Bitcoin is the legacy digital peer to peer cash system. It is not a scam. It is a terrific solution and fix on some of the problems that gold cannot solve so easily in that it does not need an intermediary, it does not need to be stored, and transactions are relatively quick and final given that some of them involve exchanges half way around the world across borders that are erected to control the flow of capital and labor and other things. It is not, however, more established than gold, nor is it as safe, if only because it still claims a relatively small market cap, and thus a narrow doorway (on ramp) in and out, made narrower by the efforts of competing traditional monopoly issuers of money and the regulators they have captured along the way. If you are new to this publication, read our guide for newcomers (click link) and Phil Champagne’s “Book of Satoshi”, on the collected writings of the creator in the members area. We have promoted bitcoin since virtually its inception and it became a formal part of the dollar vigilante portfolio in 2013. In 2019 we launched The Crypto Vigilante to help investors navigate the crypto markets in more detail. At TDV, bitcoin is still our largest exposure. We recognize that it still has fundamental problems that may or may not be solved so there is risk that the currency will fail or be usurped. TCV is where you want to be for that story. On this page I will however update you on my outlook for the USD price of bitcoin, which many investors still view as a benchmark for the cryptocurrency space. My 3-5 year target is $100k, but this is a speculative target, contingent on a continued improvement in fundamentals. I will keep you posted on both, its technicals and fundamentals, here.
I see an 85% likelihood that the price of bitcoin continues to coil within the shaded range of a narrowing long term neutral consolidation pattern.
The bull market call in H1 2019 was obviously premature. A new bull market has not technically begun until the price breaks out of the triangular pattern in the chart here. Since it is a neutral pattern it isn’t indicating which direction it may break. While the shaded region demarks my own expectation for the rest of 2020, the levels that control the bull-bear signal demarcate a wide range from $3k to $14k. Previously it was around $3-6k with the upper bound defined by the 2018 downtrend.
The consolidation has seen a wringing out of some of the bad ideas and a steady advance in the technology and adoption of the leading ones, like Bitcoin, Monero, and others. The overall market capitalization of the sector has shrunk throughout. There is uncertainty still about the way forward but the market will make its choice and we will know sooner or later whether technologies like LN are catching on or whether the critics are right about the capacity constraints of the network, and other problems, like network privacy or security.
My medium term outlook is for a rally back up to $10k in the next month followed by a correction to about $7k and the completion of a right shoulder over the summer months before the bulls begin to push through the $10.5k level in the second half to threaten a new bull market leg by the end of the year. The way I drew it in here is one way it could happen. But there are two other possible scenarios in my outlook. One is that the market drops to a lower low, like down to $3k, or lower perhaps in the midst of one more panic liquidation, before it rallies up to the $10.5k neckline. The other possible scenario is that it has already made its low in this sequence but may form more of a bottom before its rally back up to $10.5k. Maybe a pullback to $5k.
I think we have made our low so I am putting only a 15% likelihood in the second scenario, but as far as whether we pull back to $5k again now or break up through $7k in the next few days, it looks like 50/50.
Short Term View
You can see the three scenarios in this chart too. The shaded region, a price gap, also represents significant resistance, But if the decline to $3k was anomalous, i.e., as the result of a liquidity crunch, it shouldn’t keep the bulls down for long. They have been grinding back steadily with higher lows.
As previously noted, the sell off ended in a classic one day reversal wick on the daily bar chart.
The hourly chart here shows the triangle that it formed in reaction to the sell off, and the subsequent break out from that triangle.
The triangle itself has a classical technical price objective of between $9k and $10k on the upside, and the trading range it has found itself in now points to a target somewhere north of $8k.
Technically speaking it’s important for the bulls to recover that ground above the shaded region in this chart before the bulls can say they have recovered the bias, technically, in the intermediate and long term charts at least.
I can’t decide if we are going to break back up over $7400 without breaking that uptrend line in the last graph above or whether we will see a pull back to $5k or $6k first, say, this weekend, before we do it. I am more or less bullish in the short, medium and long term; except it is difficult to say which way the next $1k will go.
Silver and crypto. Buy. Keep buying. Traders might want to wait for a dip, but I don’t think they’ll get a big one in either of those assets going forward. Investors should continue to buy up to our allocation weighting for both categories: gold & silver = 30%, bitcoin = 12.5%, and the TCV crypto portfolio ex bitcoin = 7.5%.
We enthusiastically like gold, silver, bitcoin, and monero at these levels for the HODL portfolio, and likewise continue to recommend accumulating the stocks in the TDV stock portfolio and the coins in the TCV crypto portfolio, also to buy and hold for the bull market cycle in commodities and digital currency assets that will benefit from the destruction of the dollar-based fiat system that appears to be unfolding.
BTCUSD just broke back above the $6k mark, where it had run into resistance a few times before over the past week following its unexpected plunge to $3600 on March 13th, the week that the oil war started.
The market began to act weak just before the oil price plunged, recall my warning of the bulls being rejected at the 9200 level the day before. We saw the potential for a break down into the $7k levels but I had no idea that oil prices were about to plunge and send the Dow into a second phase of the liquidity crisis.
The US is invested in a lot of shale oil but is a high-cost producer while US banks hold a lot of bad oil debt leftover from the previous oil boom (note the links provided above on pp. 2). This hit US equities hard and triggered a further liquidity crunch that saw gold, silver, and bitcoin get hit. This was not an expected phase.
I was covering our shorts right when it happened and was fortunate to have kept a couple alive, at least until today. We are covering our shorts in the cyclicals and selling the QID calls but staying short the techs through the QID ETF. The bitcoin price started falling sharply when the oil price AND stock markets collapsed.
It initially simply fell to the low end of my predicted range at $7800, then churned a little between 7600 and 8100 before the bottom fell out in the massive panic sell off.
The good news is that the bulls put in a reversal bar on the daily chart the same day - closing it back up at $5700 after bouncing off $3600 - and followed that up with what looks like an ascending triangle, with a neckline developed at about $6k (just below the $6400 November low using coinbase prices) in the post-July downtrend. So far, since the sell-off, the bears have kept the bulls below that 6400 low. They are fighting over it right now, so maybe we haven’t seen a real breakout until we’re back up above $7400. We can probably say, however, that break down from the Jul-Sep top completed at $5800. And we can perhaps call the move to $3600 anomalous. Certainly, it is a classic bottom, technically speaking, with the daily reversal. The 7-day bottom it has built under $6k, moreover, suggests that it should rally back up to between $9k and $10k over the next week or two. Maybe we’ll see a rally all the way back up to $10.5k where it was headed back to just before the oil price shock. That would also hint at quite a massive inverse head & shoulders bottom targeting $25-30k after bouncing around between $8k and $10k until August or September (to finish a right shoulder) to make it back up to $14k by year-end, and to the $20-25k level by this time next year. I could easily see this market racing towards $20k again in a year. But for now, I’d be happy to see it back up above $7400-8200.
Why did gold, silver and bitcoin crash so much harder than I expected?
So we have three factors at play. A liquidity crisis, liquidity crunch, and a credit crunch. Wikipedia describes the “liquidity crunch” as a “flight to liquidity”, i.e., the demand for liquidity.
Further liquidity crises and credit crunches can cause additional liquidity crunches, but credit crunches are not as likely given the Fed promising to keep all credit flowing at ZIRP levels and its promise to destroy the currency. The deflationists are out of luck. But it is possible for stock prices to trip over further shortages in liquidity if investors continue to expect the Fed to be printing way more than it is, for instance. Often, gold can benefit from a flight to safety. But it had some froth in it, as I tried to explain in the months leading up to this event. So did bitcoin. However, the biggest factor behind the crushing blows in bitcoin and silver was that I didn’t expect the liquidity crunch to be so big. And the reason for that was that I didn’t foresee oil.
At any rate, often the crunch itself produces excess cash itself, and unless the demand to hold cash remains high and the central bank is not doing anything, it will find its way back into an asset, soaking up liquidity.
For a detailed explanation of the inner workings of the repo markets and how a liquidity crunch emerged to hit gold and bitcoin, watch this video. The author does a pretty good job of breaking it down.
