTC GBTC) is an alternative for non-crypto account holders. See the prospectus.
ETH/USD I have to admit, Ethereum is holding up very well considering. It is not the first time it has done so. Most recently, at the 50 day mark just before today’s range. Counts still show divergence, but now the daily agrees with a bottom and not just the 90 day. I’m going to say hold, because I can imagine in this Fed cycle that Ethereum will start to lead Bitcoin. Just saying! If we get some kind of banking regulation on digital loans, that’s a different matter.
If you don’t have a crypto account, you can also buy Grayscale Ethereum Trust.
Grayscale Ethereum Trust (OTC ETHE) is an alternative for non-crypto account holders. See the perspectus.
Grayscale Ethereum Trust Daily Count (updated on 07/13/2022).
Nothing has changed with the Alt’s! So, I’m going to say hold another week.
Alt. Coins
LINK/USD (revised profile March 6, 2022) I expect some type of banking supervision soon. Once that drops, Bank of America will be all over these contracts.
ADA (Cardano) nice base!
Crypto Stocks
MARA: Nice bounce, but it will come off again with bitcoin.
Scott Henderson’s Risk Disclosure & Disclaimers
Follow me on Twitter @swingtradenotes for charts, quick thoughts and smart remarks.
