Bitcoin – Shaken but not Stirred
Summary: Crypto markets largely recovered from last week’s geopolitical turmoil and selloff. There are no on-chain or sentiment indicators of a cycle top. We still appear to be consolidating at a mid-cycle range below all-time high. Volatility and indecision will present at times, due to ongoing macroeconomic and geopolitical tensions.
Last week we noted “Given how past cycles trended, our bias would be towards the upside here. But against the macroeconomic and geopolitical climate of 2024, the traditional crypto cycle requires more examination and sometimes reinterpretation.”
Price was structurally weak against strong resistance along $70,000, stubborn inflation stifling the macroeconomic recovery, and geopolitical tensions in the Middle East were rising. Unfortunately these are a recipe for volatility.
Volatility is what we got. Rising tensions between Iran and Israel late in the week led to several marketwide selloffs. Bitcoin faired well, with a peak retracement of 16%, and it’s mostly recovered going into Monday, bouncing from lows around $61k to $67k.
Altcoins were hit harder. Ethereum saw a 25% drop and Solana 37%, at peak. In total, the altcoin market cap lost nearly 30% ($310,000,000,000). The good news is that altcoins have already recovered half of their recent losses, reflecting the strong bullish sentiment underlying this cycle.
Recovery was helped by a couple bits of good news: Israel announced no intent to retaliate against the Iranian attacks, and Hong Kong Bitcoin ETFs are approved, opening the door to Chinese investors.
More volatility is likely, until the macro climate turns and tensions in the Middle East and Ukraine are lowered. But the market is still high-timeframe bullish, as we approach the end of a peak rate cycle some time this year or next, Bitcoin ETFs are being adopted in the two largest global economies, and the halving is coming up next week. Also this correction reset a lot of on-chain and sentiment indicators, giving us more runway for the bull market. Don’t be shaken out!
Key Levels: I noted the most significant horizontal supports on the chart above, ranging from $40 lows (worst case) to $60s.
Bull Case: halving is in 2 weeks; ETF interest growing as Hong Kong approvals open the door to Chinese investors; semantics around the overall crypto market and Bitcoin are vastly improved from past cycles; on higher-timeframes most on-chain and sentiment data indicates a bullish market, but not excessively greedy or overbought yet; Coinbase app isn’t near the top of app ranking.
Bear Case: the US Fed may not taper rates as early as markets anticipate, especially in light of recent jobs data; the US election could introduce divisive political and regulatory dialogue around cryptocurrency; geopolitical tensions in the Middle East and Ukraine; the US Dollar is benefiting from weakness in competing currencies and some inflationary economic data like jobs, leading the Dollar Index (DXY) to rise.
What you do from here depends on your risk appetite, and won’t change until we leave this range:
- If you are still buying spot (as I am), use this time to rotate out weak performers, and double-down on strong performers. Don’t ape and lose it all on memecoin rugs. Be aware of tax implications as you do this and set aside some stables or cash for that.
- If you are a LOW RISK spot holder, you should already be exiting positions. Sell and don’t look back, or FOMO might pull you back in. Remember tax implications when selling, which makes it risky to re-enter the market after exiting.
- If you are a day trader, continue to respect the overall high-timeframe bias to the upside. There will be corrections, and we can move sideways for weeks to months at a time. But sentiment is generally bullish and we can get explosive moves to the upside with little notice; use a stoploss and minimize risk.
Promising Narratives I’ve been monitoring into this part of the cycle are listed below. If you are looking to rotate into something new, they may offer respectable risk/reward, but do your own research:
- Utility expansion on Bitcoin, like ordinals, Stacks, Runestone
- Ethereum L2s and L3s, especially those built around BASE, which Coinbase will drive new traders to
- OG projects like DOGE or LTC that might see institutional interest
- Emerging L1s like SEI that have VC investors & interest, VCs find ways to pump their bags
- Memecoins with utility, for example if Elon adopts DOGE for Twitter
- GameFi or NFTs related to gaming
- Web3 and crypto digital art. Cryptopunks, XCOPY, Beeple, and many others.
- Solana’s maturing DeFi ecosystem and memecoins (when its not broken)
Long Term Cycle Forecasts
The market is rarely this simple, but one possibility is for the top to arive along the same diagonal range we saw in 2017 and 2021, which would land around $140k.
Below is the totality of Bitcoin’s logarithmic growth, another great way to display data that spans many orders of magnitude. This shows Bitcoin reaching the lower $100k range by early 2025. When considering the current cycle’s growth trajectory, that could arrive earlier, and go higher.
Changes in the macroeconomic, regulatory or geopolitical climates can impact this timeline. For example, if inflation starts to steeply rise again and the Fed raises interest rates, we would expect crypto to respond negatively.