I’m bullish on bitcoin. Both bitcoin and gold are susceptible to further liquidity crunches. I don’t think that silver is because it is so oversold now. But I could imagine bitcoin and gold falling a bit more if the Dow were to fall another 30% suddenly on some new shock that isn’t expected and demand soared for cash liquidity.
However, as the government blows up its budget, I doubt that will continue to include treasuries indefinitely, and increasingly gold and bitcoin will benefit from these crunches, especially as the banks start to look precarious for depositors. Since I don’t see deflation in the cards, I see a bottom in bitcoin now.
It may continue to get bad for a lot of other crypto but the lead coins are in total buy range now. Both fundamentally and technically, there’s no qualification.
Sure I could be wrong and we could get deflation or more crunches but I don’t think so.
I’ve been looking for a reversal in bitcoin the past couple days amid a 4-5 day triangular consolidation in prices after the panic sell off to 3600. The pattern is itself neutral but implies a magnitude of a $2-3k move in one direction or the other. If I’m too bullish, it is possible we could see $2500 in a fortnight, or on the other hand, if we are right and this panic sell off was a mistake, it will be back up above $8k in no time.
I see a bullish trading bias and am betting on the latter scenario.
The USD price of bitcoin has been correcting for a few weeks ever since it hit $10.5k in mid February while I was at our conference in Acapulco. This was not unexpected. In fact, it has pretty much traced out my expected path so far. Early in the year I told you that I thought it would peak at about $10.5k or so and then come back to the high $7k area before the bulls regrouped for another rally later in the year, perhaps after the halvening, maybe after summer, I don’t know exactly. But in a post this weekend I noted the bearish rejection of the bulls at ~9200, which was important somewhat as the neckline of the large triangle top -made last summer (Jul-Sep).
I didn’t know there would be an oil shock but I have been warning of the effects of a demand shock or liquidity crunch when the stock market caved, which we are seeing even if not exactly as expected.
I am expecting the 7800-8200 level to hold, and would definitely buy the market here. Not just bitcoin, but also the crypto portfolio published by The Crypto Vigilantes. This is another good time to start buying.
Probably the best time since the $3k low in terms of sentiment and where the Fed is.
Speaking of popping, the precious metals and bitcoin look ripe as well. Don’t be discouraged by the lack of an immediate response from the crypto market. Schiff wasted no time taking advantage of the observation to lay out another shitty forecast, and no kidding, if you just look at his track record, you should take the other side of his call immediately. I know, we’re tired of bashing the guy too, but he’s become such a troll.
A more sincere analysis would have pointed out that bitcoin had a delayed reaction to the Iranian affair, as well, and he would have had more humility in his celebration of gold’s forecast. It could still be early.
The stock market is bouncing today as we speak and in the next day or two it could be up more, pushing gold back down. What would he say then about gold? I’m sure he’d say something witty. But that’s my point.
He’s not really an analyst, and can’t be taken seriously.
Bitcoin is doing almost exactly what I have been predicting.
It shot up to $10.5k, and has pulled back into the $8k’s, perhaps to complete a right shoulder in the intermediate sequence. I think it may have already put in the low on this shoulder but it could fall a bit more, to $8200, or maybe $7800, before the bulls regroup for another shot at $10.5k this spring or summer, maybe going into the halvening. At the moment it is coiling (in the hourly chart to the left) and I detect a small bullish bias so I’m willing to bet we may get a run back up to $10.5k a bit earlier, but maybe not break out until after the halvening.
Investment Strategy Recap
In my trade alert, Tuesday morning, I put out a bunch of trade ideas - just in time - some shorts and some hedges. I wasn’t timing the virus to be sure. That news has been out for a while now. I was timing what I felt was exhaustion by the bull again. I also urged you to scale back your gold stock allocation by about 10 percent or so, as I reduced the weighting in the TDV allocation while increasing our weighting in the big short.
If you have not acted on this, don’t be in a rush now, you missed your first window. That’s true also for the gold stocks. Wait for the bounce now, or if you don’t get one, then wait out the correction a bit more. For a few months I have been warning that gold and bitcoin both got a little ahead of the dollar story. They started rallying a year ago in anticipation of a bust in the stock bubble, and a capitulation in the currency.
Indeed, the economic indicators were all rolling over. You saw it, because I was on that story.
But the Fed came in hard on Trump’s request, and much earlier than we expected, to reflate expectations about the boom, essentially pushing stock prices to new highs, and thereby keeping the greenback from surrendering a weak post 2017 long-in-the-tooth retracement leg in the primary sequence on forex markets.
I’m still very bullish on the long term trajectory of both gold and silver, as well as bitcoin and monero, which have again been performing very well in recent months.
In my defense, I reduced the TDV recommended trading allocation from 20 to 15 percent at the outset of last year, and previously from 25 to 20 percent. The extra 10% went to bitcoin and monero and other cryptos at their lows when we increased those allocations from 10 to 20 percent. Second, I recommend cash and not trading unless you are sophisticated enough to handle the risk management on your own because, as is the case sometimes. This is not really a trading service where I can follow up on each trade. Nor do I want to promise that at this stage. These are just some ideas. This past year they happened to go against me.
However, the rest of our portfolio, the primary allocations that we recommend, did exceptionally well - bitcoin, monero, gold, silver, and most of the gold stock portfolio except for the exploration juniors all soared.
In 2019 our allocation strategy returned 24% overall, most of it from bitcoin and our gold stocks, with a healthy 17% from our precious metals, both gold & silver.
Our non bitcoin crypto portfolio contributed some negative returns as well as the Fed pumped its markets in H2.
Our crypto portfolio had more mixed results (+40%) with bitcoin nearly quadrupling in the first half while only ending up as a double by the end of the year.
Bitcoin will be all over the map, I fear, but will end the year driving towards $15-20k. But all three of those assets will have many good years in the next decade, another lost decade in Keynes’s calendar.
The downtrend in bitcoin has been bumping up against some bulls. The lower lows haven’t sustained and the slope has become less negative, with some coiling over the past month at the bottom of a downtrend channel.
The market looks like it is firming up a bit, although the bulls still can’t seem to get any follow through on any of their moves. But I’m betting we’ll see them put through a pop of about $1k in the short term, maybe next week, or this coming weekend. It may not happen, in which case it could produce the lower low to the $5k area that we never thought we’d see again on the way up, earlier this year. In any case, since my last trade update, the short term trend has moderated and I have turned bullish on it while reducing my enthusiasm over the rest of the year after the first quarter. I think there’s a good chance that prices will range between $5k and $10k this year for bitcoin. The market will end up on the year, imo; it is possible that the new bull market has started and that this is just the last days of a relatively normal intermediate correction, but we also have to accept the possibility that it will go nowhere for another year, even if fundamentals improve.
My current outlook is for a pop back up to the $8500 level, maybe more, and then a final lower low to around the $6100 area, or maybe $5500, before a more sustained run, say, to $10k, and then pull back to $8500 by the end of 2020. That’s just a possible scenario that explains my neutral intermediate outlook and bullish short and long term outlooks as I tried to indicate in the table above. It just means that I’m undecided on the medium term outlook. Also, note that I am overweight bitcoin in the crypto portfolio, and while I’m not a bitcoin maximalist, I think it will do very well before any other coin really starts to take away market share.
However, note that my conviction is on the bullish side, and that if you are a buy and hold investor, this is a really good time to enter. You may or may not get a better opportunity later this year. My expectation for a lower low is not a high conviction forecast. It is a possibility for traders to turn a profit, but not from here.
Technical Analysis: Bitcoin: Hold
You may consider bitcoin as a benchmark for the crypto space as I do, or you may not want to do that if you think bitcoin is not a good benchmark for whatever reason. Personally, I’m a pluralist. I’m not a maximalist on any of it. I think there is room for many even though most are probably not going to work out. I don’t think bitcoin is the most secure and most private coin, nor the most fungible, as our team often points out.
However, it does have network effects in its corner and they are strong, and it is not a bad coin. It still is the leading network. And I don’t see that having changed here. But I do see three sources of risk for the space.
