Death, taxes, and over-the-top panic during cryptocurrency market corrections. These are certainties that seem as unshakeable as rock itself! Yet, we are anything but in uncharted territory right now, going through a correction of quite similar magnitude to many of the present and past bull markets. What is causing this pullback and where does it put us technically? We will analyze it in more detail through this communication.

First and foremost, despite the short-term market noise, it would be inappropriate not to first highlight the Taproot update to the bitcoin network, having been implemented without any technical concerns, so that it has flown under the radar for many. Yet, at block #709,632 on Sunday, the first major update since August 2017 – when we had witnessed the addition of the Lightning Network and Segregated Witness – was implemented with almost complete consensus. While SegWit and the Lightning Network were aimed at making transactions faster and cheaper, Taproot brings much more than improved scalability and lower fees. The latest upgrade aims to increase the privacy and security of the protocol.

Taproot brings Schnorr Signatures to reduce some of the burdens on the network. It creates a sort of master key to summarize a set of signatures in a single one. This makes it possible to perform multi-signature multi-input transactions (UTXI) a lot easier, faster, and cheaper. In addition, Taproot aims to improve Bitcoin’s scripting language through the concept of a Merkelized Abstract Syntax Tree (MAST). This opens the door to smart contract capabilities on the network, which will lead to even greater adoption. “It (MAST) can help make smart contracts more efficient and private by revealing only the relevant parts of the contract when spending,” says developer Hampus Sjöberg. “Taproot is a 100-year soft fork that will, in the long run, yield a more fungible and robust blockchain.”

In short, while it’s the price action that often rings very (too?) loudly in the ears of investors, we’ve nonetheless just witnessed the most important fundamental change in bitcoin in the last four years.

Why is bitcoin’s price fighting to stay north of $60,000, then? Basically, the recent burst of optimism has been slowed by a few different pieces of news. Once again, concerns about a continued regulatory crackdown in China are raising concerns. The country will indeed consider punitive electricity prices for companies involved in cryptocurrency mining. Also, on our side of the Pacific, the United States passed its $1.2 trillion infrastructure plan, a bill containing several controversial anti-crypto provisions.

Additionally, while many thought such an investment was only a matter of time, Twitter CFO Ned Segal said in an interview that investing in crypto “didn’t make sense for them right now” due to the extreme volatility of the market and the lack of accounting rules in the industry. Segal noted that for Twitter to invest in crypto companies and related avenues, the social media giant would have to change its current investment policies, which currently only allow the company to hold assets of a more stable nature like securities on its balance sheet.

Finally, it is often argued that investing in bitcoin, especially in times of inflation, is akin to taking a short position in the U.S. dollar. However, the latter is at its highest level in 16 months.

Technically speaking, it now seems particularly appropriate to zoom out and look at the charts over longer periods. We quickly notice that during its first run above $60,000, the price only managed to close above that threshold five times. Since it pasted that level again on October 15^th, only one day has closed below that mark, and that was on October 27^th. Even with yesterday’s drop, the price closed above that level. In fact, the current price is what it was just… three weeks ago. Furthermore, the important 50-day average of the present bull market served as support overnight and is currently continuing to do so.

We saw six pullbacks of more than 20% during the 2017 bull market, despite the price ultimately increasing by a factor of ten in that same year. The current correction from peak to overnight low is just over 15%. In short, if the past is no guarantee of the future, it is nevertheless quite plausible to favor the hypothesis of a simple bull market correction rather than a sudden loss of the latter.

The news is not all gloomy and the industry continues to grow at a rapid pace. A huge partnership was just announced this morning with Crypto.com purchasing the naming rights to the Laker’s Staples Center for a $700M deal. The deal links Crypto.com to one of the NBA’s biggest brands, providing crucial brand awareness for the platform as it positions itself to capture market share in the rapidly expanding digital currency sector. Terms of the deal have not been officially disclosed, but a person familiar with the matter told CNBC that it is a 20-year deal worth $700 million.

As expected, VanEck’s proposed exchange-traded fund backed by physical bitcoin rather than asset futures was blocked by the SEC on Friday. Its futures ETF, meanwhile, began trading under the symbol XBTF yesterday. The ETF saw 38,398 shares traded on its first day, closing at $59.73 per share – just below its $60 per share opening. The ETF had $9.6 million in assets under management at the close. That’s just a fraction of the $1 billion in first-day trading volume that ProShares Bitcoin Strategy (BITO) enjoyed on October 19^th on the NYSE. Since then, BITO has reached the top 2% of all ETFs in terms of total trading volume. There is no doubt about the competitive advantage of being the first to enter such a market!

The trend in bitcoin reserves on exchanges continues to paint an optimistic picture going forward. Indeed, the 90-day moving average of the daily net exchange flows remains entrenched in the negative territory. In plain English, the broader trend of coins leaving exchanges remains intact, indicating persistent holding sentiment.

The popular analyst nicknamed TechDev points to the many similarities with previous bull markets, believing that bitcoin in 2021 is acting almost identically to 2017, but with a small delay. “Price action continues to lag 2017 by five to eight days since July,” he said. “If bitcoin’s relative strength index (RSI), a key factor in bullish cycles, recovers above a trendline it lost during this week’s pullback, a price target of $80,000 to $90,000 remains possible by the end of November,” he added.

This threshold, which appears virtually impossible today with only two weeks to go, is however also the level predicted by the Stock-to-Flow model which has so far been particularly well respected. In this regard, it is interesting to read the analysis of Jurrien Timmer, director of macro trends at Fidelity. Timmer suggests that the S2F model is unidimensional and that a model incorporating demand could yield more accurate results. His research suggests that demand for bitcoin has so far closely tracked demand for cell phones. Timmer extrapolated this logarithmic relationship from historical bitcoin data and mapped it to the S2F model. Here’s the resulting graph:

In short, the speed of progression is certainly not the same, but for both modellers, the long-term trend could not be clearer!

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of November 17th, 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.