Bitcoin Market Update | Week 33 – August 25, 2021
Last week we identified the makings of a supply crunch that will be playing out in the next few weeks and months, barring any unforeseen market developments.
As of today, the price of Bitcoin continues to range in the 45-50K region as long-term holders and the DCA army continues to accumulate Bitcoin. This accumulation will continue until demand exceeds the supply of Bitcoins up for sale at this price range.
I was expecting to see a momentary dip below $45K, an excellent potential buy-the-dip opportunity with a limit order or two but hopes of discounted Bitcoin were dashed this morning by a $1B purchase from Coinbase early this morning.
As there’s little to no news on the market front, we’ll use this week’s update to explore what we can expect over the next several months. We’ll also reference Bitcoin’s performance at various points in historical market cycles to anticipate upcoming scenarios.
Confidence Strengthens with Infrastructure Bill
Congress passed the $1 Trillion infrastructure bill two weeks ago, and Democrats have votes needed for an additional $3.5 Trillion. In the final moments of the Senate vote, there was debate over the language used in an amendment intended to set new regulatory standards on tax reporting of exchanges. Unfortunately, the amendment included language that was frankly embarrassing to anyone with even a basic knowledge of cryptocurrencies. It mandated that wallet providers and software developers are ‘brokers’ and therefore required to report on taxable events of their end-users.
Efforts by Senators Lummis, Wyden, and Toomey to pass an amendment with more precise regulatory language failed to garner unanimous consent after outgoing Senator Richard Shelby objected. Shelby intended to add $50B to defense spending, which was sure to be met with resistance from the Democratic leadership. Toomey and Cruz rejected Shelby’s request. Ultimately, the Senate passed the bill with problematic regulatory language. Several Senators vowed to re-visit the issue when they return to session in the fall and before any 2021 tax reporting.
It’s no surprise that Congress is struggling to understand this new emerging financial system. It’s was also not surprising that not a single senator or congressional leader advocated for punitive legislation that could hurt Bitcoin and other digital assets. Instead, surprising some, Sen. Ted Cruz offered his full-throated support of the crypto industry, exalting the benefits to the American economy and, by extension, the American people.
The key takeaway from last week’s events in Congress is that Bitcoin is entering a new era of acceptance by the US political establishment. Bitcoin’s favorable treatment should serve as a sign of things to come with several issues on the table, including SEC approval of an ETF. It’s not a matter of if but when the SEC approves a Bitcoin ETF.
Congress’s dovish view of Bitcoin is a stark contrast to their treatment of Facebook’s Libra project, which was met with outright hostility when hearings were held in October 2019.
Many crypto investors remain hopeful that Congress will take a thoughtful approach to crypto-focused legislation while the most risk-averse investors will remain on the sideline seeking regulatory clarity.
Current Key Market Indicators
As we continue to progress through this mid-cycle corrective phase, there are two indicators I’m looking at that will inform how the market structure has changed in this 2021 cycle.
The mid-cycle correction was put to an end by Long Term Holders (LTHers). LTHers have completed their purchase of the Bitcoins made available after the May 19 liquidation event, these Bitcoins are now off the exchanges making them unavailable to Short Term Holders (STHers) or traders. We saw this pattern play out in 2016 and 2020 before the rapid price appreciation of Bitcoin in 2017 and 2021 and we’re seeing it play out at a much more aggressive pace right now.
Exchange Supply Balances
We’re approaching ATLs (all-time lows) of Bitcoin supply on the major exchanges. As a result, we can expect the price to bid up dramatically as we enter unchartered territory. Price will bid up until short-term holders are shaken out, and long-term holders capitulate.
Bitcoin Dominance measures the amount of market capitalization represented by Bitcoin compared to all other altcoins combined. When digital asset investors flee risk, they move into Bitcoin or stablecoins. Whenever Bitcoin Dominance increases, so does the price which induces FOMO which adds fuel to the run-up. This was last seen at the end of the 2017 cycle.
It’s yet to be seen if this cycle is different so we’ll be keeping a close eye on this metric.
Even though we may see altcoins outperforming Bitcoin on shorter timeframes, the trend continues to show that altcoins lose value against Bitcoin. Put another way, an investment in Bitcoin will perform better than altcoin investments for long-term investors.
We’re monitoring several other metrics that strengthen confidence that Bitcoin will trade hands for over $100K at some point in the next several months.
I’m continuing to DCA and take advantage of buying dips. We can expect to see several minor corrections, likely 10-30% between now and the 100K milestone.