Bitcoin Hash Rate Plummets – Issue 32

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.

Crypto News Bytes

Here’s what caught our attention this week…

BITCOIN HASH RATE PLUMMETS FROM ALL-TIME HIGH

The network continues along every block just fine but the mean hash rate has suffered a decent hit over the last month falling 17.4% from the recent all-time high. A lot of the hash leaving the network that we’re seeing is because 1) hash rate following a lower bitcoin price as older machines become unprofitable on the margin and 2) impact of the recent heatwave in the United States and curtailment especially in Texas. As energy demand soars in the summer months and electricity prices rise with it, we can expect periods of industry-scale miners shutting down hash rate as per their power agreements.

There’s only a handful of times in Bitcoin’s history when we’ve seen hash rate drop this much. Yet it’s still up 13.93% this year, while bitcoin price is down 56%. (bitcoinmagazine.com)

Bitcoin Surges to Intraday High After Fed Rate Hike (but will it hold?)

The U.S. Federal Reserve has hiked the benchmark interest rate by 75 basis points following a two-day meeting held by its officials, continuing its aggressive monetary tightening.      Bitcoin is currently up 3.07% and trading at $22,087 on the Bitstamp exchange, reaching a new intraday high. The price of the world’s largest cryptocurrency dropped by more than 14% in the run-up to the Wednesday event. (u.today)   

Bitcoin Miner Core Scientific Signs 75MW Hosting Deal

Core Scientific (CORZ) – the largest bitcoin (BTC) miner by hashrate, or total computing power – signed a new deal with an undisclosed party to host 75 megawatts’ worth of mining rigs.

As part of the agreement, Core is getting prepayments that will fund the additional infrastructure needed to host the miners, the company said in a press release.

Hosting is a service that data centers provide to crypto miners so that customers can store their mining rigs and mine their preferred digital assets for a fee without having to build the accompanying infrastructure themselves. (coindesk.com)

EXPANDING BITCOIN CUSTODY MODELS WITH FEDIMINT

Fedi, an open-source wallet and commercial company they are building that leverages the open-source FediMint protocol to bring an extremely user-friendly wallet and suite of services to those in desperate need of Bitcoin’s utility as a distributed network with a sound monetary good. When individuals send bitcoin to these federated mints they receive Ecash tokens that represent different denominations of sats. In return, they can then send these within the mint to other users with a high degree of privacy. Once users are inside the federation and transacting with Ecash tokens, federation members do not know who is transacting with whom. This is a very creative way to give end users better privacy while creating an environment in which bitcoin can scale to billions of people. (bitocoinmagazine.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

The Mayer Multiple trades below 0.55, signaling the market was trading at a 45% discount to the 200DMA. Such events are extremely uncommon, and only account for 127 closes out 4186 days, a total of 3% of the trading history. (glassnode)

Now the MVRV Metric is another tool to assess these deviations between spot pricing, and the aggregate market cost basis. 

Bitcoin as an asset is constantly maturing, in recent years it has garnered interest on both institutional and national levels. Therefore, to account for dynamic economical climates, a 4 Year Rolling Z-Score is used to normalize the data whilst also capturing the common halving cycle. (glassnode)

  • Standard Deviations below -1 have a strong history of helping to identify bottom formation. Thus far, it has signaled undervaluation for all bear cycle bottoms, including 2015, 2018, and the March 2020 flash crash.
  • The June leg down in price action has produced the lowest 4-yr rolling Z-Score value on record, suggesting a statistically extreme deviation was reached, adding fuel to the present upwards relief rally.

Now lets look at Market in Aggregate Loss

We can now formalize this observation by inspecting the actual spending behavior of Long-Term Holders. Long Term Holders (LTH) are often considered synonymous with the HODLer class and represent participants of statistically higher conviction. In the chart below, we compare the profitability of their more recent monthly spending, to their yearly average. (glassnode)

When monthly profitability exceeds yearly profitability (orange), the market is entering overheated conditions, as LTHs are spending more, and taking increasingly large profits.
When monthly profitability is less than yearly profitability (red), it generally suggests extended Bear Market momentum is in effect, and losses are being locked in by the LTH cohort.

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.

