Ecoinometrics - Time to stack sats

May 24, 2021

Bitcoin is down 50% since the all-time high of April. Does that mean the bull market is dead?

Maybe. Maybe not. Maybe it doesn’t matter...


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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Time to stack sats

Well that escalated quickly... we went from a pretty standard drawdown, similar to what we have seen in 2017, to a pretty large 53% correction.

That's not good for the sentiment. Although when even the pope starts spitting on Bitcoin you know that we have clearly reached peak FUD...

The interesting thing is that this kind of dip is not completely unheard of during a post-halving bull market.

Back in 2013  BTC rose very fast after the halving before spending almost 200 days in a drawdown that bottomed at 69% from the all-time high.

Full disclosure, I wasn't involved in the Bitcoin space back then. So I don't know what was the sentiment during this 6 months long correction. But given that for most of those 200 days BTC only traded sideways I can’t imagine it was all rainbows and unicorns.

Fun fact, the top of the first wave in 2013 was around $259. If you had bought $600 worth of BTC at that top and held it until today you’d have enough to buy a Tesla Model S… too bad Elon Musk doesn’t accept Bitcoin anymore.

Jokes aside, my point is that we don’t know what Bitcoin’s value will be tomorrow, in one week or in one month. But what we know is that there is a macro trend that drives more and more money to Bitcoin. 

So if you bet that this trend will continue the only real question is: what is the natural market size for Bitcoin as a store of value?

Well if I take gold as reference:

  • There is about $2.5 trillion worth of gold captured by financial instruments.

  • The total market size of physical gold is somewhere between $9 trillion and $11 trillion.

To land somewhere in this natural range you’d expect Bitcoin to grow 4x to 17x...

We aren’t there yet. But at the same time nothing new came up over the past 30 days that would change the macro trend. 

Conclusion: Bitcoin is still an asymmetric bet, time to stack sats.


Contagion

Apparently Bitcoin is to blame for everything now:

“Some government bonds gained in price on Wednesday, while futures on the US benchmark S&P 500 equities index dipped and oil also pulled back after the price of bitcoin plunged 30 per cent on signs that China was preparing a crackdown on digital tokens. The Japanese yen — a currency often in demand in times of stress — also popped higher.”

Financial Times

That’s a good one but I don’t really buy it. You can’t blame Bitcoin for everything.

I mean let’s take a look at this oil dip.

Do you really think this pull back in oil prices is related to Bitcoin? 

Here is what happened on Wednesday in the oil market:

  1. The EIA reported a sizeable build of crude oil inventories in the US.

  2. The COVID situation, notably in India, had some investors worried about the impact on global oil demand.

  3. The US seems to be willing to lift the sanctions on Iranian oil exports. Some take it as bearish as it would potentially increase the global oil supply (most likely not but hey this is not a crude oil newsletter).

  4. From a price action perspective oil bounced from the top of a trading range. Those things happen often.

So yea, just reading the news I can think of at least four reasons why WTI pulled back last week. None of them have to do with Bitcoin.

SP500 dipping, bonds price rising and trades around JPY are more likely to be driven by the sentiment surrounding rates and inflation than the fact Bitcoin is in a correction.

For now what the data indicates is that:

  • Bitcoin is uncorrelated to gold, stock, rates, the oil market and commodities in general.

  • During liquidity events in the stock market, Bitcoin is sold (same as gold) to raise cash for margin calls. Not the other way around. 

To get a sense of scale when it comes to the trading activity, we can look at the daily traded volume on the futures contracts traded on the CME.

If I pick a random day last week I can see that:

  • Bitcoin traded approximately $4 billion worth of contracts.

  • Gold traded $53 billion worth of contracts.

  • Crude oil traded $68 billion worth of contracts.

  • The SP500 traded $309 billion worth of contracts.

That means there is basically a 10x factor between Bitcoin and gold, and a 100x factor between Bitcoin and the stock market.

Maybe there will come a day when Bitcoin is larger than the bond market, the oil market or even the total stock market… but we are not there yet.

Read the article.


That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.

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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:

  1. Click on the subscribe button right below.

  2. Follow Ecoinometrics on Twitter

Done? That’s great!