Blockstream Markets Weekly — January 22, 2021
Yellen, Double-spend FUD and Tether deniers spook weak hands, Coinbase premium turns negative, GBTC premium collapses, Bitcoin illicit activity just 0.34% of transactions in 2020, MSTR adds $10M more Bitcoin, and the world’s largest asset manager — $9T Blackrock — warms to Bitcoin
By Jesse Knutson
What’s happening in the markets?
Taming the badger
Bitcoin is on pace to narrow losses after its worst seven-day slide in ten months. Declines this week saw a brief dip below the $30,000 mark for a total drop of almost -40% from the all-time high two weeks ago.
A slew of negative headlines this week was just an excuse, I think, for investors to take some money off the table and for the price to let out a bit of steam.
Support out of the US looked to waver significantly this week with Western exchanges continuing to see an inflow of BTC this week, and the Coinbase premium vs Binance down to -$122 exacerbating continued Asian hour weakness.
We are still very early
News flow this week was decidedly negative, pushing the crypto fear & greed sentiment indicator down to a three month low.
Talk this week that Tether may not be adequately backed, that the US government may be considering new regulation around cryptocurrencies, and reports of a new, critical flaw suddenly discovered in the Bitcoin protocol generated a feeling of deja vu this week.
These are topics, like the Korea and China bans of times gone by, that the industry can’t get enough of and that get recycled repeatedly.
Tether is most likely properly backed. Their struggles to be transparent are more likely the result of their efforts to bridge the old, high friction banking system with a newer low friction, high accessibility system.
Authorities may impose new regulatory and taxation schemes on Bitcoin companies, users, and investors. This will be a pain for some users, but it won’t slow institutional inflows. Institutional investors are already deep in that world and Bitcoin users that want a greater degree of self-sovereignty and privacy will always find a way.
There was no double spend on Bitcoin this week. This is simply how Bitcoin works and why Satoshi recommended six confirmations as a good basis to consider a transaction finalized.
The fact that these headlines can still spook investors probably points to how early we still are. You get the feeling from reading the analysis of Bitcoin’s newest institutional investors that while they understand the inflation play, there’s a lot of Bitcoin and industry dynamics that they don’t understand.
The good news
News flow this week wasn’t all doom and gloom, though.
Highlights this week included reports that the world’s largest asset manager, Blackrock (~$9T AUM), would begin offering clients Bitcoin exposure via cash-settled Bitcoin futures, a $10M Bitcoin top-up by Microstrategy (MSTR), and a report from Chainalysis indicating that illicit Bitcoin activity accounted for just 0.34% in all transactions in 2020.
This has all happened before and will happen again
At the time of writing, we’re down about 16% over the previous ten days.
Looking back at the previous 2016/2017 bull run, there were 20 occurrences of worse ten-day price declines (table below). 100% of those occurrences were positive ten days later with a median gain of 13.5%. The median 50 day gain was 54%.
The 50-day moving average of $28,000 should be a decent line of support. This is also roughly the fair value price implied by the stock-to-flow mode. Ultimately, if we can churn out a bit of volume north of the $30,000 level, I think that is a very good thing. It will build up a base and put us in a better position going forward.
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Bitcoin markets news
- Blackrock is the world’s largest asset manager with ~$9T AUM
- The firm updated the prospectuses for two funds, allowing investors exposure to Bitcoin via cash-settled Bitcoin Futures
- Note that the firm, like Paul Tudor Jones, is seeking exposure via Bitcoin futures. This is likely due to mandate restrictions as the company does its first toe-dip. This will change in time
- This move makes it extremely difficult for senior management at any financial services provider to cite reputational risk as a reason to be back foot on Bitcoin investment or offering exposure to their clients
- Brings their total balance up 70,784 BTC
- A report published by CoinTelegraph suggested that a $22 double-spend had been spotted. Meaning that the same 0.00062063 BTC had been spent twice on the blockchain
- Bitcoin educator, Andreas Antonopoulos, provided a good explanation of the event here
“There was a chain re-organization in the Bitcoin blockchain. This is a common occurrence that is part of Bitcoin’s normal operation. It is a result of decentralized consensus under Proof-of-Work. All PoW chains do this”
- While most of the Bitcoin-related press focused on Yellen’s cryptocurrency comments, the market tailwind provided by expectations of big borrowing and big-spending will probably more than offset Yellen’s ‘concerns’ around cryptocurrencies
“I think many [cryptocurrencies] are used, at least in transactions sense, mainly for illicit financing and I think we really need to examine ways in which we can curtail their use and make sure that anti-money laundering doesn’t occur through those channels”
- This echos similar comments from ECB head, Christine Lagarde, last week
- Longer-term, the persistent, false narrative of Bitcoin’s role in illicit activity is a bit of a concern
- I think the biggest difference between crypto investors in Asia and the US is their degree of fixation on Tether
- People in Greater China, that do the bulk of Tether trading, don’t care. It’s a tool. It works today. If it doesn’t work tomorrow, people will use something else
- Tether is one of the few truly disruptive innovations this industry has produced. Perhaps even more so (at the moment) that Bitcoin.