Galssnode noted a Resistance to The Recovery with price action now experiencing its first relief rally since April, we can assess various models which have provided overhead resistance in previous bear cycles. We can compare resistance levels between both a macro technical view point, and then seek confluence with a suite of on-chain models.

The following simple moving averages have displayed relevance for Bitcoin price action through time:

  • The 200WMA is currently at $22K and has historically been an indicator for bottoming formation.
  • The 111DMA is a component of the Pi Cycle Top indicator, and currently resides at $30K, aligning with a psychological price level, and with supply concentrations detailed above.
  • The 200DMA is trading at $35K, and remains a key transitional boundary between macro bull and bear market momentum.

In fact, Glassnode data reflects some rejection at the 111DMA.

Next, the on-chain cost basis of Short Term Holders, Long Term Holders, and finally the aggregate market Cost Basis can be used to assess relative price action strength. We can also consider the Realized Price to Liveliness Ratio (RPLR), which aims to describe a sort of HODLer implied fair value.

  • Price has recorded a breakout above both the Realized Price, and the LTH Realized Price, which are each trading at $22K. The channel between the two is a contested point of interest providing confluence with the 200 WMA.
  • The Short Term Holder (STH) Cost Basis is currently trading at $28.5K and is in a strong downtrend. This is a product of two mechanisms, STHs realized losses, lowering their average cost basis, and the transfer of coin wealth to a new cohort of STHs buying closer (or below) the current spot price.
  • The RPLR is trading at $35.8k, which provides confluence with the 200DMA. Given the wide view on the 200DMA, and the implied value imparted by HODLers in the RPLR, these models make for a structural level worth keeping an eye on. (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)

Summing up the week!

I can’t use the word contrastive because we keep hitting resistance and get rejected. In short, we don’t have enough power to slice through resistance so we’ve develop this steepening $4K trading range. That’s telling regardless of the data! Once it fails every will head for the exits.

The daily chart expresses this the best. We have not even tested the main overhead résistance yet at $25,545.70, which was the floor from the March 29th from $48,269.00 back-test, which was rejected and we flushed by more than $20k. Those types of capitulation flushes (when buyers surrender) just don’t recover in a week. Sometimes it takes months to grind our way back through them.

Until we break above that Floor and hold on the weekly this is just a bear flag playing out. The resistance is huge there at this point because and 1/2 the future are scalping that $2k range at this point.

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) Notice how much we struggled with price this time into the Fed. We were weak enough that the candle could not muster enough strength to get back above trend resistance on the flag. The daily count says we were done, but I don’t know, it does not look done to me. I’m still thinking we need one more good flush.

Bitcoin/US Dollar Pair Weekly Count (updated on 07/27/2022).

GBTC (Bitcoin ETF) Has now joined the bottoms in count club. But again its reflecting the weakness in Bitcoin.

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

Grayscale Bitcoin Trust BTC Weekly Count (updated on 07/27/2022).

ETH/USD I can’t argue that wave 4 seems to have held to the upside. However, we still do not have a divergent low of any kind on the weekly. So, I’m sticking to my rules. I need one Divergent back-test on the weekly to consider a trend w=change with this type of count. What has changed, is ETHE now has a deeper leg lower which support my thesis.

Bitcoin/US Dollar Pair Weekly Count (updated on 07/27/2022).

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 07/27/2022).

Reiterate, if you’re a brave sole, you could start averaging back into Alt. coins using micro lots. I’m still of the view the bear market has just begun and we probably will keep getting these bear market rallies into Sept. or Oct. and we keep getting rejected.

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: OK, we have improved significantly since the report on their cash position. And I can’t argue with the fact that it’s netting just under 20% at a $20K Bitcoin with their cost synergy. And we have a primary wave setup with a 90-minute trigger and we do have divergence on the 4 hour, so MARA meets my basic test of a bottoming pattern, but not on the weekly yet. As for a position trade, I’d say scaling in on any back-test toward $5 is a viable option, or just setting up a 1/4 size weekly allocation and then planning on increasing that % as it continues to work.

Marathon Digital Holdings Inc (Updated on 07/27/2022)

Scott Henderson’s Risk Disclosure & Disclaimers

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