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Weekly: March Madness
The expected 25 basis points; bitcoin unfazed by crypto crackdowns; a year-end target
STRATEGY: Bitcoin is unfazed by the Fed’s hawkish attempts and the recent SEC news and is notably trading more like gold than equities in this environment. While the Fed remains “open” to hikes, the bond market has pushed back. Bonds signal cuts, and bitcoin and gold are rallying. The next weeks will be crucial. Continue to buy dips with an eye on the 200D moving average for support, now over $20,000. I offer my year-end target at the end of this note (hint: $48,000). This strategy is supported by:
A strong reminder of the willing backstops provided by both fiscal and monetary groups, highlighting core tenets of bitcoin’s investment theses: 1) continued policy willingness to spend versus verifiable scarcity, 2) banking counterparty risk versus on-chain transparency, ad 3) the ability to “be your own bank”
The likely end of tightening, given continued disinflation and now worries around regional banks
Digital asset price resilience through equity volatility: bitcoin has reached $28.5k, up 67% YTD
A resilient US consumer, disinflationary trends, a robust labor market, and decent equity earnings as a “good enough” foundation for risk assets after an incredibly tough year. GDPnow estimates ~3.2% for Q1.
The still-likely October as the cycle low in equities, and what a better equity market means for digital asset relative value
The systematic signal of price > 200D moving average, now $20,094
Continued strength in underlying fundamentals. I’ve recently discussed bitcoin holding trends, non-zero addresses, and active address growth for Bitcoin and Ethereum
Risks to this strategy include:
New highs in interest rates and yields - reducing risk appetite (do not foresee this)
Regulatory crackdown on bitcoin specifically (do note that cleaning up the last of the wild-west is necessary, and even improve bitcoin’s relative value versus alts. I also do not foresee negative bitcoin specific regulation)
3/24/2023 Strategy Note
Wow - where do I begin? The highly anticipated March Fed meeting is finally behind us, and bitcoin is rallying even as the crypto “industry” faces further crackdowns. Equities have whipsawed, but bitcoin is unfazed, trading more like gold in this environment.
March Madness + the Ides of March. This month has certainly brought volatility and naturally, calls for economic “crisis.”
But give me a break. The SVB fallout was self-inflicted - a greedy search for yield at the wrong time. Most other banks do not have duration mismatches, despite what the fearmongers want you to think. Of course - panic led to some bank runs (FRB) and that is always a risk in any market. But just because the fear-trade makes money (see short regionals (KRE), or long DB CDS right before the weekend, for example) - doesn’t mean the world is going to end.
Either way - fear and panic has ensued (information flows quickly these days), and both monetary and fiscal groups have been so quick to backstop the situation. Growing willingness to spend? Yes!
Bitcoin has benefitted from the uproar and uncertainties around these banks and deposits as I discussed last week. Another great awareness moment that of course, the government isn’t too happy about. A banking crisis and bitcoin is up 67% YTD.
In other news, while the Fed hiked the expected 25 basis points, they kept the door open for further hikes down the road. The idea is that the banking situation is not systemic - and the focus remains on “fighting” inflation (which has worked). Remember - the Fed won’t show their cards - discussing a possible pivot, is in fact, a pivot in itself.
“Rate cuts are not in my base case” is how Powell ended the presser. Well, the bond market thinks otherwise, expecting at least 1 cut by July, and 4 by the end of the year:
And consider my usual “the bond market bullies the Fed” - the 2yr is now well below the Fed Funds Rate:
I believe true Fed policy will end somewhere in the middle: I don’t foresee “crisis cut” but the disinflationary trend that continues to occur is unlikely to warrant a 5% Fed funds rate by the end of the year.
Regardless - bitcoin’s correlation with gold has risen, with the two benefiting from expectations of rate cuts:
I welcome the decoupling versus equities and towards gold in this environment - given that it, alongside DXY weakness, signals the Fed is likely done with rate hikes. As usual, intermarket analysis shows the way.
As I discuss next, the “crypto crackdown” has yet to impact price, while also increases the relative attractiveness of bitcoin within the digital asset ecosystem. Remember - bitcoin is the cleanest digital asset exposure in regards to regulation, notably deemed a commodity by many (and the current) SEC chair(s), and thus, has the least risk of being labeled a “security.”
