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The week that ended yesterday ended modestly higher for the cryptocurrency market, with the price still below $40,000 apiece for bitcoin. Again this week, many indicators, both fundamental and technical, are battling it out for future price direction. While that direction to come is unknown, the factors seem to be in place to create some fireworks in the near term. Let’s elaborate on that.
The financial media justified the weekly rise in the price of bitcoin by Elon Musk’s flip-flop – again – with Musk saying that Tesla will resume accepting payments in BTC once more than half of the miners are using green energy. While several estimates already place miners above this threshold, it was nevertheless an encouraging development after the billionaire’s last few weeks of affronts against the mother of cryptocurrency.
While this news was certainly welcomed by the markets, we are more of the opinion that it was the conclusion of MicroStrategy’s $500M bond issue that will have been the catalyst. Indeed, it is contractually agreed that this money will be used entirely for the purchase of bitcoins in the short term. Moreover, as of Monday, these purchases had not begun. To add another level to this reality, the company has announced an additional issue of $1 billion. In short, there is known and confirmed buying pressure in the near term. While such a purchase is unlikely to blow the price out of the water per se – bitcoin is much more liquid than that – it does lead many speculators to want to front run this purchase. Many are also hoping that it will be the spark for a clear bull market rally.
On the uncertainty side now, the U.S. Fed will be making a statement today on its liquidity injections and possibly how they will be addressed going forward. This is not about raising interest rates, far from it. The question is whether the central bank will slow down its stimulus programs or keep them at their current level. “The market is completely neutral ahead of the Fed with only a little spot buying,” Brian Tehako, CIO at Warwick Capital Management, said. “Traders are waiting for the Fed announcement.”
“If the Fed remains dovish [retains pro-stimulus bias], cryptocurrencies would have the most upside potential until September at least, given the overselling we’ve seen relative to other macro markets since May’s CPI print,” QCP Capital noted in its Telegram channel.
Meanwhile, on the regulatory front, House Democrats announced that they have formed a task force on the topic of cryptocurrencies led by Maxine Waters. Waters, chairwoman of the House Financial Services Committee, said the group will work “to engage with regulators and experts to do a deep dive on this poorly understood and minimally regulated industry.” In a hearing last week, Sen. Elizabeth Warren (D-Mass.) echoed a similar sentiment toward the crypto industry, referring to it as a “Wild West” in need of regulation.
Certainly, the current environment has led to a fierce and rapid build-up of short positions in bitcoin, at least on the bitfinex exchange. Many are betting on a future decline in the price of the crypto asset. In addition to the uncertainty about the Fed explained above, it is also the near-inevitability of a death cross, where the 50-day moving average crosses down the 200-day moving average, which is possibly fueling this position-taking. Nevertheless, one should always keep in mind that these averages are lagging indicators.
While such charts may appear scary, they are actually a double-edged sword. Indeed, the short positions chart shows sales that have already been made and is not in itself an indicator of the direction of the markets. It simply shows the positioning of speculators. Moreover, if these speculators were to be wrong, this would provide ammunition for a stronger and more sudden rise. As a matter of fact, every short seller who covers his position is forced to buy back, increasing the upward pressure on prices. Is it any clearer why we told you at the beginning of this letter that the elements are in place for a strong move in either direction?
On the news side for the week, let’s point out that after El Salvador this month made bitcoin a legal tender, it’s Iran’s turn to announce that it wants to legalize cryptocurrencies as quickly as possible. The country’s President Hassan Rouhani said this week that, “To legalize the activity of cryptocurrencies and protect the capital of people in this area, we must think of a solution as soon as possible and establish the necessary laws and instructions.”
On our side of the Atlantic, Texas banks can now provide custody of cryptocurrencies. The Texas Department of Banking this week issued a notice confirming that state-chartered banks may store cryptocurrency on clients’ behalf, provided they have “adequate protocols in place” for complying with the law.
We already know that the Millennials generation has the highest level of trust in cryptocurrencies as an investment vehicle. It’s interesting to note that according to a study by broker Voyager Digital, 87% of respondents in this age group said they were in no way frightened by May’s declines. Instead, they advocate taking advantage of the correction to make additional purchases. In addition, seven out of ten respondents were bullish on the price of bitcoin over the next three months. “It’s encouraging that investors remain bullish following the recent market correction,” said Steve Ehrlich, Voyager’s CEO, in a statement.” The fact that the vast majority of our large sample size of investors are more confident in the future of cryptocurrency shows how people see May’s volatility in many crypto-assets as a buying opportunity”. A parallel survey, meanwhile, shows that at least one-third of millennials millionaires own half of their wealth in cryptos. Nearly half of those have more than 25 percent. Meanwhile, none of the baby boomer millionaires have more than 10% of their wealth in crypto, with 83% of US millionaires having none of their wealth in crypto.
While we still rely on our internal analysis rather than that of other firms, it’s still interesting to read them in order to get a picture of the sentiment of different market players. Technically speaking, Jurrien Timmer of the Fidelity Group believes that we have hit the bottom of the spring correction. The chart he shares to reach this conclusion is interesting:
On the Fund side, as bitcoin’s dominance looks like it may resume its rise, we have been trading consequently. As it has been the case for several weeks, we consider the price to be in an area of uncertainty. It will remain so until it breaks north of the 200-day moving average around $42k-43k or breaks support at $30,000. Nonetheless, after three bounces off that same support, signs of a true bullish recovery are growing. With the stock market continuing to record new highs, we remain in a position of cautious optimism. In the very short term, let’s hope for a status quo from the Fed today.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of June 16th, 2021, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