This cycle is different, due to institutional buyers and the economic climate. This makes it difficult to rely on historical trends, so we look for confluence across several data points when forecasting this cycle.
Market Health – Is Cycle Top Near? Read On..
Below is a list of popular data points that can INDICATE whether a cycle top is in range. Never take a singular piece of data as gospel, there is no single and guaranteed way to predict a cycle top.
Note: a glossary of each item is at the end of the article.
Supply of Bitcoin on Exchanges
- Performance 7d: Neutral
- Performance YTD: Bullish
- Top Signal: No, supply continues to trend bullishly
40% drop in exchange supply of Bitcoin since 2020. 7.5% year-to-date, No notable change past week, despite selloff. Bitcoin price will experience a supply crunch in the coming year(s) if demand remains constant, or grows.
Net Unrealized Profit and Loss (NUPL)
- Performance 7d: Neutral
- Performance YTD: Bullish
- Top Signal: No, but ~20% away from historical top signal
No major change in the past week. At ~.57 reflects persistent greed & unrealized profit, but room to run before historical peak between 0.7 and 0.8. NUPL is near the top of it’s historical range, typically mid bull market territory.
Miner Position Index (MPI).
- Performance 7d: Bullish
- Performance YTD: Bullish
- Top Signal: No
Miner selling has been trending down since March. Miners are not adding significantly to sell pressure on higher timeframes, with only occasional minor profit taking, once or twice a week.
Bitcoin Netflow (All Exchanges)
- Performance 7d: Neutral, small increase to inflows during Israel/Iran news
- Performance YTD: Bullish
- Top Signal: No
Netflows remained elevated last week, correlating with a short term rise in selling pressure during heightened geopolitical tensions in the Middle East. The underlying bullish sentiment in the market is apparent, as nearly all of those inflows were absorbed.
Going into the next week, we want to see netflows drop deeper into outflow territory, or we might be seeing an early indicator of rising bearish sentiment where inflows outpace demand.
Pi Cycle Indicator
- Performance 7d: Neutral
- Performance YTD: Bullish
- Top Signal: No
The Pi Cycle’s moving averages are trending bullishly, moving towards each other but not at risk of crossing yet. The 111 DMA isn’t forecast to cross above the 350 DMA x2 before Q4 2024.
Market Cap to its Realized Cap (MVRV)
- Performance 7d: Neutral
- Performance YTD: Bullish
- Top Signal: No, but within 30% of historical top signal
In recent weeks, MVRV continues it’s consolidation 20% to 30% below key rejection levels, suggesting room for the bull market to continue.
MODERATELY BEARISH PAST 7D: US Dollar Index (DXY).
Last job report was troubling for the US Fed, because it showed employers adding a significant number of workers to their payroll, more than expected. This was followed by the Consumer Price Index (CPI), a popular inflation metric, showing inflation stickier than expected.
If inflation remains stubborn, it will lead to high rates for longer, or a small chance they raise rates further. Both would be short term bearish for crypto.
Note: even if they go this route, the Fed is still near the end of a hiking cycle, and for several reasons, particularly the US deficit, they can’t continue this course without serious repercussions. This is why markets are long-term bullish, even if the near-term is dicey.
If this happens, expect Bitcoin to continue sideways with a moderate bearish bias, with retests of key supports starting around $61k (most bullish), $50s (moderately bullish), and as low as mid $40s (weakly bullish).
Market Sentiment
BULLISH & NO TOP SIGNAL: Coinbase App Ranking. Rank 294 globally and 14 among finance apps. Its trending bullishly, but not high enough to suggest a cycle top.
BULLISH: Google Trends. Bitcoin continues to grind it’s way up towards bull market highs, but not high enough to suggest a cycle top. Last week’s sell-off cooled sentiment considerably. This type of sentiment reset can lengthen the lifespan of a bull market.
Bitcoin Dominance
Bitcoin dominance rallied above the 8 year resistance on the back of the Israel and Iran news! This led to Bitcoin outperformance versus altcoins during last week’s volatility. Dominance retraced back below the 8 year resistance since then, as altcoins recovered from the initial drop.
Its hard to say whether this represents a longterm trend emerging, or if Bitcoin will reject from here. With Hong Kong approving Bitcoin ETFs on behalf of the Chinese markets, we could theoretically see a significant increase in demand for Bitcoin, which could lead to it outperforming altcoins.
Personally I’d use this past week’s reset to increase your exposure to Bitcoin. Even if you are primarily an altcoin trader, I suspect some strong performance from the old man later this year.
Additionally if economic data trends hawkish, inflation begins to rise, this might send price down and Bitcoin Dominance up, as altcoins drop lower than Bitcoin.
Crypto & Economic Calendar
The events below inform governments, corporations, traders and investors on the health of the economy. I only list events noted as “high volatility expected” in related markets.
