THE MOST DETAILED MULTI-FACTOR CRYPTO MARKET ANALYSIS[2020-2021]Market Guidance 2020-2021 Edition 2: Bitcoin as a credit cycle indicator- Is Bitcoin in fact, a safe-haven asset?
Giving my intuition on expected long & short term future returns, and answering why the sell-off happened last week.
If you stare at a chart long enough, suddenly it all makes sense . Abstract for any that don't have the time or understanding to read fully. I have to say soo much more, but the format, for now, is condensed and made as short as possible. I understand that it's a complex chart, but I attempted to simplify it as much as possible. If you've lost plenty while trading or investing in cryptos, and even if you've made sizeable returns, I highly recommend this brutally honest read. Announcement at the end. Happy weekend everyone!
_________________________________________________________________________________
Abstract
The current crypto market state analysed based on four perspectives: fundamental, macro, behavioural and technical . Interesting correlation was found between investment grade and fintech ETFs to bitcoin . Moreover, bitcoins' high volatility correlation to market volatility, in fact debunks the myth that bitcoin is a safe-haven asset . The last sections involves the long-term monetary policy effect on future expected returns in cryptos and the four types of investors interested in cryptos. As there is a considerably high probability that we might be stuck at the zero-lower bound in rates, even negative in the long term, bitcoin can provide diversification benifits in certain portfolios.
_________________________________________________________________________________
Analysis
Nowadays, I rarely post about cryptos, hence this time I really dug deep into all the factors: fundamentals, behavioural finance side, monetary policy correlation, macro shock factors(volatility) and of course technicals. Let's get on going with the fundamentals first.
Surprisingly to me, bitcoin has an extremely large correlation to investment-grade(IG) bond(LQD, left chart) and fintech ETFs(FINX, right chart). Logically at first, I thought bitcoin should have a correlation to commodities (limited supply) and while there is a correlation, it simply doesn't explain well all the movements. Yes, you can describe bitcoin as a digital commodity(not gold, more like silver atm), but the way I view bitcoin/cryptos after designing this chart, is that as an asset class it, behaves more like a levered investment in a high growth fintech stock. But why is there a correlation? - The simple answer is, it's because of investor preferences. Outside the fintech/computer science community, not many agents are knowledgable or care enough about to invest in cryptos. Obviously, these investors work for companies within the named tech-intensive sectors that largely compose LQD and FINX(www.globalxetfs.com). Here's where the fun begins. In many of the IG ETF's such as LQD, there's plenty of junk hidden inside their structure(50% of LQD is rated BBB, for the sake of chasing yields-https://www.ishares.com/us/literature/fact-sheet/lqd-ishares-iboxx-investment-grade-corporate-bond-etf-fund-fact-sheet-en-us.pdf). And a good portion of BBB rated bonds, are still within sectors such as energy and materials(commodities)- and we all know how XLE has performed so far in 2020. The rest of the correlation is explained by movements in high growth zombie tech companies. Other fundamental factors worthy of mentioning that affect bitcoins price are oil prices and electricity prices (substitution effect), GPU prices(affected by precious metals), etc etc.
Now onto the macro side of things and the recent broad market shock. Obviously, at this point, we're all very aware of the negative impact of the virus. Moreover to the fundamental point of view, many companies within LQD and FINX are at risk of their debt being downgraded or at worst entering a death spiral . Put yourself in the shoes of a fintech employee; if your company isn't doing well, and your position isn't guaranteed in the future, are you going to keep stocking up on "cheap cryptos" ? Of course not! In fact, most would trim down on their exposure . Essentially, this is what happened last week during the large drop once people got asked to work from home and others that unfortunately got laid-off. This is the basic intuition behind the notion that bitcoin works as a credit cycle indicator appears. What scares me is the number of stock options that these "silicon valley" types of companies use as compensations, that can further exaggerate the negative momentum as seen from the VIX(Right chart) .
