Is this a suckers rally? – Issue 31

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.

Why are miners selling into this rally?

Low Bitcoin prices have forced most miners to sell their coins to cover operational costs and complete large purchase orders they made several months ago during the bull run. Core Scientific sold most of their holdings in June, while Bitfarms liquidated nearly half of their Bitcoin treasury to pay down a loan. Miners used to be some of the most adamant holders during the bull market, where large Bitcoin holdings could boost their balance sheets as the token appreciated. (bnnblomberg.ca)

Secondary argument! If this selling is the manifestation of higher utility prices what’s going to happen when the UK is cut off from Russia Oil & Gas and we see $180 to $200 barrel oil?

What the difference between a relief rally and a bull market?

  • Cyclical versus secular trends.
  • Short-term bear market rallies are much more powerful than shorter-term bull rallies.
  • Relief rallies in bear markets generally lack follow through.
  • Buying volume is higher on up days in a bull rally.  In a bear rally volume is higher on the down days
  • Bullish pattern failures are more frequent in bear rallies.
  • Market sentiment responds differently in bull and bear markets.
  • Volatility is higher during bear rallies. 
  • Short squeezes occur more often and are more powerful during bear markets. 
  • If a rally is occurring below a previous high, it’s either a bear rally or cyclical bull until proven otherwise.

Crypto News Bytes

Here’s what caught our attention this week…

Crypto miners moved over $300 Million in Bitcoin

14,000 bitcoin, worth more than $300 million at its current price, was transferred out of wallets belonging to miners in a single 24-hour period at the end of last week — and in the last few weeks, miners have offloaded the largest amount of bitcoin since Jan. 2021. The phenomenon is called “miner capitulation,” and it typically indicates that miners are preparing to sell their previously mined coins in order to cover ongoing mining expenses. (CNBC)

Tesla May Take $460M Impairment Charge on Its Bitcoin Holdings for Q2

Tesla, the electric car maker led by crypto proponent Elon Musk, may take a $460 million impairment charge on its sizable bitcoin holdings for the second quarter, according to a note from Barclays analyst Brian Johnson. The company is scheduled to report after the stock market closes on Wednesday. (coindesk.com)

Ether Breaches 50-Day Average for First Time Since April (will it hold?)

Ether moved above the 50-day simple moving average (SMA) on Monday, hitting a one-month high above $1,500. The cryptocurrency traded at $1,525 at press time, with the 50-day SMA at $1,327. Bitcoin remained below its 50-day SMA at $23,000. (coindesk.com)

21Shares launches S&P risk-controlled Bitcoin and Ether ETPs

The Swiss crypto investment firm 21Shares has launched two new exchange-traded products (ETP) offering investors exposure to the largest cryptocurrencies — Bitcoin (BTC) and Ether (ETH) — while aiming to soften volatility via rebalancing assets to the United States dollar.

The new products, the 21Shares S&P Risk Controlled Bitcoin Index ETP and 21Shares S&P Risk Controlled Ethereum Index ETP, will start trading on the Swiss SIX Exchange on July 20. The ETPs will trade under tickers SPBTC and SPETH, the firm announced on Wednesday.

Both ETPs target a volatility level of 40%, which is achieved through dynamically rebalancing or allocating more assets to USD when volatility rises. The products seek to replicate S&P indexes’ benchmarks that control risk by adjusting the exposure to the underlying index and dynamically allocating to U.S. dollars.(cointelegraph.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

I find it ironic that Glassnode used a similar title to issue 29 this week! “Is Bitcoin Building a Bottom?” vs. “Is the Bottom Close?”

To start this piece, Glassnode defined what is meant by Realized Value and Unrealized Value, as these concepts will be foundational to the insights that follow.

  • Realized Value (spent coins) is the difference between the value of a coin at the time of disposal, and at the time of acquisition on-chain. For example, an investor buys 0.5 BTC at $40k, and then and withdraws it from an exchange. The investor then redeposits it for sale at $20k. Here, they have 0.5 * ($20k – $40k) = -$10k in realized losses.
  • Unrealized Value (unspent coins) is the difference between the current value of a coin, and the value at the time of acquisition on-chain. In the example above, if the investor still holds 0.5 BTC, and the price is trading at $21k, they would hold an unrealized loss of 0.5 * ($21k – $40k) = -$9.5k.

The Realized Price is one of, if not the most widely recognized Bitcoin on-chain models, and is often considered to be the on-chain acquisition price (cost basis) of the Bitcoin supply. It is currently trading at $22,092, vs current spot price of $21,060, which puts the average Bitcoin investor at an unrealized loss of -4.67%.

