Bitcoin price considerations — Legitimate Demand or Ponzi 2.0?
This is a continuation of a series of articles I published on bitcoin price, the latest of which you can find here.
Unfortunately, I had a brief stint in the hospital for something I could not put up for longer and also a busy time at work, so I have simply not had the time to give a proper update before and even this one will just mention the most important considerations in my view.
Brief review of where we are in terms of price
You will remember that I had three possible scenarios for the price of bitcoin in my last article. By now it is abundantly clear that we are firmly in scenario A. IF (huge if) this is a legitimate market, we have indeed bottomed and once there is a dip and any lower support (10k, 7.5k, 6k) holds, I would personally be happy to be long bitcoin again. That is also the way I would “play” this move. The impulse to the upside from breaking $6k was simply so strong and so “non-stop” that it cries out loud for a correction, though it also means most people will not have caught the move.
As you will know from my previous posts, I try to avoid FOMO at all time, so I am not chasing price. I have no issues with bitcoin going back to $20k without me in it. As long as I do not make a mistake when I take the position, I don’t really care about the price. To me, the game plan (as for long positions) is simple and has been the same all along. Once a bottom has formed, I wait for the end of the impulse that follows and I see if it can hold any lower support levels and then break to new highs. In practice, I am looking for something like the blue square on the chart below, but on a larger scale:
What you can see here is a parabolic uptrend that got broken at the beginning of June, a drop to a support level below, a short bottoming and then a move above the prior top. I personally took a very short-term long at this break out, but nothing to write home about (and I closed it quickly).
Anyways, this is the simple, but effective methodology I use to go back into the market after a long bear market. The highlighted area (for me personally), was just too short and too small in terms of correction to take it seriously. At some point (I have no idea when), bitcoin will see a c. 30%+ correction. If and when that coincides with one of the stronger support levels (say $7.5k) and then breaks the previous high of the move, I would be comfortable in a long. So now you know what my personal game plan is, let’s look at what I find much more important about this move.
Is this move a legitimate market move or is it a manipulated move driven by one single entity or a group of coordinating traders?
There are quite a few people better placed for exchange order analytics than myself, so I will not be able to give the full picture here. However, for someone with c. 20 years of public market experience like myself, the current move feels “empty”. Remember that I was a happy participant in the bubble to $20k, because it felt like the .com bubble and I was able to get out (and even short) at a reasonable time due to that same experience. Experience is one of the strongest ingredients to long-term trading success in my view, so I never take it lightly when my “feeling” tells me something different from what I see, given that this “feeling” is nothing else than my body’s chosen outlet for the sum of my experiences. So given I am very skeptical of the move that occurred since April 25th, 2019, it makes sense for me to look at a few indications of what is going on:
Bitcoin USDT vs Bitcoin USD premium
This is basically the difference in price between Bitstamp (one of only two (!) likely fully legitimate exchanges that are full USD on-ramps) and Bitfinex for bitcoin. Bitfinex obviously is a fully-illegitimate (opinion!) tether exchange.
On the chart above, in the lowest panel, you can see the tether premium. When these bars are positive, it means that the price for bitcoin is higher in USDT than in USD. As long as people see these as perfect substitutes (ie believe that tether is fully backed and won’t disappear), this should be close to zero. After the NY attorney general publicized its action against Ifinex and Tether, alleging (amongst other things) that they speculated with customer funds (duh), you can see this premium spiked massively. This is due to tether holders running for the exits via btc buying btc on tether exchanges while there is no follow up demand on actual USD exchanges.
Then something peculiar happened — while it becomes easier and easier to see what tether did with the funds that they did have (anyone who does not admit this by now is just trying to make you believe in fairy tales), theoretically, bitcoin should have continued to trade at a wide premium in tether. However, the premium collapsed and even went (quite substantially) negative. To this day it fluctuates around zero and is trading a lower level than pre-NY AG news as you can see nicely above. That is a huge warning sign to me. Everyone in the market knows of the NY state’s action against tether. For people to pay LESS for a bitcoin in tether (ie making tether more sought after than USD) is a clear sign of distortion. Think about it: it means people want more tether as opposed to US Dollars AFTER the likelihood of tether disappearing significantly went up. Nuts.
