I’ve noticed a new pattern on Bitcoin’s price action. Since the beginning of the year we are getting one significant drawdown every month.
And you know what those have in common? They have all been good occasions to buy the dip.
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Nothing has changed
Bitcoin finally had almost one convincing week above $60,000… then came the dip over the weekend.
That’s a bummer for sure but is it a big deal?
Honestly no.
You gotta remember that last week we had the Coinbase listing. Some might have guessed that COIN would give some publicity to BTC and as a result we could see the price rise.
Fair enough.
Apparently some traders made that bet with a good amount of leverage and the price rise became a self-fulfilling prophecy.
But obviously trading with too much leverage is putting your portfolio at risk of any hiccup in the market. And what can happen did happen, we got some hiccup over the weekend in the form of a “significant” drop in hash rate.
The cause? A blackout of the electricity grid in mainland China from a region where a lot of miners operate.
From there who knows exactly how things started, maybe whales doing a sell the news kind of trade, some algos freaking out or a random trader hitting the panic button. But the result is the same:
Significant price drop.
Leveraged long positions hit by margin calls.
Liquidation of the leveraged positions driving down the price even more.
This ladies and gentlemen is how you go from $60k to $52k in just a few hours.
At this point if you are not someone trading BTC on an hourly time frame you have to take a break and ask yourself a simple question: has anything changed for my Bitcoin investment thesis?
There was a drop in hash rate.
Did the hash rate drop so much that the Bitcoin network became insecure? The answer is no.
Is this hash rate drop likely to have any long term negative effect on miners? This was a short term drop caused by a localized “incident”. So the answer is no.
Will this hash rate drop have any long term effect on the price (due to negative public perception or otherwise)? Well we’ve had hash rate drops in the past and while they do correlate with short term negative price action there was no long lasting effect. So I’m going to answer no for this one too.
Conclusion: nothing has changed.
Alright so if nothing has changed then what should we do now?
Don’t overthink it, just buy the dip.
Like any of the previous dips in this bull market this one is nothing special. So far:
It lasted 4 days.
It bottomed at 19%.
Check out how this measures up against the other drawdowns.
Actually take a closer look at the drawdowns that lasted more than one day during this cycle (orange) versus the previous cycle (blue). The distribution of those dips is pretty similar right?
Whatever is causing those they aren’t unexpected during a bull market. So no need to sweat too much over them.
This time with a dip down to about $52k we ended up with something like a 75th percentile drop. That is only 1 in 4 dips during the previous cycle went deeper than this one.
Right now the price has already started to recover so if you haven’t bought yet don’t waste time.
Coinbase listing
There we go, with the Coinbase listing we have a new entry for the Bitcoin Treasuries Index. Indeed Coinbase is:
Listed on the NASDAQ which we assume as a proxy for being liquid enough.
Hodling more than 0.005% of the BTC supply on their balance (see page 112 of their S1).
So they fit the bill.
When you compare market caps in the index Coinbase is in the middle of the pack:
10 times larger than MicroStrategy.
2 times smaller than Square.
With an estimated 4,500 BTC on their balance sheet COIN is not a massive hodler. But given that their entire business model relies on the success of Bitcoin we can expect that the two will be somehow correlated.
That being said I wouldn’t really expect COIN to outperform BTC. The reason is its size. The small caps greatly benefitted from the bull market:
MARA is up like 50x since the halving.
RIOT is up more than 30x.
MSTR is up 5x.
But COIN is already at a $65 billion market cap company which means it qualifies as a large cap stock. So 50x sounds improbable.
Thus my “wet-finger model” for Coinbase valuation tells me to expect something of the order of 5x in the years to come…
Once we get a few more data points I’ll start publishing a daily tracker for Coinbase on Twitter so we’ll see how that plays out.
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
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I would be very interesting to see the drawdown graphs with lines that plots the creation of each drawdown point over days, instead of the scatter plot.
The smallcap miners still have huge room to grow. Some have more hashrate than Riot/Mara at 1/8 the market cap.