Crypto Market Commentary
26 June 2019
Doc's Daily Commentary
Make sure to watch Doc’s 6/21 Trade School session on “Prepping for Volatility,” which is posted in the “Trade School” archive.
Our most recent “ReadySetLive” session from 6/26 is listed below.
The Mind Of Mav
Why Is Bitcoin Rising (Ignoring That Flash Crash)?
Let’s talk about why Bitcoin is going up in 2019.
And yes, I’m aware that the recent Coinbase outage took the wind out of the sails.
A Shrinking Supply
The chart above plots the price of Bitcoin (the black line) over time, compared against the colored bands, which represent the % of Bitcoins supply that has not been spent within a certain time frame. The blue bands at the top represent the % of Bitcoin in existence that hasn’t been spent in over 5 years. The red bands at the bottom represent the percentage of Bitcoin that hasn’t been spent in less than 1 day.
What does this all mean?
There are more HODL’ers
You’ll notice that while the total supply of Bitcoin is rising, the liquid supply of Bitcoin is decreasing. This is represented by the growth of the blue bands in the top right corner of the chart. As mentioned, these bands represent the % of Bitcoin in circulation that hasn’t been moved or spent in over 5 years, it represents the HODL’ers.
Right now, around 20% of the total supply of Bitcoin hasn’t been spent in over 5 years, meaning 20% of the supply is currently being held for the long term, or maybe even lost due to forgotten keys and passphrases.
Regardless, it shows that the liquid supply (amount of coins available to be spent) of BTC is shrinking, while the total supply (amount of coins in existence) grows.
In approximately 330 days, the Bitcoin mining reward will be cut in half. Let’s take a few steps back so we can better understand what that means, and what it will do to the value of Bitcoin.
Bitcoin is minted when a miner or group of miners finish validating a block of transactions (think of a block of transactions like one page in a financial ledger). Miners are like blockchain accountants, they set their computers to validate the transactions occurring on the Bitcoin ledger, and whenever they mine a new block they are paid 10.4 Bitcoin. That 10.4 Bitcoin is newly minted cryptocurrency that didn’t exist until a new block was mined- this is how the supply of Bitcoin increases.
The mining rewards are also meant to cover the basic costs of mining, electricity bills and such. What this means, is that every time a new block is mined and new Bitcoin is generated, miners will usually sell this new BTC to cover their costs, releasing new BTC into the greater ecosystem to be bought, sold, and HODL’d.
The supply will continue to increase in this fashion until there are 21 million Bitcoin in existence. The halvening is an anti-inflationary function that Satoshi Nakamoto (the creator of Bitcoin) put in place to make sure the value of Bitcoin was never pushed down by the supply increasing too fast. He describes the function in the Bitcoin white paper.
“The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase
Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”
The halvening is a very positive catalyst for Bitcoin, not only does it represent a decrease in the rate of supply growth, it also represents a smaller amount of BTC being sold on a regular basis by miners. This decrease means less downward pressure on the price of Bitcoin over time.
It’s been a while since I took Economics, but I’m pretty sure that decreasing supply coupled with an increasing demand is a good thing?
Now that we’ve examined the supply, let’s take a look at the current demand for Bitcoin.
Hedge Funds, Banks, Pensions, and other financial institutions have been quick to speak negatively about Bitcoin in the pass. The CEO of JP Morgan notoriously called Bitcoin a scam, right before announcing that he had loaded up on Bitcoin himself and that JP Morgan would be launching their own cryptocurrency…
People tend to hate what they don’t understand, and up until recently, institutional players didn’t really understand Bitcoin. Bitcoins value is a result of the growing number of people who understand its utility, and it seems like institutional investors are starting to catch onto that utility.
There has been a rise in the number of institutions actively investing (or considering to investment) in cryptocurrency. Fidelity opened a cryptocurrency custody service in early 2019, they conducted a survey amongst institutional investors and found that 43% of them want to add cryptocurrencies to their portfolios.
This is big because the demographic that allows institutional investors to control their money is the same demographic that has shown resistance in entering crypto markets. If institutional investors decide to move their Assets Under Management from bonds, or gold, to Bitcoin — the growth would be astonishing.
A lot of the recent growth we’ve seen in Bitcoin has come as a result of Institutional investors entering the space with large amounts of capital. The market cap of the entire crypto market is around $300 billion at the moment, the last time it was at $300 billion Bitcoin hit all time highs, as well as Ethereum, Litecoin, and several other top coins. This is important because a lack of liquidity was cited as one of the main reasons institutional investors stayed clear of cryptocurrency in the past. They were afraid that there wouldn’t be enough buyers to liquidate large orders when it came time to sell.
It seems like the market is starting to provide this liquidity organically (let’s not talk about market makers). Just in time for platforms like BAKKT to launch in July, providing an on-ramp for another wave of investment.
“Institutional demand for bitcoin has soared. As of June 17, open interest at CME Group saw 5,311 contracts totaling 26,555 BTC, or approximately $246 million — dwarfing the volumes during the 2017 price peak.” — Yahoo Finance
I’ve read and written so much about Facebook’s cryptocurrency in the past few weeks that I’m sick of it. So I’m not going to go into too much detail here. I won’t go into whether or not the coin will be truly decentralized, or if its a worrying sign of a future where corporations have sovereignty over all.
Let’s throw aside any thoughts of whether or not Libra will be managed effectively.
What I want to focus on here is what this piece of news has done, and will continue to do for Bitcoin and other cryptocurrencies. Facebook has the attention of the media, it’s one of the worlds largest corporations, and has more money than several countries.
For the past week news about Project Libra has been all over my Twitter feed, Medium, and even traditional media outlets. Forbes, Fast Money, Financial Times; everyone is covering Facebook’s entrance into crypto markets.
This is amazing for Bitcoin. The retail investor wave hasn’t begun even begun. I don’t have old friends from school calling me asking me about Bitcoin just yet, we haven’t hit critical mass.
The search volume on Google for “Bitcoin” is still at relatively low levels compared to the last time the price saw this much growth. As the retail market catches on, we’ll see that search volume rise, and FOMO will kick in.
The future is wide open.
We certainly are not past the days of $1000+ BTC swings, as evidenced by today.
I do think we’ll bounce around a bit more, maybe even giving back much of what we just earned.
But, the cynics have been silenced. That, in of itself, is worth its weight in digital gold.
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