5 Feb 2022

Bitcoin Fundamentals: Why It’s Possibly the Time to Buy and Not to Die

Let's talk today about Bitcoin and the recent price volatility. We are all shocked by the speed that Bitcoin experienced a correction this past week. The situation raises many questions, which we will try to clarify. However, please remember that none of this can be considered financial advice. If you need personalized financial advice, please reach out to us directly, so we can provide you with an investment strategy that fits your needs and goals.

Why is Bitcoin a risk asset?

To better understand what's going on in the market, let’s analyze this candlestick chart.


The orange line represents the correction in Cathie Wood’s flagship project, Ark Innovation Fund (ETF), which is the quintessential fund holding many of the well-known, non-profitable tech companies that have the promise of significant earnings in the future. The green-red line is Bitcoin‘s price, and the blue-green line is the two-year Treasury yield that has been going up as our two assets (in orange and green-red) are coming down, especially in November.

This correlation shows how closely Bitcoin and non-profitable tech stocks move together. It is almost one, and has stayed that way for quite some time. Furthermore, it shows that the correlation was not as strong until interest rates started significantly. As we can also see, both assets have been gradually correcting since March but started crashing in November after the Fed’s moves.

Here's a simple explanation. In order for companies in the Ark Innovation Fund to shine, money must be cheap (offered at low interest rates) because profits for such companies are projected far into the future, and for the valuation models to make sense, the discount rate, which includes the risk-free rate, from far in the future to the present, has to be low. The point here is that as rates go up, liquidity tightens. When liquidity tightens, risk assets are less attractive.

The bottom line is, currently Bitcoin price action is mainly driven by macro and big picture fundamentals. Furthermore, Bitcoin is not a corporation and is considered by many experts as a currency or an asset such as gold or a commodity.

Why is it going down? Before moving to additional charts, here is the explanation - Bitcoin has become an asset traded by macro investors, and huge macro hedge funds. They treat it like other risk assets. And when institutional investors start selling off their tech stocks, they’re simultaneously selling off their Bitcoin holdings.

What will the future bring?

market implied

The next chart shows that the market had priced in 4.3 or 4.25 rate hikes by the end of this year. Since volatility shot up a week and a half ago, this estimate has been going down quickly.
Usually, or at least over the last 40 years or so, if the market crashes dramatically, the economy starts scaring folks in government, the Federal Reserve, and other central banks, and they tend to cut rates. Today, it’s reasonable to assume that the further the market goes down and scares the Fed, the probability of rate hikes will also go down. That, in turn, improves the situation and alleviates the pain for risk assets such as Bitcoin.

Time to buy?

You may ask if we’re talking about Bitcoin, when is it a good time to buy? Now? Let’s look at the following chart provided by Deep Dive, they do excellent work. The yellow line is the realized value of Bitcoin; the dark-blue line is the current price of Bitcoin. As you can see, historically when Bitcoin’s prices crossed the realized value line, it has been a generational buying opportunity.

btc market value to realized value ratio

A realized value means the average realized price at which everybody who holds Bitcoin bought it. So historically, this orange line has been a great time to purchase this cryptocurrency. And below, we see gray and green lines showing the times when BTC was in the “generational” buying opportunity range. Historically, when Bitcoin goes below its realized value price, ($24,000-$25,000), it signaled a generational buying opportunity.

So, we’re not quite at that generational buying opportunity level. We’re getting closer, but might never get to that point. At least, this chart is one way of looking at different values for Bitcoin in the past. And what do we see? We’re off the highs around the $69,000 average where we were late last year. We’re much closer to what historically is a great buying opportunity for Bitcoin.

That’s something to think about in terms of where we are in Bitcoin's potential price movements. The more Bitcoin goes down the better potential buying opportunity it is, while at the same time, the more painful it feels to buy. When thinking about strategy for investing in BTC, a quote from an astute investor comes to mind: “Buy when there is blood in the streets, even if the blood is your own”. This is easier said than done.

Long-term perspective in the short run

more data to Bitcoin and its potential

Here's more data to help you understand Bitcoin and its potential. It's the weekly chart that also shows the 200-week moving average of Bitcoin's price. As we can see, there were only two times (in 2018 and in March 2020) when Bitcoin’s price hit the 200-week moving average; those were obviously great buying opportunities. Today, for Bitcoin to reach the 200-week moving average, it would need to get down to about $20,000. That’s a rather significant drop from the current price trading closer to $36,000. Meanwhile, if it gets there (certainly looks like a possibility), it can be considered a great buying opportunity.

The Bears are in control

Heikin-Ashi candles

What does the trend look like? A good way to look at the trend versus just price is using Heikin-Ashi candles, a type of chart that doesn’t show the price directly, but shows the trend. Red is down, green is up. Here, several weeks in a row, we have a green candle and a solid upward trend. The downward trend doesn't show signs of subsiding at this point, and in a war between the bulls and the bears, the bears are in control.

Diversify your basket

Diversify your basket

Here is another chart - another way of looking at Bitcoin, its valuation, and a good potential entry point. An alternative indicator and a way to look at the potential value of Bitcoin's current price. It’s simply the value of the number of Bitcoins multiplied by the lifespan. As we can see here, the red indicates that the markets overheated when demand was high. And we’re nowhere near that type of price action. It seems that we're currently in the over-cooled range, right?
To conclude: it looks like much pain may take place over the next several months for Bitcoin holders. And at some point, there may be time for the market to turn and start moving upwards again. It doesn’t mean that Bitcoin couldn’t keep going down; as you can tell by the charts, getting in at ranges when Bitcoin was a historic good value, does not mean that it can’t become a still “better value” leaving your portfolio at a (hopefully temporary) loss. As with any investment, it pays to do the obvious; think about risk, and don't put all your eggs in one basket.