I am not sure how the process works exactly, but I would hypothesize it goes something like this: (1) print tether out of thin air, (2) buy bitcoin, (3) keep printing tether and buying bitcoin, (4) sell bitcoin into strong tether driven moves upwards for real USD and (5) spoof price up with large USD buy walls from the actual USD you have, while simultaneously keeping the printing press on. Alternatively, it is entirely possible that there are enough bots that work on USD exchanges to manipulate prices like on tether exchanges by now.
My hypothesis is that all this is an orchestrated pump that is directed by one single entity or group of traders. Bear in mind, this is only a hypothesis. I have to look at other indicators to see how likely this seems.
Bitcoin vs Altcoins — Bi-furcation of quality and trash
I have long stated that in order for crypto to sustainably be the phoenix from the ashes (or rather for the .com bubble recovery to happen to crypto as well), ie start a new bull run, bitcoin will need to separate from altcoins.
99% of all altcoins (and quite possibly literally all of them) are entirely worthless. Therefore, in a renaissance that sees smart investors “buy the bottom” and make the Amazons of this bubble rise from the ashes and leaving the letsbuyit.coms behind, you should see a bi-furcation between quality (bitcoin) and trash (altcoins) happening. You can see above that this is sort of happening (bitcoin is yellow, all other coins are blue) on a US Dollar basis, but Alts have still rallied along with bitcoin. The Altcoin-to-BTC pairs of course have indeed strongly suffered.
I am not sure if this is enough of a signal as I would have expected the trash of this bubble to simply linger at the bottom and not return, but coupled with the fact that there are quite a few “dead coins” that are artificially lifted due to their btc trading pair not falling strongly enough (hence the USD price being artificially high), while nobody is actually trading them, it may be enough of a split. Also, some people would argue that coins such as Ethereum or even (gulp!) BNB have a use case and are not trash, so they would need to be separated out from the blue line for a clear picture.
For my purposes, I am just going to say that the bi-furcation between quality and trash seems to at least take place in part. So that’s a good sign to support the case for a sustainable price move up.
Tether issuance vs. Bitcoin price
An important indication to look at is whether this move in btc is (again…) accompanied by massive tether issuance. Looking at the chart above, that is a resounding “yes”. Tether in circulation has increased by 75% since the beginning of April. Over the same period, bitcoin is up about 200%. The correlation is not easy to avoid.
Now, that might just be how things are “normally” and I note that tether has even woken up to finally (at least partly) using “uneven” prints of money so as to make it look more organic (brownie points to the guys!). However, I cannot help but wonder why anyone would want to use tether to buy bitcoin instead of USD? You have to think that people start out with some sort of fiat and then think about getting crypto. Institutions and retail customers alike are simply unlikely to wish to take the intermediate step of converting into a stable coin that has highly dubious practices and is currently under investigation by the authorities. The only reasons I can think of people wanting to deliberately use tether are tax evasion or money laundering. Nothing else really makes sense. Add in that the new tether issuance really got going after the NY state AGs suit was brought and you wonder — why on earth would people have more demand for tethers now that this is out there while there are (by now) a good handful of alternative stable coins that you can use if you do not for some reason want to go direct USD to crypto (all that requires is AML and the only reason you would be afraid of that is, going back to my to reasons, if you wish to avoid taxes or launder money; not a great set of characters there).
Don’t forget that according to an end of March Bitwise report, 95% of reported crypto exchange volumes is “suspect” (ie likely fake), while the vast majority is still trading volume on tether-based exchanges.
So all in all, I find it super unlikely that there is any organic demand that causes tether prints from either retail or regulated financial institutions. So who is getting those tethers? Ifinex and their band of brothers of course. Does not look good to me.
