Bitcoin's 6th consecutive week of gains. What is driving this Bitcoin rally? We look at the data to uncover clues & implications. Examining sector repositioning in U.S. equities.
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The Bitcoin Economic Calendar:
Week of Monday November 16th to Sunday November 22nd.
Market Commentary:
Bitcoin: Bitcoin closed its 6th consecutive week of gains on Sunday, reaching another 2020 high at $15,966 up another 3.13% for the week. Although we are nearing the highs of 2018, the feeling around the market and the community this time around is completely different. Recent events suggest that there is a great amount of interest around professional investors and institutions. Just this past Monday, Stanley Druckenmiller - another famous U.S. billionaire hedge fund investor, went on national business television (CNBC) to state that he holds Bitcoin and that he thinks it is "attractive from a store of value
perspective". We will be digging into the data to explore institutional vs. retail activity in this Bitcoin rally and spot some trends & implications in today's Market Trends section.
S&P 500: The S&P 500 had a good week up 2.16% - with the markets picking up last week after a lower than expected inflation reading in the U.S. on Thursday afternoon. As we had mentioned in the last BEC, we are starting to see some sector repositioning around U.S. equity markets following the U.S. election this week. The price action in the Nasdaq and the Dow Jones last week give us a picture-perfect opportunity to see this at play:
1 - Big Tech is under pressure: Looking at the Nasdaq, which is predominantly a Technology index, we see that it had a pretty rough week down 5.54%. This is consistent with what analysts had been predicting as investors are concerned that the new Biden administration will be more prone to enact anti-trust probes against Google/Amazon/Facebook et al which have been market darlings.
2 - Industrials in favour: Looking at the Dow Jones 30 index, we see that it had quite the opposite week - up 4.08%. This reflects the belief that the new administration will be eager to support companies that create jobs for industrial America, which will likely favour this sector. Equally, industrial companies look to benefit from a weak dollar for exports - which the Fed is aggressively pursuing to drive up domestic inflation. (By making U.S. exports cheaper, the conversely also make imports more expensive - creating inflationary pressures. More on this next week).
Gold & DeFi: Gold had a bad week last week down 3.19% almost erasing its gains from the previous week. Although it seems like it has been bouncing around quite a bit - it has essentially remained flat over the last 2 months. Not surprising, as that is approximately the last time where we had some debate around U.S. stimulus. The price action here lets us contrast what a traditional inflation hedge asset behaves like vis a vis Bitcoin. And the contrasting price action is a telling sign of the market momentum that Bitcoin has.
Moving on to the FTX DeFi index, we saw that it had a rockstar recovery week up 9.11% on the back of momentum from DeFi "Blue Chips" like YFI, AAVE, and COMP. With the rise in value of BTC and ETH, the proxy "Total Value Locked" in these platforms rises - which creates upwards price pressure on their token prices. There is a good chance that these tokens continue to rise in price (although it is uncertain whether these prices can be sustained). Nevertheless, we will continue to track them as they are a good heuristic for euphoria in the markets.
What is driving this Bitcoin rally?
This Bitcoin rally feels different. There are no celebrity endorsements - no "everyone is getting ridiculously rich on Crypto and you're not" mainstream media articles, and no uber drivers offering unsolicited advise about "the next bitcoin". There is no alt-coin euphoria either - the DeFi crazy dissipated, although it is showing signs of life as of last week. For context, last time that Bitcoin was at $16,000 - which was on December 2017, Ethereum was at around $700 (it is $440 as of the time of writing) and Litecoin was at about $312 (it is $62 as of the time of writing). These factors lead many to believe that the FOMO and the buying driving this Bitcoin rally is coming from somewhere else - demand from institutions and professional investors. In today's market trends sections, we look at the data to see if it supports these claims:
Retail activity clue - Google search volumes: Google search trends reading currently show "Bitcoin" at 15, which is nowhere near the levels reached leading up to December 2017. The first time Bitcoin reached a Google trend reading of 15 leading up to the previous rally was around June 1st, 2017, when Bitcoin was trading at $2,300 and it had been at $1,100 just 2 weeks prior. This suggests that the level of retail involvement at this time has been low.
