Bitcoin
After bouncing within a high of about $29,000 and a low of $27,000, bitcoin closed last week almost unchanged, -0.20% at $27,992.
The fact that Bitcoin is settling at around $28,000 after a +26% weekly move is impressive - and healthy, for several reasons.
The week of March 13th, when bitcoin saw its +26% move higher, had the highest spot traded volume ever for Bitcoin. For context, bitcoin traded more spot volume on the week of March 13th, than the week of the Covid crash, and the week of the FTX collapse.
If we look at the 2 previous highs in terms of weekly traded volume, we see that both were booked during steep selloffs. Both instances were exacerbated by liquidations of “long positions”. These instances occurred at times when the market setup was relatively bullish, and the market moved in the opposite direction than most were expecting.
The record-setting week in terms of volume was different. The setup was decidedly bearish, and bitcoin saw its one of its largest weekly moves to the upside. This resulted in a large amount of short liquidations.
The other thing to highlight from the above chart, is that every time after a record was set in terms of traded volume, prices stabilized on low volume in the subsequent weeks. This suggests that we could see a period of consolidation for bitcoin around the $28k range for a few weeks before its next move.
A few more technical points to highlight:
Despite the massive rally to $28k, the relative strength did not enter into “overbought” condition. This is because bitcoin was coming from an oversold condition once it entered the rally. The recent pause at $28k has also allowed the RSI level to remain within its normal levels. This setup is healthy from a technical standpoint.
Additionally, the $28k price looks to be very contested for Bitcoin. This makes sense, as the $28-$32k range was a very contested price range back in May-June 2021. The $30k resistance will be the next key level for bitcoin’s current rally.
We’re seeing a slight increase in bitcoin short positions, up 43% this morning from their lowest levels historically. While the number looks big in percentage terms, the absolute number of short positions is still near historical lows.
In terms of support, we continue to monitor the 200-week moving average, currently at $25,444.
In terms of catalysts for this week, we have almost $12 B worth of bitcoin options contracts expiring this Friday. The “max main price” for this expiration date is $24,000 - this is the price at which most options contracts expire worthless. If bitcoin is trading near this level on Thursday, market makers could try to get the price to $24k at expiration time, giving “gravity” to this level on Friday’s trading session.
Digital Asset Markets:
There are several macroeconomic trends that are playing in gold’s favour at the moment. One of the primary drivers of the positive price action has been gold purchases by Central Banks - particularly from developing economies. A second driver comes from where we are in the current market cycle, and gold’s historical performance.
Last week we focused on why Central Banks are divesting from holding “inside money” to holding more “outside money”. Today, we’ll focus on the second driver.
First, a quick summary on why Central Banks are buying gold.
As a refresher, “outside money” are assets or instruments that cannot be controlled by any one political group. These are assets like commodities (gold, oil, grains). “Inside money” are assets and instruments that are controlled by a political group. These are assets like U.S. dollars and U.S. government debt.
During the 90’s and 2000’s, most central banks divested their gold holdings in favour of government debt and sovereign currency. In light of recent U.S. sanctions, and volatility around U.S. government debt, Central Banks have been gradually reverting their allocations back to holding more “outside money”, like gold and commodities. The chart below sums it up quite nicely.
Now that we covered why Central Banks are buying gold, let’s dive into the current market structure and what it means for gold (and bitcoin).
Historically speaking, equities and commodities have an interesting relationship as economic conditions change. During “good times”, investors tend to prefer owning equities as they have the potential to appreciate faster than other assets. During “bad times”, investors tend to prefer owning commodities, as demand for commodities tends to be more “recession-proof”. People don’t stop needing oil, corn, or wheat during a recession, but they can definitely cancel a Netflix subscription.
This can be evidenced on gold’s price chart. Upon the outset of the COVID pandemic, gold rallied after the announcement of the stimulus package, but it only rallied for 5 months. The rally ended on August 1st, 2020.
Conversely, the S&P 500 kept rallying and making new highs until December 21st, 2021.