Retail frenzy or Institutions are coming?
There are more ways to understand what is driving demand. Another theory is that this is a new retail FOMO wave with people trying to get their hands on precious bitcoin in expectation of new highs.
As you can see above, neither “bitcoin”, nor “buy bitcoin” has seen much traction in terms of google searches compared to what happens in an actual retail frenzy. Of course, since the “lows”, interest in bitcoin is up relatively speaking by about 50% or so, but it is hardly surprising that it is up somewhat.
Correlation or causation? No idea, but its a clear indication that retail frenzy (new money) is not likely driving this. It would be ideal to get data on the number of active coinbase accounts over the last few weeks or even the USD cash inflow to Coinbase and Bitstamp, but that kind of data, according to my knowledge is not available publicly (anymore).
As for institutions, it is notable that since the NY AG Tether news broke, Bitcoin has advanced c. $4,000 on weekends alone, usually on relatively thin volume. Of course that does cause positions in CME futures that are short to experience margin calls on monday, amplifying the move. This worked like a charm for many of those weekends.
So more than 1/3 of the total upmove so far took place on the weekend on lowish volumes. One thing I am sure about is that this is not institutional buying. These guys actually have a work week…
Finally, you could check out Willy Woo’s work on the NVT Ratio, which at this point in time also points to price being far ahead of any kind of actual underlying activity. Link here.
So if it isn’t new retail money (even disregarding the google searches, who can get USD to an exchange on a Saturday?) and isn’t institutions either, that leaves me with a very empty feeling and of course a very strong suspicion. I cannot prove that this is one entity or group of traders deliberately “painting the tape”, but if you still actually believe that this is anything else then I have a bridge in Manhattan I’d like to sell you.
So where are we?
I personally think that all of the above can lead to numerous conclusions, but the most reasonable to me is:
- The NY AG suit against tether caused Ifinex & Co to ramp up their efforts, perhaps aiming for new all time highs before their end of July court hearings to re-ignite FOMO and get “the people” behind them (everyone loves a ponzi that makes everyone rich, right?)
- The IfinFriends & Co pushed the price of bitcoin up with the same methods as previously, though involving USD exchanges more this time around.
- Retail money in this is currently “old” crypto money, ie people who still had / have positions in alts or btc who are happy that some of their “old” trading methods were re-vitalized and are happy to be along for the ride after so much pain. So far, new money is not entering and neither is on chain activity pointing to a sudden use case for bitcoin as an actual currency emerging and driving demand.
I presume that, this being an artificial pump, there is some goal that the people who run it have in mind. I would not be surprised if it is a new All Time High or just making back the $850m that they currently lost to the banks in light of the NY suit. I do not know. But what I can definitely say is that this run up feels entirely different to the ICO driven frenzy in 2016/17 and surprisingly, I don’t actually think that is a good thing.
My biggest issue with bitcoin is still the same — there is a massive tail risk called tether that is alive and well and the practices that necessitate AML avoidance (in non-dictatorial societies) are all unethical. Yet they continue to be celebrated in the cryptosphere. I find that very sad, but of course I am too much of a trader to not take advantage of an opportunity when I see one. A personal game plan for these kind of situations is described at the very top. There is nothing wrong with acting on that method if one feels so inclined, as long as we all bear in mind the tail risk that is tether. Never forget — you can lose all your money.
I guess it is worth noting on the side that if the Fed should start lowering interest rates again or even engage in more quantitative easing that will be a fundamental positive for bitcoin.
None of what I write is investment advice. It is always personal opinion.
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Lastly, the all important disclaimer: this is my personal opinion, not my professional advice. Most of all this is not investment advice in any way. Crypto assets can fluctuate widely in value and all of your capital can be lost. I have a 50/50 chance of being right. Any negative views expressed are solely aimed at the token in question, never at the development teams behind them for which I have utmost respect (if they are sincere).