- A liquidity event, as Jeff will be writing about this weekend
- We may be too far ahead of the market
- Regulatory pushback
The Jul-Sep triangle top that you see in this chart has always implied a target of around $6k, it’s just that we didn’t believe what the chart was telling us. I thought we might pull back to the $8k’s and I have been bearish more than neutral in the short term in recent months, but I discounted the idea of going all the way back to $6k. The trends have been sour in the short and intermediate term, but the $7400 level technically was a very important level because it represented the last resting place on the way up, the last highest low before July’s peak.
So far the correction has been orderly but the market has been weak. The rallies have not held up, giving in to lower lows, with the latest one in limbo after bouncing off the ~$6500 low.
I cannot get too bearish on it though because sentiment is so terribly bearish here and while I can concede the possibility of further lows, I see this as a decent level to buy some as well, but only for long term accounts and only if you are underweight to begin with. Otherwise we are largely hedged with our short positions against a liquidity event and have most of our capital in the precious metals otherwise. For traders it is a tougher call.
But what makes me particularly bearish on the short term for a trade, besides the fact that the bulls have not answered the lower low (i.e., below 7400), is the unusual margin long position on the bitfinex exchange.
It is unusual because it doesn’t match our read of sentiment.
As you can see next page, the margin long position is way above where it was at the top in 2017.
Sure it’s a bigger market today but look at the situation compared to what the shorts are doing in the bottom of the two charts. Sure, it is just one exchange but this data suggests that bullish sentiment is too high. Maybe for traders. I don’t anticipate a collapse down to $2k or $3k although who knows, it is a speculative asset.
My expected outcome is that either we’ve bottomed here or will bottom quickly at around $6k. Probably only the most nimble trader should short it here. If it fell in a mad scramble for liquidity across all markets it may not stay down for long. So consider this just a cautionary note if you happen to have too much exposure.
The market fell to a lower intermediate low of around $6800 overnight changing the short term trend as we recorded it last week from bearish-neutral to outright bearish overnight. Sentiment has absorbed itself with speculation about what China is going to do from one week to the next. The buying panic which characterized the $3000 pop on Oct 25 and 26 occurred from ~$7300, a pivotal level on the charts. That level is important because it represented the last highest low (before the new high) in the $10k gain from the mid $3k level in March to over $13k in June. The bears pushed through that level overnight with hardly a fight from the bulls.
The technical significance of breaking through that low now is that it is the first real challenge we have seen to the thesis about a new bull market has begun. The move takes the bullish bias out of the “neutral-bullish" rating we assigned to the primary (long term) trend when the market broke up past the $7k level in May, and it remains "neutral" as long as the price remains below the $7700 level. The bears have marked the resistance zone between 7300 and 7700. The short term negative implication of the breakdown is that the July-August triangle top comes into play again, with an implied target of around $6k. Watching the tape overnight has been an exercise in frustration for the bulls. Every time they try to get a rally going they have been met with a wall of selling, knocking prices lower even further. At the time of writing the market is churning over at the $7100 level following a nice bounce from ~$6800. As I mentioned in my last trade update:
"The main risk with bitcoin, I think, is gauging how far ahead we are of the crowd. Hopefully not too much. We have to accept that there is some risk it may revisit the $6k area if the downtrend isn’t broken before the stock market rolls over, and depending on how the roll over occurs. The most important support level for now is the June low at ~$7400 representing the last highest low in the daily chart on the way up."
We could be in that situation now. I didn't buy the reason for the up move in October, which most analysts attributed to the nebulous comments made by the Chinese President Xi Jinping on encouraging blockchain technology. I thought that was a bit weak and looked for another explanation, like maybe that the market is structurally in stronger hands. I suspect we will find out soon based on the market's reaction to this lower low, i.e. whether it turns into a panic selling frenzy or whether the selling fizzles out and we finally bottom.
The news flow in the crypto space has turned a bit negative as the market has tried to digest the implications of central bankster plans to issue their own centralized digital currencies and the current fears over supposed raids by Chinese authorities on various crypto exchanges that have been defying the government’s trading ban, reversing some of the optimism that drove the market higher last month. But what if this is all noise, maybe a distraction from a smart accumulator, someone smart enough to go away for a while after raking the market. I mean, if someone were raking this market for a HUGE billionaire order, this is where you’d expect to see the next $3k move up like we saw late October. Was the fake news about Binance’s offices being raided in Shanghai enough to shake the tree by triggering stops below or near the October low? Whatever the catalyst for the lower low, if the market is in strong hands there should not be much of a panic sell off, and the accumulator will be forced to start buying sooner than later taking it back up to $9k or so if that were to happen again, but then he’d go away for another month and watch the traders all cannibalize one another again as their lack of HODL power spawns fresh liquidity for him to absorb in his next raking maneuver, whenever that might be. This is just one scenario but I think it is more than wishful thinking.
Short term concerns aside, I am very bullish long term on this space so maybe my point of references is too skewed to get much more bearish from here. I would warn only that the primary trend turns bearish below $6k and that $6k should be about as low as we should go if a new bull market has indeed begun from the December 2018 bottom. If our hypothetical billionaire accumulator doesn’t show up then that may not be the correct analysis and we may have to re-evaluate where the market is at that point. Ignoring that scenario, my current outlook “bearish-neutral” suggests a bounce up to 7300-7700 level before one more lower low.
How This Gold Bull Took to Bitcoin
Before cryptocurrency, gold bulls were this evil central-planning system’s biggest enemies. But many gold bugs are co opted, you know. They don’t all want to get rid of the central banks or governments. One of the things that Jeff and I agreed about early in the game, even before I was convinced that bitcoin would work, was that nobody should force money on the market, gold or otherwise. And right out of the gate I was intrigued by that fact about bitcoin. It was something created by actual entrepreneurs. I rejected the arguments from other gold bugs - that it was a ponzi scheme or scam - by breaking down for myself exactly what that would look like if it were true. There were plenty of scams involving bitcoin out there, pyramid schemes for recommending it and email frauds demanding payment in it but I saw no scam in the concept of the network or what Satoshi et al tried to create. I saw only beauty. I didn’t see bitcoin holders benefitting from a stream of income that was promised to them by the guy they bought their bitcon from and who would get it from new buyers.
As I began to grasp the innovation of the blockchain, the Nakamoto mining consensus, and the concept of distributed computing, the market’s infatuation with bitcoin began to make sense. And the more I learned about it the more I saw that whoever wrote the code also understood economics, and in particular, the Austrian brand, which is very interesting to me. Hayek wrote long ago that he supported a system of freely competing currencies, noting that the market would ultimately gravitate to the sound ones on its own.
It occurred to me that if it was not a scam and it was not a government created or subsidized activity that whatever it was, the market is behind it, which didn’t mean it would work, but it meant it wasn’t a fraud.
Was it a tulip though? The prospect occurred to me and I thought about it for years. But I kept seeing a practical value in the technology, even if it were still only a payment network then. I began to see that, at least online, it could do the things that gold or cash could do in the physical non digital world, except better, because bitcoin was made for this new world. I immediately disregarded Schiff’s volatility argument as disingenuous knowing that it is not YET money and that if it were to become money it would have gained enough critical mass in market capitalization that the volatility would disappear, eventually. I saw that many of the critics were just saying what was obvious, that bitcoin wasn’t money. It is NOT yet, except within certain small networks at this point. That term belongs to the most marketable and liquid currency - good or asset. But that doesn’t mean it isn’t emerging. Admittedly it has a way to go or else we wouldn’t be interested in it as an investment class. The only reason there is upside is because mass adoption hasn’t happened yet.
In other words, we are investing in it because at this stage it still promises volatility. If it were already money it would not be a great investment. We only keep money on hand to deal with uncertainty. Speculating in currencies is only such a big and profitable business because of how much volatility exists in the fiat currencies in the first place that Schiff I guess must be okay with. It is potential money though, and that’s where the speculative upside comes from. But it’s pointless to point out that it is not money, in my view.
I found that many gold bugs would not push themselves to understand the difference between fiat and bitcoin. When they charge that bitcoin can be created out of thin air like government fiat it is ignorance that betrays them in not realizing that the word “fiat” means by decree. Moreover, the expansion in quantity of bitcoin is neither arbitrary nor excessive, and in fact, it is probably deflationary from this point on.