The Crypto Crackdown Continues
Along with the “Operation Choke Point 2.0” type of work going on with both banks and on-ramps, the SEC continues their crackdown, most recently:
Stablecoin issuer Paxos and BUSD, security offering
Kraken exchange’s staking-as-a-service as a security offering
Terra Luna’s Do Kwon, fraud
Sushi Dao, they offered no public comment
Justin Sun, securities offerings TRON, BTT
Several celebrities, related to promotions
And now, a Wells notice to the leading, household-name & exchange, Coinbase, related to staking services.
A bad headline, not great on perception, but of course, there’s more to it. Many have seen this coming given the Kraken situation - and even so, Coinbase is probably best positioned to fight the good fight. There are better follows in relation to news in this regard - but my role here is about price action.
Newsflash - there was none. Bitcoin moved higher, and ether even outperformed on the margin. Importantly, bitcoin dominance continues to trend higher, now ~47%, as it should in an uncertain digital asset environment (uncertainty around altcoin regulations) - remember, bitcoin is the “safe-haven” within digital assets.
Updated bitcoin technicals chart:
Going forward, monitor the $28,500 resistance - a close and follow through ABOVE would indicate continuation. Know that the rally is relatively extended - but that is natural for bitcoin. Still, very little opportunity to buy the dip - next week, I’ll offer an easy way to do so.
Importantly for long-term investors, bitcoin is above its 200D moving average (I discuss further below), which is more than enough to remain positive going forward.
So, I promised a year-end target - even in this uncertain environment, I feel it will help my readers quantify my “strategy.” When conditions warrant a change, I will change my target. If the target is achieved earlier than year-end, I will update it. This is all supported by my comments and perspectives written in each and every weekly note.
I believe bitcoin will reach $48,000 by year-end. I reach this number quantitatively through both a realized price “multiple” - alongside with some technicals that happen to coincide with previous breakdown points.
Following the 2018 bear market, realized price (average on-chain cost basis, which grows from inflows and declines from outflows) grew 22% - during a period in which it was much less clear that bitcoin is here to stay.
Let’s round down to 20%. This would bring realized price from today’s $19,949 to ~$24,000
In this environment (the end of tightening / eventual rise in M2 as a result, the growing understanding that bitcoin is here to stay, rising retail education and institutional interest, and the growing need to “be your own bank”) I believe bitcoin should be worth around 2x it’s fair value - a level that was achieved throughout much of 2020, 2021, and even parts of 2022. Note that the current MVRV is 1.4x:
This also coincides with technicals - as we remember, bitcoin retraced 61.8% from the 2018 bear market to the June 2019 rally high (shown in the technicals chart above). $48,000 also happens to be the price in which bitcoin rolled over from the 200D rejection in March, just prior to the true breakdown that begin after the May 4th FOMC meeting and the collapse of Luna/UST shortly thereafter.
Is the target perfect? No, but are any? While there are no DCFs, sum of the parts, or similar analysis possible, to me, an assessment of the market environment, an MVRV multiple as described above, and a technical retracement is enough to serve as a guide for the rest of the year.
Of course, similar to equity or index estimates - the target is sensitive to the multiple. Here’s a scenario analysis of possibilities:
A 2x MVRV (consider market peaks historically are at 4, 5x multiples), even with 0% realized cap growth would bring us to ~$40,000 - the Luna/UST breakdown level.
Remember, bottoms are often 1x multiples, sometimes below - which serves as downside protection. Remember - nothing goes up in a straight line.
The risks to this target are the same risks to my strategy conclusions:
New highs in interest rates and yields - reducing risk appetite.
Regulatory crackdown on bitcoin specifically (do note that cleaning up the last of the wild-west is necessary, and even improve bitcoin’s relative value versus “alts”).
AND don’t forget the 200D moving average strategy, in which bitcoin is now 40% higher from the signal given on 1/13/2023.
We can identify 17 occurrences when bitcoin’s price flipped above or below the 200D moving average, illustrating a robust signal for long-term trend following.
Joe Orsini, CFA, CMT
Disclosure: This blog is for educational use only and is not to be construed as financial advice. Please consult a financial advisor. This serves as a diary of my personal macro and digital asset viewpoints and strategies, which may change without notice. All data is perceived to be accurate, Please do your own research. Educational use only.
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