Last week bitcoin experienced heightened volatility after briefly piercing the key $10,000 level before abruptly reversing the following day. Currently, price is back below $10,000, leaving many bulls frustrated amidst growing institutional adoption, supply issuance cut, and expanding fiat monetary base.
Fundamentals (the pros)
The most public example of increasing institutional demand is the investment firm Grayscale, reportedly buying 1.5x the amount of bitcoin supply issued since the halving for their trust (GBTC). A perfect example of demand exceeding new supply.
Additionally, increased retail demand might be coming from the notorious stable coin, Tether (USDT) and its linkages to capital flight. In 2020, the dollar has appreciated demonstrably versus Emerging Market currencies, which provides the impetus for citizens of weak fiat regimes, e.g. Brazil or Argentina, to seek purchasing power refuge elsewhere. The digital and global nature of stable coins like Tether provide the ability to easily transition from weak fiat to USDT to bitcoin. Tether’s market capitalization has increased approximately 150% in 2020, which might suggest the retail flight is already underway.
Data Analysis (the cons)
The fundamental undercurrents discussed offer a bullish outlook for bitcoin price in the long-term. However, some simple data analysis seems to suggest that price may need a breather beforehand.
First, one of the more interesting dynamics we have witnessed in the bitcoin market is seasonality, i.e. whether price is likely to increase or decrease, based upon the commensurate month. Analysis since 2010 illustrates some of these seasonalities. For example, historically, bitcoin performs best in Q2 and performs quite poorly in Q3. As of now, 2020 has not been the exception with bitcoin performing very well in Q2, but entering Q3 in the next few weeks.
Second, like weather patterns, price follows similar cycles with decent predictability. One way to measure these cycles is using trend analysis, particularly Hurst Exponent. Currently, the metric is offering a slightly overbought reading, i.e. greater than 0.65, which could eventually translate into lower prices as new buyers fail to materialize at higher prices.
Finally, though the logic that stable coins like Tether provide the perfect global on-ramp into bitcoin, the statistics suggest that its effects are minimal. For example, the correlation between Tether supply and bitcoin log returns is only 0.025. Thus, the current capital flight seems confined to only Tether at the moment rather than spilling over into bitcoin.
Bitcoin’s principle dichotomy is that long-term fundamentals are strong while short-term metrics suggest some weakness could be on horizon.
The author owns bitcoin and Ethereum at the time of writing.