However, many gold bugs will still continue to criticize bitcoin as a fiat currency because it can be replicated by code over and over and over. And code isn’t scarce, right? But try to start a new network from scratch.
It is not that easy. Anyone can copy the bitcoin code on their computers and engage in the mining of bitcoin but that doesn’t mean that they have just created bitcoin. They still have to compete in the “mining” of it.
It is possible to create coins based on the bitcoin network or other coins that compete with it but it would still take a lot of time and energy to get people to use it and merchants to adopt it and so on.
Something doesn’t become money overnight.
Finally, while I was never really hung up about tangibility as there was nothing Mises said to rule it out and I had long learned that there is value in intangibles, I did have some trouble with the “regression theorem”, at first. That is the theory that money has to evolve from a commodity. Many Austrian economists got hung up on this idea thinking that this theory applies to every situation that produces money, as if every instance of money had to start out as a commodity. But this was patently untrue. I had long argued that the dollar and especially the euro didn’t start out as a commodity and that they were delinked from redeemability long ago.
I reasoned that the original unit of value lies either in the production of energy or the value of the network, and I preferred the latter argument. But whatever it was, I saw it was the product of the market’s work, and not a scam or a ponzi or fiat. It was in fact exactly NOT any of those things. And then, in 2015, one of my favorite living Austrian scholars, Walter Block, wrote an essay in 2015 explaining what Ludwig von Mises really meant by the “regression theorem” and why bitcoin doesn’t reject it as many Austrians thought.
He wrote that the regression theorem applied strictly to the transition from barter to a society that is based on money. In those societies, money starts out as a thing of value. But once a price structure has developed, he argued, it’s just a matter of transitioning from one currency to another whether by force or voluntarily.
Bitcoin in the TDV Portfolio
By 2013-14 I was already sufficiently convinced in the bitcoin story to include it formally in the newsletter’s investment strategy, although Jeff had been promoting it to our readers since the earliest days.
I started covering it when I got some conviction on the regulatory front.
I decided then that the government and the bank cartel could not do anything to stop bitcoin, and that the best they could do was to try to gain control of its development and its utility. I had just realized that the cat was out of the bag, if you will, and bitcoin was already too big to stop, although I later learned that they had been fighting and losing as far back as when the cypherpunk movement open sourced PGP in the early nineties. I began to see the game theory of governments emerging, where they would create their own digital coins and then outlaw the others. But while many gold bugs saw that as an obstacle, I just saw it as competition; another attempt like the government’s first attempt with the SDR’s that many gold bugs today think is going to replace the US dollar. The SDR was the Nixonian solution to the collapse of Bretton Woods.
They floated it as the paper gold of its time back in the early seventies. It never went anywhere until now with currency reformers bringing it back out of the darkness in a new time of crisis facing the dollar.
Likewise, I don’t see their digital paper working either.
In the end, I came to see gold perhaps as the most perfect manifestation of sound money that is possible in the real world, naturally. It still would no doubt make a sound money and if the money lobbies were liquidated then it would probably play a role in any new monetary system even today. I am bullish on gold and silver values here and continue to promote holding the precious metals as our primary conservative strategy when it comes to protection from the confiscatory policies of the state and its banking cartels.
Gold still has the best established properties for the job. However, what I have come to realize is that bitcoin is a good attempt at creating the perfect money. Not just sound but perfect. It was created by someone who understood economic theory and history as well as computer code. Importantly, however, perhaps the most important factor that makes all of this work, is the realization that digital scarcity has now been achieved.
And yes, it absolutely is challenging the bank cartels in a way gold cannot... more like in the way the internet did to one information or publishing monopoly after another... or the advertising and media businesses.
It disrupted them! That is the true threat of bitcoin to the banking cartels. And they know it. They also know they cannot outlaw code or math, as our crypto trader and analyst, Mr. X, often likes to remind us.
Bitcoin’s Most Irresistible Quality to Wall Street
What many gold bugs won't accept is that a more perfect concept of money can be created digitally, which will work so long as the internet is not itself shut down. The fact that most gold bugs didn’t appreciate it out of the gate wasn’t surprising because I had already learned that many of them don’t understand economics either, even though it is true that they are more literate in the subject than the average person.
In the end, it might not even matter if bitcoin works. If I know Wall Street and the banking crowd, they have already designed a plan to corner this market. They love scarcity from that point of view: opportunity. It is perfectly structured to become a tulip. But it could also actually become a sound money. Either way, by the time it is over, you will probably feel like 20% was a conservative allocation to this emerging asset class.
Today’s update will summarize my take on what is going on in the precious metals and other markets relevant to our trading and investment strategy. It includes a technical analysis of the five asset classes that we care most about in finance: i.e., gold, USD, bitcoin, Nasdaq 100, and US treasury notes. After that I will review some of our open trades for premium subscribers, which I still really like. Some of them are riskier than others but if we have our timing right some of the riskier ones could stand to make 300 to 400 percent gains in the next six weeks.
TDV’s Trade updates offer guidance and ideas for trading short and medium term macro trends through traditional options and ETF/ETP products, and sometimes also hedging strategies for the long term stock portfolio we have designed.
Overall our investment strategy has been performing well, at least for most of the year. Bitcoin prices are up almost 130% year to date in dollars after being down 35% from their high while gold & silver are still up some 15 and 10 percent, respectively, even though they too are down from their highs the past couple of months.
The bitcoin trade was tricky to call as it went up through the $10k level in June and just continued to charge on parabolically even while most of the alts continued to languish. It was caught in a short squeeze until the summer blow off finally convinced the bears to pack it in. The market sold off further once the bulls realized they may have been a little bit too far ahead of the institutional crowd. The correction is relatively normal, though maybe a bit long in duration compared to similar corrections in the 2016-17 bull market. It could still drop further. My model is mixed on the short term, as it is on gold, even though there too in August I warned how gold prices were a little ahead of themselves and would likely consolidate - perhaps until the end of the year - before breaking out past the $1550 area, sustainably. That was one reason we promoted silver then.
The market shot up strongly when the Chinese government made favorable remarks about bitcoin, but it couldn’t hold the important 10.3k or 9.1k handles. It is currently hovering below the latter at around $8700.
In this letter I’m not going to discuss the question of whether bitcoin is going to be the best cryptocurrency, I’m only referring to it in this analysis because it is the most liquid and representative of the bunch.
Its correlation with the pm's and the uncertainty about the rate of adoption in the near term lead me to look to gold for direction in the short term, which means, like gold, the next 5% or so is a tough as nails call.
I am cautiously bullish on the short to medium term. The funnymentals are great. The main risk with bitcoin, I think, is gauging how far ahead we are of the crowd. Hopefully not too much. We have to accept that there is some risk it may revisit the $6k area if the downtrend isn’t broken before the stock market rolls over, and depending on how the roll over occurs. The most important support level for now is the June low at ~$7400 representing the last highest low in the daily chart on the way up.
That’s where we bounced from at month end in October. It was a solid bounce. The question is whether it is a sign of structural long term strength of the market or if it was just a pump on China.
In the context of trading and investing, bulls expect the price of the particular asset being traded to increase in value, and bears expect the price to fall in value. For example, if we are bullish on the cryptocurrency pair XMR/BTC, we would expect the price of Monero (XMR) to rise in terms of Bitcoin (BTC). If we say that we are bearish on BTC/USD then that means we expect the price of Bitcoin (BTC) to fall in terms of US dollars.
The USD price of bitcoin broke up and out of a two week triangle that has an implied target of somewhere in the low $9k area, a few days behind schedule but otherwise more or less as predicted, thereby turning the short term trends bullish. The million dollar question is whether it will continue on after hitting its technical objective, or whether that will just be the retracement that touches back on the resistance area, which marks the bottom end of the summer topping pattern between $9k and $14k, before heading back down to the $6k handle again. The resistance area starts at $9100 and consists of layers up to about $10.3k. So there is much to chew through. Not that we can’t. It’s not a big entrance way. But that’s the area where the bulls have to bid up to, at a minimum, in order to soak up any real volume if they’re serious about accumulating, if not higher.