Glossary of Terms
Below is an explanation of each indicator and data point I discuss above.
Bitcoin Dominance:
Bitcoin dominance is another way of saying “Bitcoin market share,” or how much of the total crypto market is Bitcoin. While not the clearest indicator, on lower timeframes, you can use this information to speculate when altcoins may rally. This is also described as an “alt season.”
Altcoin rallies often follow a local or major top on Bitcoin dominance and can last for several weeks or longer, while Bitcoin consolidates for the next move. The recent memecoin cycle is a form of altcoin cycle.
Bitcoin Supply:
Supply trends are simple- rising supply on exchanges implies bearish pressure, because it’s there to be sold, and the opposite true when supply drops.
More Bitcoin is being bought and HODL’d than is being mined, and this has been the prevailing trend since 2020. As we know with commodities, scarcity boosts perceived value. With a 40% drain on total supply since 2020, we are trending towards scarcity faster than ever.
While general supply trends can signal sentiment, did you know you can also account for localization? For example, in the last cycle, as we approached the top, Asian and international exchanges logged notable increases in supply, while America was net decline. Effectively this meant Asians left many Americans holding bags near the top.
Net Unrealized Profit and Loss (NUPL):
NUPL indicates the total amount of profit/loss in all Bitcoins, represented as a ratio. You can see why that makes for a handy data point, because as more of the market is in-profit, the risk of a retracement rises.
NUPL indicates a potential minor or major top when it rises over 0.75. Another way to think of this is as a greed tracker. The higher the NUPL, the greedier the market is, and eventually greed will turn to fear, as profit-taking cascades towards the end of a cycle or subcycle.
Miner Position Index:
Miners are among the smartest traders in crypto. For obvious reasons they need to optimize their selling to fund operations. Miners sell to fund operations, but will HODL supply when conditions permit, and sell heavily in the early to middle bull market.
MPI is the ratio of miner selling against the yearly average. If its rising strongly above the average, it suggests miners are worried about a top approaching expedite their selling. They do not try to land the top of the market, so they often sell in advance, which is helpful to traders trying to also time their exits.
Bitcoin Netflow:
Another fun data point is netflow. This shows the net result of a day’s inflows (moving Bitcoin to an exchange) and outflows (moving Bitcoin off an exchange).
The implication is that Bitcoin moved off exchanges is unlikely to sell. And as we approach tops, the netflows skew towards increasingly heavier inflows (moving to exchanges to sell).
Pi Cycle:
The Pi Cycle indicator is something many traders joke about, but there is no doubting it’s effectiveness.
It uses the crossing of two key moving averages (MA) to predict cycle tops: 111 DMA and 350DMA x2. It accurately called earlier cycle tops within a few days. The top signal is when the 111 DMA crosses above the 350 DMA x2.
Whether you believe these two MAs can predict cycle tops, its worth keeping an eye on it. As you can see, we still have time before the MAs converge.
Market Cap to its Realized Cap (MVRV)
MVRV is used to understand when the exchange traded price is below “fair value” by looking at the ratio between market cap and realized cap (approximates the value paid for all coins in existence).
This gives an idea of whether the market is fairly priced and can be used to identify potential tops and bottoms in the market. As with any indicator, don’t use it in isolation; look for confluence with other data.
A new component this cycle is the orange line, the top of the MVRV range, which reflects an increasingly smaller ratio over time. For the first time this cycle, the longer term diagonal resistance is lower than the generally acccepted upper range of 3.7 for cycle tops, so traders should monitor both.
US Dollar Index (DXY):
The US Dollar Index (DXY) is an index that measures the strength of the US Dollar. There is an inverse relationship between the DXY and speculative markets like crypto and equities. In general, when the DXY is up, crypto is down. The opposite is also true.
Of particular importance, the ~101 level, arguably the most significant for the DXY. Almost every time in the past 50 years, when DXY rejected from, or closed under the 101 range, it led to a prolonged period of weakening dollar.
If the fed drops rates in 2024, thats a strong signal that the DXY will continue to drop, and rates will inevitably decrease, its just a question of timing and whether they will start in 2024 or 2025. For rate decreases to occur in a year along with the Bitcoin halving would be particularly bullish.
Market Sentiment:
Economic events, political discourse, or general price action are all events that can impact sentiment. The market remains predominantly bullish since October 2023.
Sometimes market sentiment needs to cool off, otherwise bull markets can burn out too early. The market moves in waves of fear and greed, and too much of either can lead to pronounced moves in the opposite direction, which can further cascade due to leverage in the market.
Going into the election cycle, we can expect some volatility to accompany the crypto narrative, with players like Senator Warren building an anti-crypto coalition. It remains to be seen if this will have a bigger impact on sentiment than the increasingly accomodating macro.
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