As interest rates rise and the S&P 500 rolls over, investors are rotating back to commodities as fears of an impending recession loom. Let’s look at the previous cycles to get a better sense:
As you can see, there’s a well-defined historical relationship between commodities and equities. And we seem to be at the part of the cycle that starts favoring commodities for the near future. What this chart says, in other words, is that for the next year or so, commodity prices like oil, gold, wheat, lumber, steel and others, should do better than the prices of company shares - like Boeing, American Airlines, Tesla and such.
The following graph shows the historical performance of gold vs. the S&P 500 after yield curve inversions. (The U.S. yield curve became steeply inverted more than 5 months ago).
Both charts share a similar learning. Gold has historically performed better than equities during times of recession. And high interest rates suggest a potential recession in the near future.
For context, veteran gold investor Dan Tapiero shared on twitter that his target for gold this year is $2,300.
In other words, Mr. Tapiero believes that gold can rally by another 15% this year from the current levels. For disclosure, Dan Tapiero’s fund, 10T, is an investor in Ledn.
What does this mean for bitcoin?
Bitcoin’s narrative as “digital gold” has grown even stronger in the face of the recent financial crisis. In fact, bitcoin’s one-year price correlation with gold is at 60%.
Central Banks and people are buying bitcoin for the same reasons. They want to save in instruments that cannot be manipulated. Therefore, arguments in favour of gold should also hold for bitcoin. We expect that bitcoin’s correlation with gold should become stronger over time.
Macro:
The COVID pandemic started in March 2020 - more than 3 years ago now. Back then, most major cities worldwide imposed restrictions on public gatherings, public transit, and told companies to effectively stop all in-person work. It forced the corporate world to go fully remote overnight.
They say it takes 12 days to form a new habit, and companies had their entire teams working remotely for months at minimum - years in other cases. This made a lot of CEOs reconsider their office space needs. Many got rid of their offices all together, others held on to the idea of “bringing everyone back to the office”.
Despite the best efforts of CEOs far and wide, people are resisting going back to the office around the world.
For context, the U.S. cheered this week when the average office attendance in 10 major cities reached 50% of its pre-pandemic levels.
In Toronto, the main employment hub in Canada, which is the fastest-growing G7 nation, office occupancy rates are at 43% of its pre-pandemic levels.
This presents a problem for a few groups. If you’re the CEO of a company where employees are not coming back, or a small amount of them are coming in a few times a week, you are either:
a) seriously reducing your office foot-print on your new lease. i.e. leasing a much smaller office, or
b) looking to get out of your office lease as soon as possible.
Either way, you’re probably on the phone with your landlord - who also has a problem now.
To simplify a complex matter - the demand for commercial real estate has gone down since the pandemic. The supply has not changed, therefore the assets that “supply” that space need to get re-priced.
For context, analysts estimate the value of all commercial real estate assets in the U.S. to be $11 Trillion - that’s roughly the market cap of gold. There’s roughly $5.5 Trillion in U.S. commercial real estate debt, and about $2.3 Trillion of that is held by small U.S. banks.
So, what are the implications for bitcoin from all of this?
- We may continue to see more funds flow from smaller banks into larger banks, and the Fed might have to take more aggressive steps to prevent the systemic failure of hundreds of banks.
- The Fed risks “breaking” the commercial real estate market if they raise rates further - which may be an incentive to stop very soon.
- The Fed might have to backstop commercial real estate debt instruments to prevent the systemic collapse of developers, operators, landlords and tenants.
All of these options involve the Fed getting involved, and will be perceived as “backdoor Quantitative Easing”. As we’ve seen in the past, any act or event that inflates the Fed’s balance sheet is typically good for Bitcoin’s price.
The Week Ahead đź“°
It’s a busy week ahead with Fed members out on a media tour reassuring the American people that “everything is fine” after their latest rate increase last week. The Fed is also taking the hot seat this week, answering questions about the recent banking crisis to Congress and the Senate.
This week we get inflation data from the U.S. and Europe on Friday. Analysts expect significant reductions in both. In the U.S., the expectation is for the February PCE number to come in at +0.4% month-over-month, vs. January’s +0.6%. In Europe, the expectation is for March “flash” inflation reading to come in at +7.4%, vs. February’s +8.5%.
As always, here’s a summary of the events and data that could move markets in the week ahead:
Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans. As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.
Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts. This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers at https://ledn.io/legal/disclaimers