In principle, as long as volatility is controlled and in bearable amount, it benefits bitcoin. It attracts the trading type of investors that bring additional liquidity to the table(behavioural list below). But not if the volatility is five or more standard deviations above normal. Recent sell-off shock came around close to 8 std.deviations! Now that they're doing their job in the US (finally doing tests) we should see this volatility uptrend to continue. No doubt, the next two earnings seasons for Q1-Q2 will be massacres.
Clearly there's a correlation between Bitcoin and SPX volatility.
Look no further. This chart shows that there are more than enough evidence to debunk the myth that bitcoin is a safe-heaven asset in the short-term. Multi-asset class correlation happens in such large volatility moves, mainly because of large number of fund redemptions- basically flight for cash to fulfil short-term liquidity needs . From the charts above and the thorough technicals, in the short-term, there's a high probability that we will at least have a double bottom pattern in bitcoin. As the long-term bullish trend(right chart), as well as the 50 monthly SMA that served as a support at the end of 2018, are barely holding- by my assessment we are about to enter into a crypto bear-market! This brings me to my last two points, the behavioural side of crypto investing and long-term expected returns in cryptos. In principle, there are four types of crypto investors whos biases I won't discuss in this read. Here's my behavioural framework .
Now since I described why the sell-off occurred last week, the question is who bought the dip? - The macro guys/portfolio managers driven by the recent monetary policy moves from central banks globally. This is where I introduce my long-term viewpoint. Unless there are technological or regulatory disruptors , cryptocurrencies as an asset class should yield above-average returns as long as we're close to the zero lower bound in rates, and even negative rates. Won't discuss how low rates affect bitcoin/growth stocks since I think the answer is quite obvious. Essentially, you can clearly see how deeply affected bitcoin is by the policy path that the FED takes(Bottom-Left chart) . There are many solid arguments that rates will stay close to zero for the foreseeable future- the Japanification process/scenario .
But as per usual, the macro guys are too early this time too at least in my opinion. If you can bear -50-75% losses in case bitcoin drops below 3000, then you are well of to a very prospective portfolio for the future. On the flip side, if we break above the monthly Ichimoku cloud again + break the downtrend, this could be a great bullish breakout entrance point.
________________________________________________________________________________________
Conclusion
A long and extensive idea, but what do all these factors summarize to? In my perspective, the crypto asset class is still in its initial growth phase, still very immature. The crypto run in the last few years is very comparable to the 1848-1855 gold rush and the '90s .com bubble(www.youtube.com). Realistically speaking, it took two recessions(00's, 08-09) for the tech sector from the '90s to filter out the unproductive zombie companies, for the sector to mature . This is an inevitable stage in every innovation cycle. A similar industry to cryptos is the streaming industry, and likewise, I'd argue based on the cash burn rate that even Netflix is in the same cycle stage as bitcoin.
Therefore, I still hold the opinion that the crypto asset class is immature and frankly, not investable at this point. I've laid the conditions based on which you can find a purpose of cryptos in your portfolio. Generally, most of the diversification benefits should come from by combining cryptos with the retail/cons. discretionary sectors. Finally, in case we do get many gov. bail-outs funded by tax money during the next economic downfall, I could see this as a strong argument for owning cryptos. As central banks balance sheets expand(fred.stlouisfed.org), the value of fiat is driven lower, which leads to an appreciation of all assets, especially currency substitutes(gold, cryptos).
Short-Term: Bearish Bias (Target range 1000-2000)
Long-Term: Bullish Bias (Target range 100 000+)
Portfolio diversification if bitcoin is not owned in combination with fintech/XLK companies.
This is it for the current state of the crypto market . I'd appreciate any and all feedback, questions, discussions in the comments . Don't forget to support my work if you find any of my ideas useful. For every new and all my current followers, make sure to send me a private message in case you want a preview of my next idea related to gold.
Currently, I am working on a set-up to migrate to my own website. Most likely will take a year or two to get to a satisfactory stage, but I will keep everyone interested in my work informed. Thank you for all the support!
Previous and relevant idea on the timing of the next economic downturn
-Step_ahead_ofthemarket
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well-informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details , every thumbs up and follow is greatly appreciated!
Disclosure : This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
