Ecoinometrics - New year, old stuff
January 03, 2022
For the first time in 2022 we look at Bitcoin’s market conditions. Unsurprisingly it looks very similar to how we ended 2021…
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First some housekeeping. Two weeks ago we looked at the idea of a Christmas rally.
In the financial market’s folklore there is this idea that roughly between Christmas and the first few days of January financial assets tend to have positive returns.
Looking at the data that seemed to be historically true, at least for the selected assets we covered. Thus we decided that if you are playing the odds then you should bet on a Christmas rally.
So how did that play out?
Well for Bitcoin we haven’t seen any Christmas rally at all. But at the same time there has been very little price action. So if you have placed a bet on Bitcoin at least you haven’t lost much.
Now Bitcoin of all the assets we analyzed is the one for which we had the least amount of data. And looking at this pretty volatile data it was hard to pinpoint an expected return on the position with great confidence.
The SP500, the NASDAQ100, gold and crude oil are another story though. Over the years those four have shown a pretty consistent Christmas rally and this year didn’t disappoint.
Basically all of them performed as you would expect on average. See the red dots...
That’s what happens when you are playing the odds. You can’t win them all, but if you place enough bets with positive expected value you are rigging the game in your favour.
The new year continues to be tough on Bitcoin. The unmistakable sign that there is no market dynamic can be seen by comparing this drawdown to the other corrections of the same size.
Typically those -40% dips are getting bought fast. But the more you look at this one, the more it resembles those outliers 200 days snooze fest.
Check it out.
Now if this is all we get then so be it. As long as Bitcoin doesn’t move to the bottom right corner on the chart below then it remains an easy sell: yes you aren’t getting the same parabolic moves as the past cycles, but you also aren’t getting the same downside.
Combine the idea that there is at least a 10x growth left into Bitcoin to match gold’s market cap together with those consistent risk adjusted returns and I think investors could get behind this narrative.
So the question is: how solid is Bitcoin at this level? Well, there are good things and bad things.
Let me start with the bad things. The on-chain accumulation trend looks very precarious. The heat map below shows you whether or not in aggregate over the last 30 days the wallet groups that control a given amount of Bitcoin have been accumulating.
Blue is bad, red is good and the neutral point is at the transition between green and yellow.
Take a minute to observe the trend.
What I see is that:
The small fish have bought the dip all the way down to $47,000. But now things are starting to slow down.
Whales have been distributing coins quite aggressively at the end of the year.
For the categories in between there is no clear pattern. For some time it looked like the trend was starting to heat up again but that’s not the case anymore.
Things may look even worse when focusing on the levels of hodling since the start of the bull market at the end of 2020.
Whales are basically flat over the whole period and getting into the downtrend zone.
The small fish are stalling hard after six months of an almost uninterrupted upward trajectory.
So if the small fish are giving up at the same time as the whales are selling coins, Bitcoin might find itself with a real lack of support. That happened in the middle of 2021 with those dark blue spots and things got ugly real fast.
But we aren’t there yet. Among all those negative signs there is one thing that is still looking good. Coins are continuously leaving exchange wallets.
Sure the past few months haven’t seen record levels of outflows, but certainly there is less and less Bitcoins available on exchanges for anyone to scoop up.
So if by chance the narrative turns in favour of Bitcoin again, you wouldn’t need a lot of buying pressure to get the price to rise.
The other metrics of the aggregate risk score are pretty much in the bulk of their distribution. That just means historically speaking there is nothing remarkably high or low in either the accumulation score, the unrealized profit hodlers are sitting on or the strength of the price with respect to the long term trend.
That’s neither good nor bad. It just means we need to wait and see which way the wind will blow.
Spray and pray
In this newsletter I tend to focus mostly on the macro assets.
For crypto that is Bitcoin and Ethereum. For the rest of the market it is gold, the US stock market, government bonds and the main commodities.
I focus on those because they are driving the big long term moves.
But that doesn’t mean there isn’t money to be made by investing in other assets.
Take the cryptocurrencies market in general. Past Bitcoin and Ethereum you have a host of alt coins and tokens that are basically like small caps assets.
Maybe you don’t have any conviction for their long term value. Hell, there are so many of them that you probably can’t even track them all.
Still, some of those will be up +1,000% during a short period of time. So betting on alt coins with a mind in taking profit quickly as part of the risky side in a barbell strategy is legit.
How do you go about investing in thousands of coins though? Since there are so many tokens and nobody knows which one is going to pump on any given week it doesn’t seem very practical to do the spray and pray approach of investing a little in EVERY SINGLE COIN that sees the light of day.
So what can you do?
Well, Market Sentiment has done the work for you. The idea is very simple (which tends to always work best):
At the beginning of the month you look at what are the most popular alt coins.
You DCA in them.
You wait until some of them inevitably manage to produce 100x returns.
There is more to it than that regarding how you want to execute the strategy, what qualifies as a popular coin, how to split your allocation and why it works. I’m not going to reproduce the article here so you should definitely give a read to Market Sentiment’s whole explanation.
And if you like the data driven approach to investing there are many other posts that you’ll find interesting so I highly recommend you check out the Market Sentiment’s newsletter.
Price prediction poll
Not much to comment on this week. The charts speak by themselves. Two words: Christmas hopium.
Time to let me know where you think the price will be in a month by filling out this form:
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