- I think a lot of people underestimate the difficulty of offering a high accessibility, low friction USD proxy at scale
- If there’s anything worse than a capital gains tax, I guess it would be a tax on unrealized capital gains
- This would obviously be a significant drag on investor sentiment and the practicalities of enforcement are also questionable
- Given record deficits and COVID stimulus spending from virtually all of the western world, I think we should probably prepare ourselves for a sharp uptick in government efforts to boost tax revenue
- A great article this week from Obi Nwosu, co-founder of the UK’s longest-running BTC exchange. Obi highlights how Bitcoin is part of a system of privacy and digital self-sovereignty that offers an alternative to big tech’s surveillance capitalism
“… anti-trust is more than just monopolies: it is the defining concept of our age. People don’t trust their politicians, they don’t believe the media — and they certainly don’t trust our tech overlords…”
- Market surveillance and crypto forensics firm, Chainalysis, reported in their 2021 Crypto Crime Report that illicit activity use fell from 2.1% in 2019 to just 0.34% in 2020
- With institutional flows looking to dominate 2021, I would expect this percentage to fall even further this year
- Meanwhile, the American Institute for Economic Research previously estimated that
“…more than a third of all US currency in circulation is used by criminals and tax cheats…”
- Kristalina Georgieva, IMF’s Managing Director and Chairwoman, urged policymakers to spend more to rekindle sputtering economies
“I continue to advocate for monetary policy accommodation and fiscal policies that protect the economy from collapse at a time when we are on purpose restricting both production and consumption”
- VC giant Sequoia is now allowing employees to defer a portion of their salary into Bitcoin, Bitcoin Cash, or Ethereum
- Do yourself a favor and pick Bitcoin :P
Outflow mean reversion?
- Glassnode highlighted this week how 30 day rolling Bitcoin exchange outflows are still increasing
- I wonder, though, if we’re approaching a level where mean reversion starts to kick in
- Looking back at previous outflow peaks, it seems to foreshadow a period of price consolidation or weakness
Chart credit Glassnode (white arrows mine)
Top 10 Day Declines
- Looking back at the 2016–2017 bull run, there were 20 declines worse than the -16% drop we’ve seen over the previous ten days
- Virtually all of them were followed by a pretty strong bounce
Bitcoin sentiment indicator signals fear
- Fear & Greed drops to a three month low
Chart credit Crypto Fear & Greed
Stock-to-Flow multiple falls back to fair value
- The stock-to-flow multiple is back from a recent high of 1.54
- Currently trading around 1.1
- The 463-day stock-to-flow price is currently just north of $28,00
Chart Credit Digitalik
Coinbase premium (vs Binance) turns deeply negative
- This indicates selling is largely being driven by the US (probably new institutional and high net worth money)
- I think this make sense, new investors already with significant paper gains are probably not the strongest of hands
- The premium actually just touched on -$122 (lower than indicated in this chart). Which is towards the bottom end of the recent range
Chart credit CryptoQuant
GBTC premium collapses to multi-year low
- The GBTC is not a very good Bitcoin tracker, recently it’s been trading at a ~ 20% premium to Net Asset Value (NAV)
- With tax-advantaged retail buying back foot and hedge funds still trying to arb the premium, most of BTC price gains over the past month have been erased
Chart credit Eric Balchunas
All about the dollar
- Last week’s bounce in the dollar probably has to take some credit for the down swing in Bitcoin
- Expectations of big borrowing, big spending, and low rates will probably continue to weigh heavily on the dollar