The chart below shows how previous bear cycles have all bottomed and established an accumulation range bellow the Realized Price. Time spent below the Realized Price ranges from 7-days in March 2020, to 301-days in 2015.

If we exclude March 2020 (a flash event), the average time spent below the Realized Price is 197-days, compared to the current market with just 35-days on the clock. (glassnode)

In addition to the Realized Price, we have a number of supporting on-chain pricing models which tend to attract spot prices during late stage bears.

Delta Price ($14,215, 🟤is a form of ‘half fundamental, half technical’ hybrid pricing model. It is calculated as the difference between the Realized Price, and the all-time Average Price. Delta price has previously caught the bottom wicks of bear markets.

Balanced Price ($17,554, 🔴takes the difference between Realized Price, and Transferred Price (coinday time weighted price). This can be thought of as a form of ‘fair value’ model, capturing the difference between what was paid (realized, cost-basis), and what was spent (transferred).
Both the 2015 and 2018 bear market lows were set with a short-term wick down to the Delta Price (green zone). However, both accumulation ranges spent most of the bottom formation process trading between the Balanced Price (range low) and the Realized Price (range high) as shown in blue. (glassnode)

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. (glassnode)

Market bottom formation often has a signature of large positive swings in unrealized profit and loss. This is a result of capitulation and coin redistribution to new buyers, who are now less sensitive to price fluctuations.

Thus, we can start by isolating only those coins which hold an unrealized loss (2021-22 cycle buyers), to calculate their aggregate USD value. With the market trading between $17.6k and $21.8k, the aggregate Unrealized Loss has ranged between -$165B and -$198B.

Note how the total unrealized loss in the post-Nov ATH era was much larger in comparison to the May to July 2021 period, even when prices were at $29k (shown in 🔵). This is a result of coin redistribution during and after the Aug-Nov rally, and is the same mechanism that created the bearish MVRV divergence. (glassnode)

Weekly Summation

We’ve seen a strong and rapid recovery in the short-term supply in profit and loss, while Glassnode also noted that this is also likely a relief rally. I agree, and the current wave counts support this outcome. However, its also a cross roads in Elliott Wave so the bottom could also be in. The million dollar question is, can it hold with 100 basis point rate hike on the table?

My primary argument? No other bear market in Crypto has included a growing 9% inflation rate with a Fed trapped and raising in 75 basis point blocks. I’m more in the camp that says max pain is closer to $10k but I’ll take $15.5K and start scaling in there vs. my count at $12.5K. In short, the deeper inflation bites, the lower crypto can go! But, I do think it will lead us out of the recession!

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) That tightening up in the count last week was our sign of this week’s rally. Flags are not always uniform, so the breakout pennant has little value to me. I was totally wrong about the $26K back-test being muted. If I listened, someone was screaming in the room. Also not worthy is that MARA came well before Bitcoin spot did, so this rally could just be someone moving all these assets from these margin calls from these funds blowing up. Sometimes it takes weeks for custody to be exchanged. I’d say, we have 50% shot at $26,746 before we fail again. I just can’t see it with the Fed!

Bitcoin/US Dollar Pair Weekly Count (updated on 07/20/2022).

GBTC (Bitcoin ETF)

Grayscale Bitcoin Trust (OTC GBTC) is an alternative for non-crypto account holders. See the prospectus.

Grayscale Bitcoin Trust BTC Weekly Count (updated on 07/20/2022).

ETH/USD strong bounce, but it does not negate the fact Alt coins ultimately follow Bitcoin. Period! Ethereum is not immune, and the Crypto Winter proved that. It may be resilient compared to some, but it still gave it up.

Bitcoin/US Dollar Pair Weekly Count (updated on 07/20/2022).

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 07/20/2022).

If you’re a brave sole, you could start averaging back into Alt. coins using micro lots. I’m waiting for confirmation!

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.

LINKUSD Pair Weekly Count (last Updated on 07/06/2022)

CRV/USD More on Curve here!

CRVUSD Pair Weekly Count (Updated on 07/06/2022)

ADA (Cardano) nice base!

ADAUSD Pair Weekly Count (Updated on 07/06/2022)

Crypto Stocks

MARA: Nice bounce, but it will come off again with bitcoin.

Marathon Digital Holdings Inc (Updated on 07/06/2022)

Scott Henderson’s Risk Disclosure & Disclaimers

Follow me on Twitter @swingtradenotes for charts, quick thoughts and smart remarks.

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