But that would exceed the target of the current break out at any rate. For now the intermediate trends are still bearish, and the primary trend turned bullish, but is now on hold until the current correction plays itself totally out. As long as the bears keep a lid on this market below $9.1k they are in control and the $6k target is in play, and should be taken seriously. A decline all the way back to $3k is not likely; if it happened at this point it would be an unexpected development. I see the worst case scenario as just below $6k right now, and the most likely scenario as maybe one more test of the low $7k area after the current retracement fails under $9k. That doesn’t mean I’m ruling out the bullish scenario, I’m just saying the most likely one in my outlook is one more lower low in the short/intermediate sequences before we get going back towards the 2017 highs.
The Stock Bull Market Ended 2 Years Ago!
It is still true that stocks broadly stopped rising early in 2018. The fact that the bitcoin bull peaked just before the top in stocks is not really a coincidence.
They are both driven by the same thing, and they peaked for the same reason. The growth rate in the money supply (and bank credit) had come to a screeching halt in 2017, which continued into 2018 and 2019. The markets are starved of the only fundamental they have going for them: liquidity.
To be sure, the bitcoin and pm markets have been looking perky but at the same time not obviously so, as though either the bulls themselves or a small group of them is trying to obfuscate their buying. I continue to interpret as a bit of a tell ahead of the Fed.
Whatever the Fed does, it is bullish for both the precious metals and crypto markets for reasons I won't get into, in this update, but which should nevertheless be obvious if you've followed the economic story. If the Fed cuts more than expected it might even have the perverse effect of boosting stock prices first and more while bitcoin and gold sink.
That's a possible outcome, so I am cautious.
But it is worth mentioning that the perk in the markets looks like discouraged accumulation.
It’s playing out much as expected. I don’t think one can understand why bitcoin has been strong this year without understanding why gold and silver have been strong this year. It’s essentially the dollar story. The US government and the Fed are pursuing policies that are detrimental to the US currency at the best of times, let alone when it is on the cusp of rejection and obsolescence as a reserve currency - whose integrity has become increasingly reliant on the Fed falsifying economic growth and corporate profits via inflation. Gold prices broke out of a three year ascending triangle or a 7 year rounding (or multiple H&S) bottom depending on how you want to look at it. It doesn’t matter. What matters is that the move is good, it is overdue, and the trend has turned up. This is true for bitcoin too. In both cases though, the advance has been rather narrow and strong, so there is room for more correction before the trend really picks up steam.
You can see the bottom in bitcoin corresponded to the bottom of the current trend in gold and silver - all tended to occur in the fourth quarter. What happened in the fourth quarter? The stock markets started to wobble with the major averages almost triggering the popular bear market parameters (a decline of -20% from the top). Soon after that, the push began to ease monetary policy again. The caving of the Trump administration and the abandoning of any resolve - after all, stocks are at record highs again - in reaction to the cracks in economic growth are responsible for the new bull market in alternatives to the US dollar. Although the US dollar has remained aloft, note that its trend is weak, and the trade weighted index is substantially below its highs against the Euro, Yen, and most of the currencies with which it trades. But its break down has been elusive. The bitcoin market blew off a short squeeze to the upside in June that took it to an incredible $13.8k way faster than anyone expected, including us. We got caught up in the gains but remained on top of the short covering, so the subsequent correction has not been all that surprising. What threw me for a loop was the market’s reaction to the political reaction. I thought we were long past the regulatory FUD. But I guess the Libra fiasco nevertheless inflicted a punch in the gut. The psychology of the market has turned weak in the short term as the bulls seem to get pounded on every attempt to get something going. It doesn’t seem like a panicky selling. More like a deliberate punishment. Like someone or group is trying to discourage buyers, or shake out bitcoins from weak hands. The window for that is getting short. The market is well bid, and its fabric is strong. Even though its threat to upend the status quo in banking and finance is very real, any state that actually outlaws it risks becoming irrelevant and obsolete even faster than the banks who control a monopoly on money and banking today. And that assumes it can outlaw it. Yet, as one Congressman put it, soon after Trump’s barrage of anti crypto tweets, “I think there’s no capacity to kill bitcoin. Even the Chinese with their firewall and their extreme intervention in their society could not kill bitcoin.”
But it’s no coincidence that bitcoin’s rise has ignored the alts so far. I have tried to explain. The only source of fresh liquidity at the moment is fleeing - from an overvalued asset class - or the liquidation of one of the malinvestments the Fed’s investment boom produced. These things have been happening in slow motion because they can’t continue when the central banks are withdrawing the source of the illusion of their growth, which, unfortunately, is not productivity or genuine increases in wealth, or real growth. The monetary policy is still tight in that the growth rate in money is still sluggish, at least in the US. It is still on the robust side in the EU. But the growth rate is not growing. It is still trending lower everywhere, and that’s why the politicians are out there pushing the central banks to start cutting interest rates again. Both gold and bitcoin (and now silver) have reacted more or less to the promises made by central bankers on both sides of the Atlantic regarding interest rates. The markets have come to expect a rate cut by the Fed this week with the stock averages regaining record territory on the prospects. Alas, be careful in reading too much into this move, as the fundamentals are poor (that’s why they are considering a cut to begin with), and the market is out in front of the move. That means traders are likely to sell it. If the Fed were to cut rates with the stock market at record highs that’s a good reason alone to buy gold and bitcoin.
But even if it did, what you might be forgetting is that they can’t just cut rates like they did in 2007 or 2001 (remember in both cases it didn’t help anyway), they have to jolt the bulls into action with something like a new QE announcement that really catalyzes a new expansion in money… not just a drop in interest rates.
And that also comes with a lag.
So good luck to them in trying to avoid a more serious liquidation. They will fail. I think the stock market is about to take a big hit because the bulls have called the Fed’s poker hand. By bidding up share prices so much, the best the bulls can hope for is that there will be enough buyers when the traders sell the news.
Most FOMC’s in recent years have been precious metals friendly, and this is no longer news to traders in this market. They too have been bidding up gold and silver prices ahead of the Fed’s decision this week.
It’s all about the Fed because there is nothing else, there really isn’t. Try to look at the market’s fundamentals today without assuming something unreasonable about interest rates going forward. If the first thing you do is assume that the days of 5-10 percent interest rates is behind us you are already proving my point.
Try to make a bullish case without assuming something so stupid. It’s all about the Fed, that’s my point.
On Friday the US government released its advance estimate for second quarter GDP, which came in at an annualized 2.1%. They beat expectations - previously lowered to 1.8% - and the market reacted as though it meant the Fed would put off its rate cut. Gold, silver, and bitcoin sold off, stock markets wilted a little, and the US dollar firmed up as if it were a sign of a strong economy.
But that’s only half the story. Not only was government spending one of the factors that helped surprise the market, so was another secret. And I had to post it on my Facebook wall when I thought of it.
The Atlanta Fed's GDP Now model estimates that Q2 GDP grew just 1.3% (see chart below): "The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2019 is 1.3 percent on July 25, down from 1.6 percent on July 17." Fortunately for Trump, this figure didn't make it into the advance estimate released today, but that is unfortunate for stock bulls because it's the worst of two worlds: the headline number might thwart the rate cut while the reality is slowing faster than expected.
This was only the first estimate of GDP so likely the next few estimates will reflect this weakness, but in the meantime it threw an interesting wrench in the market. Will the Fed interpret economic weakness like we are, and panic, or will it try to defend the strong economy narrative?
The thorn in my side is the US dollar index. All the fundamentals are bearish. The only saving grace for the dollar is that it isn’t backed by the most inflationary central bank. There is no shortage of fodder in the fiat world that would result in a surge in dollar demand.
And yet, we can see that changing. Increasingly gold and bitcoin are the beneficiaries of instability in other fiat currencies. And, while the US dollar is still holding up against other fiat currencies like the Euro, the speculative positions are crowded on the short side of the Euro, and the long side of the USD.
Still, the dollar won’t roll over. And don’t misinterpret that. It is not strong either. It has been sick and lacking momentum for a while now. The only thing it hasn’t done is confirm the breakout in gold, silver and bitcoin by beginning a new bear market leg of its own, like it had in 2017 at least. That is not too puzzling given that the stock bear was postponed while the bulls went to front run the Fed. The US dollar’s f/x rate is highly correlated with the market’s perception of gains in dollar backed financial assets like stocks and bonds.
