Ecoinometrics - Never sell again
October 20, 2021
Well, well, well. It took some time and an ETF but Bitcoin is officially back in business, just inches away from its previous all-time high.
Now what’s next?
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 one thing, click on the subscribe button right below:
Done? Thanks! That’s great! Now let’s dive in.
Never sell again
Here it is. This drawdown is coming to an end. As I write these lines BTC hasn’t yet caught up with its previous all-time high but it came pretty close.
So it is safe to say that this dip will have lasted 200 days, give or take a few days. That makes it the second longest correction in a post-halving bull market right next to what happened in the middle of the 1st cycle.
See for yourself.
In case you had any doubt, this is not what a cyclical bear market looks like.
For each of the previous cycles, the top was marked by a massive parabolic move with less and less people accumulating around the top until it all came crashing down.
Right now the only addresses that are not accumulating coins over the past 30 days are the small fish. It looks like they have been selling the breakout. But everyone else is stacking sats.
That means when FOMO is going to kick in for the little guys Bitcoin is set to go parabolic.
Actually when you zoom out a little bit, the price action is very similar to what started the first leg of this bull market in October:
Some dip in the blue zone.
The accumulation score runs hot up to December.
Then moving past the previous all-time high we get a parabolic move.
The accumulation score hasn’t touched the red zone yet, but things are warming up...
Now at this point you might argue that actually since the whales have been accumulating for so long they must be sitting on a ton of profit. As a result they will probably want to dump all their coins on unsuspecting shrimps.
Fair enough. But I see two reasons why this might not happen.
The first one is that the current market value to realized value ratio sits around 3. That means in aggregate, hodlers are up 3x on unrealized profits. For some people that’s a lot. But it turns out that this MVRV region is historically the goldilocks zone from which parabolic moves develop.
The expected return at one month when Bitcoin’s MVRV is in the 2 to 4 zone is somewhere between +35% and +50%. So now isn’t the time to sell if you want to milk this move.
Second, there is an argument to be made that most big hodlers have realized there might no longer be any reason to sell Bitcoin.
In case you are not aware of this, people who are really wealthy usually never sell their assets. What they do instead is they use those assets as collateral to borrow against them. Private bankers fall over themselves to offer very low interest loans for these kinds of deals.
At the end of the day the result is that these people don’t pay any capital gains taxes since they don’t sell their assets. Plus those assets can keep appreciating over time. Meanwhile they get all the cash they need for their actual expenses.
I think we are getting to the point where Bitcoin as a store of value asset is about to be adopted as a pristine collateral. Which means if you are hodling a large enough proportion of the Bitcoin supply you’ll be able to live a comfortable life by borrowing against it without ever having to sell.
If that theory proves correct, the supply shock is going to be massive and we could very well see Bitcoin flip the market size of gold in just a few years.
For now we are kind of overdue on the next doubling of Bitcoin’s value. If you look at the previous cycles, it took anything between 12 days and 292 days between consecutive doublings. The next doubling is pretty close at $74k but we have been waiting for 286 days…
Hopefully once we get there things should start to pick up pace:
Next target $74k.
Then double to $148k and flip Apple.
Then double to $296k and reach PlanB’s S2FX average target.
Then double to $592k and flip gold...
Probably nothing.
CME Bitcoin Derivatives
So we just have a new Bitcoin ETF in the US, the ProShares Bitcoin Strategy ETF (BITO). This isn’t a spot BTC ETF. It is a Bitcoin futures ETF. And well, it turns out the only cash settled Bitcoin futures recognized by the CFTC are the CME Bitcoin Futures.
That makes for an interesting dynamic which is likely to prove very profitable to hedge funds running arbitrage strategies.
The idea is pretty simple:
There is demand for a Bitcoin ETF.
As a result cash flows into the BITO ETF.
BITO now needs to purchase the CME futures contracts with this cash.
That drives demand for those contracts which itself push the premium over spot BTC higher.
At the end of the day this is going to benefit the good old strategy of buying spot BTC and selling the futures at the same time to create a neutral position and pocket the premium.
And judging by how the amount of short positions held by the smart money has been climbing recently, this is already at play.
With Bitcoin on the way to reclaim its all-time high you can tell that the end of the year will be juicy for arbitrageurs.
Surprisingly, on the options side we keep seeing more and more puts being created. As of today the put to call ratio is back at 2 to 1.
Those who bought those puts are probably not gonna make it. But 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
“Probably nothing” lulz
Always looking forward to your insightful articles. Thank you very much!