Retail sign: Mainstream News coverage: Although we have seen a higher number of mentions for Bitcoin in the broader business news channels like CNBC, Yahoo Finance and Cheddar, we have not yet seen the same level of coverage outside of industry media or finance. We have started to see endorsements for Bitcoin but these are not coming from "celebrities" but rather, "celebrity investors". People like Raoul Pal, Stan Druckenmiller, Michael Saylor, Paul Tudor Jones and Jack Dorsey are the ones talking positively about Bitcoin - but they are not covered by NBC, CNN or Bravo, but by specialty finance publications. And a far cry from the Snoop Dogg, PitBull and Silverster Stallone events from last rally. The broadest coverage to date has probably come from the Financial Post or Wall Street Journal. This is another sign that the market participants to-date may not be your average "retail investors", but more of a professional crowd.
Institutional sign: Volumes in regulated Futures markets: Traded volumes of Bitcoin Futures (including regulated and unregulated platforms) has increased from $2.7 B in November 2019 to $6.1 B in November 2020 - for an aggregate increase rate of 117%. Zooming in, we see that volumes on regulated Bitcoin Futures venues like CME and BAKKT over that same time period have exploded. CME Futures volumes have grown from 129 Million in November 2019 to a current open interest of 938 Million - a 627% increase. Bakkt has also increased from 1.1 Million in November 2019 to 20 million now. While small in absolute terms, that's a 1,718% increase. This tells us that, relatively speaking, institutional activity has been growing faster than retail.
Institutional sign: Price action during traditional financial market hours: Some market participants have highlighted that positive price momentum for crypto markets seems to be linked to the operating hours of traditional financial markets.
While these are anecdotal comments, we have reviewed price action during North American market opening hours and have noticed that there has been positive momentum during 2 out of the last 3 opening weeks as per the charts below. Positive price action during traditional financial market hours can be an indication that there is buying demand coming from traditional finance market participants.
Conclusion: The data suggests that there is substantial increased demand from regulated venues, and little-to-no signs of retail FOMO. What are the potential implications? There are several - an important being that professional investors suffer from "groupthink" just as much as retail investors. There is a possibility that Bitcoin continues to gain on the narrative of inflation hedging. Professional investors also see the potential of Bitcoin grabbing "store of value" market share from gold, especially amongst the millennial demographic. For context, gold is a market that is approximately 18X larger than Bitcoin. All of this could be setting the foundation for a very strong and prolonged rally.
Difficulty Commentary
We are due for a difficulty adjustment today and hashrate has bounced back quite strongly. Last week we were looking at a potential downwards adjustment of -13% and as of now we are looking at an upwards adjustment of around 2.3% to 17.18 TH. The transactions on the mempool have been absorbed quite well and transaction processing times should be back to normal.
What’s ahead for the week:
Although the Fed came out with a really strong statement 2 weeks ago, the soaring COVID cases worldwide could lead to renewed shutdown conversations, which could put pressure on equities markets. With legal tensions still lingering around the U.S. administration, it is unlikely that we will see any real traction around U.S. stimulus until the Biden administration takes over on January 20th. For now, the markets will be "on their own" - which may lead to continued repositioning and some inflation hedging. Additionally, PayPal made Bitcoin available for purchase to its U.S. clients last Thursday - which should be a tailwind for Bitcoin going into this week. As always - we'll keep you posted on any relevant news throughout the week from our Twitter account @hodlwithLedn.
Last Week’s Content:
[Last Week’s Issue] Last Week’s Economic Calendar - Click here
Market-Moving Stats:
Bitcoin Hashrate and Network Difficulty:
Current Difficulty: 16.79 TH
Estimated Next Adjustment: 17.18 TH + 2.3%
Time to next Difficulty Update: 0 days (Monday November 16th, 2020)
Difficulty All-time-high: 19.97 TH
Corporate Earnings
Monday: Baidu
Thursday: Walmart
Wednesday: NVIDIA, Target
Canadian Central Banking Updates:
Current Target Interest Rate: 0.00 - 0.25%
Current Overnight Money Market Rate: 0.23%
Source: https://www.bankofcanada.ca/rates/
U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
Source: https://apps.newyorkfed.org/markets/autorates/fed%20funds