This weekend a massive short seller appeared to cover on about 20,000 bitcoins on the Bitfinex exchange, based on the data provided by the exchange (see second graph below). As you remember from my update a day or two earlier, I said that kind of thing would be a necessary prerequisite to any meaningful correction.
Indeed, one has started with bitcoin dipping just below $10k yesterday, and for the first time in over a week. A similar event took place on May 16th, i.e., a big short position was covered back then also, in one fell swoop, after the market started breaking up through $8000. It was only ~15,000 bitcoins then worth $84 million.
This time it was almost three times as much!
I was initially puzzled by the fact that the transaction didn’t show up in daily exchange volumes, but thanks to a member, discovered that the exchange allows some transactions to settle off market. If an investor or trader has enough funds in their margin wallet at the exchange they can claim the position by settling the financed portion. In the case of a bitcoin short, the trader has borrowed bitcoin, effectively, and sold it for dollars, so it can claim those dollars (or USDT in some cases) by paying off the loan, perhaps with bitcoin from another wallet or address, or maybe from the exchange wallet, or it can sell those dollars by buying back the previously sold bitcoin on the exchange. Or it can deposit bitcoin from an outside or cold wallet.
At any rate, what I learned from this was that the short seller is likely a single whale or pod of them.
One remaining puzzle is that instead of an inflow of bitcoin into the exchange to “claim” the short position, we saw a net outflow of over 20,000 bitcoin on the same day. Maybe they moved the short to Bitmex!
While studying the data, another thing I noticed that seems to be unique to bitcoin is that there has been a general outflow of bitcoin from the exchanges. This is not true of ETH or Tethers or any other coin. And, what’s more, Bitstamp seems to represent a disproportionate amount of the outflows over the past month.
This in general is a positive sign. It illuminates the scarcity aspect of this asset class. And suggests that it is being accumulated by long term HODL’ers. Whether the short position was liquidated or moved remains a question for me but at BFX it was liquidated. Meanwhile, the market has formed somewhat of a top, with an implied objective back down toward the 8500 area -regardless if it is a symmetrical triangle or H&S top.
If the short position is still floating around out there the market will figure it out quickly and we’ll reverse out of this correction. You’ll know this has happened if we shoot back up over $12k sooner than later.
The break down point in the short term top in this hourly chart is between $10k and $11k, depending on how you want to position the neckline, and which top you think is the legitimate one. In almost any such scenario, the range will be between $10.4k and $10.7k, with the latter number also corresponding to the last lowest high in the 2 week downtrend from $12k.
As of this writing and after posting the graph above, the bulls have recovered the 10.7k level, and are knocking on the $11.5k level, which corresponds with the larger downtrend starting from the $13.8k top.
The exchange data shows the margin spec longs also discouraged so basically both sides of the speculative realm are a bit wary at the moment.
A perfect scenario would have the shorts still over short, but it isn’t the perfect scenario.
The pattern of this resting stop is a bit different than the others, it looks more like one that will stick a little longer. There is the possibility that the new downtrend line - keeping in mind we are talking about the short term hourly charts - will cap the current rally at $11.5k. The formal reversal point for this downtrend though is at $12.4k, the month end high. But even a break through there probably wouldn’t convince me that we’re doing anything other than consolidating under the $13.8k high for a while. The bears have some legitimate angles on this in the short term. Besides looking like a bit of a blow off (parabola) on a short squeeze, they could also trade the downtrend line that is forming from the top, which would mean shorting or selling here for a move to the 8500 area, plus or minus $1k. If there was a time to short this might be one of those times because of how far it’s come. But the market really feels tight so not my favorite play, and if you do it, stay vigilant about the stop losses, probably cut them if we move above 12.4k, unless you’re waiting for the second way to trade from the short side, which would be to wait out the bulls for a rally back up to the $13.8k high.
In this case you’d be betting on a double top scenario with a target down to about 7500 maybe, in a normal market at any rate. On the other hand, as a trader, I’m a buyer below $9500. Given how I see the structure of this market, what I think will happen is that the market pulls back to the $10.5k level and that’s it for now.
Then higher. I don’t see the double top scenario as very likely. Maybe I’m wrong about $10.5k though, and maybe it falls back to 8500 as per the original premise. As an investor, however, I’m all in.
We still have a 20% allocation. That means if you are new and you want to HODL these things, then don’t try to outsmart the market, buy, or start buying. I always recommend buying in stages, averaging in.
Let me reiterate. The odds of lower prices in the short term and of extending the correction are strong.
But for an investor wishing to hold on for another bull market like we had in 2015-17, it could be costly to game an entry point from these levels, as it is already down substantially from its highs in percentage terms.
Mr. X and Rafael covered most of the happenings in the space in yesterday’s report for the crypto vigilante, I have very little to add to that wonderful analysis, but what I do have regards some of the macro trends.
What a violent reversal we have seen in this bitcoin market so far.
The emerging currency has gone through one resistance level after another, starting with the massive trend reversal that you see in my messy chart below back in April (up through $4200). The shorts began to pound on it almost immediately, pushing short levels on the bitfinex up to heights we hadn’t seen since the bottom.
In a Facebook post, I posted the following graph and the comment below it to note that shorting activity is a good sentiment barometer and that big or sustainable corrections don’t usually occur until the shorts give up.
From a trading point of view I'd like to say that the bitcoin leg is stretched and due for a normal correction. But the shorts have been stubborn. They haven't been this active in volumes since BTC was trading in the $5-6k range, and previously, during the final stages of the bear market. Sentiment lags the actual trend. And shorting is no exception. You can see in the graph below a generally inverse correlation in the direction of these trends. The arrows hone in on the period where the shorts give up. Notice that it is only shortly afterward that any kind of noticeable correction can occur. From these heights in the level of shorting activity (on the bitfinex as a proxy), in particular, the shorts have always been squeezed, and have almost always produced higher prices as a result. So while I'd like to see this thing peak out at $11.7k to $12.2k and experience a healthy correction, I don't think we can expect a normal correction (down to $8-9k would be normal) until the shorts throw in the towel like they did at the point of each arrow in the graph below.
There is still a lot of shorting and the alt market has been getting creamed, it has been a bitcoin bonanza more or less for the most part, at least for the last 5000 or so points. Not long after I posted that the price of bitcoin shot up to $14k, which was blamed on a $500 million short squeeze on the CME futures exchange.
Although the market pulled back sharply since then the shorts have hardly retreated, and the market has already begun to bounce again. Does this mean the shorts are driving this train? Not entirely. The future looks bright for this coin, developments are ongoing, the institutions are coming for it, and it's SCARCE!
As of the time of writing the bulls are pushing against the downtrend that started on the liquidation following that blow off. Volumes are light. But there are still plenty of shorts out there to make me sleep tight.
One of the biggest is in the US dollar, which has not been able to find any traction since the bulls last failed to break convincingly up through 98, about a month ago, turning down on the Fed’s very own comments, which totally undermine the economic growth story. There’s no way they should be talking about cutting rates just because of the potential of a slow down in an otherwise robust economy in their narrative. But we know their narrative is not just full of hot air but outright bullshit. You just have to look at the economic data for a few minutes to see it. The US stock market peaked over a year ago, not long after bitcoin did in fact. They are worried about a recession. But they are talking about cutting rates from these low historic levels with the stock market at record highs. Of course the dollar is going to take a hit! Stock prices have also been buoyed by streaming bs from the White House about trade deals that will never happen. Gold has been rallying for longer now. It has been rallying since mid May and really since last July while the USD has been building a wedge of sorts in the longer term charts. Note below it fell through that on the Fed’s comments ahead of last meeting.
In recent days the Fed back tracked a bit on whether the rate cuts will come or when, and as a result we saw the expected bounce in the US dollar (yes that teenie weenie little blip up from 95.15 to 96.50 or so above), a minor $40 correction in gold prices, and renewed weakness in the major US stock market indexes.
As you remember from my last trade update, the gold price has also reversed several of the resistance points that controlled the bear market trend since 2011. Bitcoin isn’t the only bear market trend that reversed.
Gold prices reversed out of a bottom that has been developing since at least 2016. The bulls have been waiting for the right combination of factors. I’ll save a more detailed analysis for the gold stock report we are trying to finish but here’s my quick TA and interpretation of the above trend. The real reveal point was the 2015 high in the prior downtrend. After 2016 the market kept pushing over the 200 week moving average in the chart above, and the shorter moving averages started crossing over. The bears continued to doubt the reversal.
I didn’t mark up the chart because I wrote this in a hurry but suffice to say that the implied objective of the break out above based on plain vanilla classical TA is about $1825 (I think I covered some of this in our last dispatch or trade alert), which is pretty much where the last top was. It could take a year to unfold, nothing goes straight up. My instinct suggests we are going for the $1525 levels right now with a more normal pull back after that perhaps back down to this level or a bit lower when the bulls feel like they have to test a floor.
What these things have in common is that they are anticipating a downturn in the US dollar, and frankly, that is the only thing that Trump has got going for him right now. If the dollar doesn’t turn down, stocks are done.
This is just to say that the macro trends continue to favor a bull market in alternatives to the US dollar.
I never expected bitcoin to get to $14k without first bottoming a bit longer and likewise gold’s move, even though it is a year later than I expected, has surprised me with its strength. Will both of these markets revisit their old highs in the next few months? The backdrop could not be more favorable. The market has not even begun to think about the risk of US government debt. While they pile it on, it is still considered risk free.
But the best part is that you can see them act desperately now. The central bank has no resolve. The administration outright lies about the state of the economy and its trade deals. The bankers and financial regulators are running around with their heads cut off as they now face the same fate that brokers and the media faced when the internet arrived. And, lest we forget, the pre election gong show will ramp up soon.
I promise you bread and circuses for the next ten years!
Okay so things are moving fast right now.
The bitcoin bull wasted no time in hammering the bears and the shorts - who gave it a shot in late April after the first double from the $3k bottom where we absolutely pounded our fists on the table for subscribers to buy - and who are at it again right now. The launch of The Crypto Vigilante was aimed at taking advantage of this bottom all along. Very few were as bullish as we were at the bottom. And very few called that bottom!
I haven’t had a chance to update you at every turn in the bitcoin market, and have left that to our two new super stars. I’m sure they will look after you as well. Right now the bulls are knocking at the $10k level and technically we can say that this is part of a new bull market. Corrections are a natural part of the bull market but the bulls have been successful at squeezing the shorts higher for the moment, making these corrections elusive, which may not be healthy, but it is totally explicable given the imminent launch of a new exchange, and the expected influx of the institutional crowd. Actually they have been coming in for a while now, but the NYSE’s Bakkt exchange and several ETF approvals are expected to bring on a big wave or two this summer.
When the hangover will start, hard to tell. The bulls will say that’s pessimistic. But we’ve been there before.
My call is that we’ll grind a bit here at 10k but that the bulls are determined to blow off to $11 or $12k before any normal sized correction even has a chance. As I write we just saw a run for the $10k wall trip over a big dump back down to under 9700, from which the bulls are coming back tenaciously for the moment. This is the first sign of a dump like that in a week or so but the market is eating it up, and the shorts are overly active, as you can see in the graph below on just one exchange. Basically they’ve been shorting the last $3000 points.
The break above the $8-9k level triggered a lot of long term buy signals, which is also playing itself out in the trade. Some things could conspire to break the back of the bull prematurely, including any trip ups in the tech, any unforeseen hacks, or well timed regulatory lobs. But those really would just be buying opportunities at this point. Right now I don’t see a break until the bears give up trying to short this thing, and bullish sentiment rings an extreme overbought bell of some kind. I would not recommend shorting bitcoin too much as it is also quite a play on scarcity. When they come, the doorway is very narrow, and it causes quite a mess.
You have to wait until everyone is in the hallway past the doorway and there is no more room to get in! IMO.
There are just too many possible scenarios looking forward in my mind to list and analyze here. But suffice it to say that corrections aside I’m bullish on this market now until I say otherwise. My gold price target is up at the $5k area by 2022. My target on bitcoin over this three year period is somewhere between $50 and $100k.
That’s assuming I don’t change my mind about which is the real bitcoin by then 🙂
Just a brief comment on the bitcoin market from me today, as a lot of it is covered by Rafael and Mr. X in this newsletter, and the new Crypto Vigilante. After a short bout of profit taking at a key resistance range - between 7500 and 8500 - where I thought the market might consolidate sideways for a while in respect of the significance of the level, the bulls have lift off again.
The significance of that range was that it marked the classical technical turning point in the previous bear market, i.e., the range of highs that represented the last lowest highs in the post 2018 downtrend. The early indication occurred at 6400 but the 8400 level is decisive in terms of that specific downtrend. I am encouraged that the bulls tested each of those levels, subsequent to breaking past them, before proceeding higher. It is also bullish that the bearish patterns are resolving to the bullish side.
That is, bearish failures are appearing. Think of it like a poker game. The charts paint a nice top, but then the bulls blow through it, they basically sucked you out of the market with a bearish pattern. That’s one reason technical analysts wait until the pattern confirms with a breakout one way or another before they make a judgment call. The reason it’s worth mentioning is that I noticed a similar pattern develop when the bear market started in 2018, except in reverse. The bullish patterns would fail. The bulls have big momentum now as anticipation builds about the launch of the new US crypto futures exchange (Bakkt) and the entry of the institutional crowd into the market altogether. I mean, every day there’s news of a new idea emerging and new capital being formed in the sector, with the players coming from Wall Street. Regulators like Sherman or hypocrites like Dimon are putting on a show in my opinion. But even if they weren’t they won’t be able to stop this train now. And if they do, it will take the economy down with it. So what does it all mean? Does it mean that the 16 month bear market ended? Probably. Does it mean a new bull market has begun? Maybe. Does it mean we can’t have a new bear market develop if the fundamentals don’t work as expected? Of course not.
But barring any totally unexpected surprises — like an economic, geopolitical or liquidity event that we do not foresee right now — I think we can call it a new bull market. No doubt a correction lasting a few months is due, but this leg looks set to target the $10-12k range in the summer first. Don’t forget what drove this market to its heights in 2017 at ~$20k: i.e., it was the launch of bitcoin futures trading on the US exchanges in Chicago.
But don’t forget about the hangover, which came because of several reasons, but one of them was definitely the fact that futures trading in bitcoin didn’t take off in the US as fast as was expected. Sure we could relate that to the fundamental problems that plagued bitcoin at the time (high transaction fees and long wait times), but however you want to interpret that top, the futures launches had a role, sort of like a sell the news event.
Likely the same will occur here. I don’t know how high we’ll go but the trade will remain largely bullish, but for a hiccup or two I’m sure, through the summer months, and will likely begin once trading begins on Bakkt.
Okay, now, this time could be different! Or maybe not.
Surely it’ll be a bit different, and I definitely cannot tell you where the peak will be at this time... not yet. But we will try to identify it when we get there.
In bitcoin’s case, I was hesitant to mark the TA as bullish because the evidence suggests that leg has more or less completed, and is ready to turn bearish in the short to intermediate term, along with the US currency f/x.
On the other hand, although I marked sentiment in gold and bitcoin as bullish, the longer term structure of the market is bearish, which plays into the bullish side of the equation outside of the short term at least.
The most we can say at the moment is that the bear market has technically ended, and that there is the potential for a safe haven run in the years ahead as pressures on the economy and the banking system resurface. Indeed, I expect the next big wave to come not from the growth in money supply or hyperinflation, which is inevitable, but from a fear of collapse in the banks first.
The bear market in stocks to that extent can be considered a driver of sorts.
So here at TCV and TDV we agree about a few things. We agree about the failing fiat systems and the rise of cryptocurrencies, and we all agree that in years prices will be much higher.
From there it gets more complicated. We all may have different short term views. And sometimes one of us will be on a roll while another is missing the mark. It isn’t easy to always be right in the business of speculating about the future. In general, my advice, if you are not trading, is to stick to the portfolio that will be re-created for TCV from the one we did for TDV.
Mr. X, Rafael, and to some extent myself will give you our thoughts and views on the trends and other TA. My short term outlook for now is flashing red. Following the break out above the upper channel in the downtrend below, the market stopped rallying at just about the last lowest high that occurred in the previous downtrend (before a lower low was made) - $8475 - which in my TA framework would have signaled a primary reversal more definitely than the break out past the downtrend line below. The dump to $6100 occurred too quickly, however, so I’m not too surprised it has recovered just as quickly, but I do see this action suggesting either a short term top or consolidation of some sort. Personally, I’d like to see a healthy drift back to the low $5k’s again before the next up leg, but it seems more likely that a consolidation (sideways of some kind) between $6k and $8k will manifest as a coiling before the break out this summer on the approval of Bakkt or one of the ETF’s, signaling the next influx of Wall St.
That consolidation may end up being the right shoulder of a massive 1 year long bottom by the time the break up happens. But this assumes my scenario works out. It could be instead that we are seeing a short term top that will produce another buying opportunity in the $3k to $4k area.
At this point that seems unlikely but possible. Another possibility that i don’t think is likely but I could be wrong is that the market continues. The $8500 level (Bitstamp) is key as far as a new bull market occurs because it is indisputably the last lowest high in the decline.
I don’t want to spend too much time on bitcoin because everyone else is going to have something to say about it today, and I want to delve into the status of a broader economic and stock analysis. Bitcoin shot up almost $1k in the last few days to over $5k at the time of writing with many cryptos also doing well in a fairly broad advance. I have written much about bitcoin’s bear market prognosis during its decline.
I’m still looking for a bigger bottom to complete this year before a new bull market springs into action but this move is more or less as expected. Going into bitcon’s decline, I was increasing our long term allocation to the emerging segment. First to 15% in September, prematurely, at around the $6k level. Previously I had stopped recommending buying on the way up after it went up through $5k and I only shorted it from $17k down to about $6k. We only had a 10% allocation going into the advance. I increased the TDV allocation a second time in late November as it sank through the low end of my probability adjusted bear market target of between $3800 and $4200, more widely publicized as $3-5k. The long term TDV allocation is now 20%.
As a matter of fact, we have brought in some very talented young analysts and industry professionals to take on the task of managing that allocation, which means rewriting it for you too. I have personally been working with them both for almost a year now and I can tell you they are more than capable, and are going to make us all a lot of money in that allocation when the bull market returns, if it isn’t coming alive already.
Let me point out that not everyone will draw trend lines the same as me. Most people will try to connect the recent highs to the ones at the top. But that’s not how it works. You have to discover the trend, which is usually delineated by the most recent series of highs -because the slope of the downtrend changes. Besides, the original move down to ~$10k in January 2018 was just a liquidation from the previous Dec-Jan top.
That is, the down trend hadn’t begun yet at that point.
Consequently, based on the chart above, it is important to note that the general bear market parameters are still in place. The classical TA objective of that triangle bottom that you see in the chart above is $5,823 but it is already running into resistance from the downtrend line that I have discovered, and is likely to pull back and retrace a bit to shake some of that newfound bullish conviction before completing its objective.
Even so, that would not signal a bull market, and I’m still looking for more bottoming, perhaps for a real bull market signal by the late summer, or early fall. From a trading point of view I’d like to say take profits, BUT it seems like that is the go-to reaction yet prices continue to stay firm as though something was afoot.
If you’re trading, take partial profits for sure, but might be worthwhile to ride the rest a bit more.
Buying Panics and Inflation Hedges
In every sense, bitcoin is becoming what stocks still are, a way to protect one’s assets from the effects of the inflationary confiscations. People have long bought stocks, commodities, jewellery, real estate and the precious metals as hedges against this draconian government policy. It’s true that Wall Street happens to be the playground of many participants that have largely been co opted into “the system”, i.e., and cryptos or gold tend to define a whole other set of participants the majority of whom prefer to be out of the system.
Bitcoin Trade Update: Here Comes A Pop?
Bitcoin prices looked set to test support at the $3650-3750 area within the 4 month symmetrical triangle formation I've drawn in the chart below, which has seen sentiment swing from ‘too bearish’ in late December to ‘too bullish’ by the time our conference ended in February. This is a development that I didn’t anticipate. I expected sentiment to remain largely bearish, which would give me more confidence that the triangle will provide a solid bottom. I would like to see more surrender in sentiment again before a break out to be honest. But I have to admit that the action in the market looks solid for a break and run to $5k.
More broadly the sentiment and psychology is still largely pessimistic, complacent, or confused.
I like buying it here and if it goes lower I will hope to buy it lower. I believe these prices are at the low end of what they will be in a few years so I don’t mind accumulating more, at least up to 20% of our allocation.
TA / BTC Update
Just a small short term warning about bitcoin's sentiment. Unfortunately, sentiment metrics like this don't give us any signals about magnitudes of the movements, and sentiment might easily get bearish again (which we prefer as buyers) without much of a move down in price. It could correct on as little as a $50 dip in price if it lasts long enough, or as much as $1k.
But for now BTC has been consolidating in a more or less neutral triangle in the chart, with a bullish bias in the action, and the OBV lines.
But mind those ST support levels between 3650 and 3750.
BTC TA, and Update
An observation about the latest plunge in bitcoin prices. I’m not sure what it means yet. Obviously it suggests a long liquidation though, since, at least according to the bitfinex data, the shorts did a lot of covering in the days leading up to the breakdown from the triangle (see below), or what previously looked like a developing head & shoulders bottom, as per my Facebook post just before the latest plunge. See the chart and the post reproduced in the text box below. Note by comparing it with bitfinex short activity on the following page how the “right shoulder” noted in the first chart below was driven by a short covering.
The selling since this post may have been related to subsequent news about the 51% attack on ETC Classic. But then, it could have been anything, including just a test of support levels.
As I pointed out in the Facebook post, the pattern that appears to be developing isn’t necessarily the one that will develop, which is why it is important to wait for confirmations when your trading breakouts.
From January 8th: In classical technical analysis, this "formation" (see chart below) is nothing until the breakout confirms it, positively. From the point of view of practicing TA it is advisable to avoid anticipating the development of a formation until the confirmation. What we can say with some validity at the moment is that the most important pivotal point in the recent decline is the late November high at $4488 (bitfinex) representing the last lowest high in the intermediate down trend. If the bears are going to remain in control of the intermediate and short term sequences then they have to keep a lid on the market at this point. Otherwise, it is a trend turner for the bulls. If the bulls can get the market through the December $4400 high they will be confirming the formation of a relatively textbook if not slightly downward sloping head & shoulders bottom with the green lines converging on a neckline of sorts. Or it could be a triangle with a steeper slope for the higher lows than the lower highs. Either way it is a 5-6 week consolidation that has coiled and is probably ready for a move in either direction. A failure of the late December low (i.e., right shoulder?) at $3700 ish would signal a $1k move down to the $2690 level while a breakout past $4400 would suggest at least a bear market rally back up to the $5500 level, plus or minus. The bias is bullish in the TA so far, and I still hold to my view that this latter situation will occur, but will also be followed by a return to these levels in the months ahead before the primary bottom is put in for the next bull market. One take away from this analysis is not to hurry into the market if it rallies, maybe take some profits on anything you bought lower, and then continue to dollar cost average into the TDV crypto portfolio on weakness. We are very close to launching a new product for investors. Stay tuned!
In the TA above I said that a break below December’s low could trigger a $1k slide to $2690 or so.
A few days later, on Jan 13, bitcoin slid to $3570, breaking through the December low after a few days of struggling with it. It’s hard to see in the chart below as I’ve overlain it with a chart depicting short activity.
The market is at $3650 at the time of writing, after a small bounce to $3800, hence it is sagging below that December low right now. The implication of the failure at $3657 is the aforementioned $2690 target price.
And yet, I’m still not convinced it will go there.
I’m still not convinced this was a real break down. Sentiment is just too bearish. It’s possible though, and if you are trading it, I would stick to what the chart is telling you, short the damn thing for a $1k decline.
If for no other reason than the fact that the short covering did nothing for the price.
But still, I don’t trust it enough to recommend the trade, and I would much rather buy this weakness for the long term, as per the expanded allocation that we have been beating the drums about down here.