Dear subscribers,
Welcome to The Bitcoin Forecast #48.
Since my last letter where we saw early signs that demand was coming in forcing a reversal in price. Bitcoin has recovered and broken out from its 3 month bearish trend. It’s been almost 2 weeks since my last letter so it’s time for an update.
Normally I like to wait for a solid view to arise, but unfortunately the last week has been marked with conflicting signals. The underlying drivers of what is moving the market is changing. Let me cover this in the points below.
Top level summary for 11th Feb 2022 (current price $45.1k):
> Price is recovering from extreme levels of being oversold, an event that has happened at these extremes only 4 times since 2015. Using our on-chain demand and supply modelling we can see the market previously priced BTC at $50k under similar conditions. The broader view is for BTC price to continue to recover.
> There is however some weirdness which I take as a sign that the market structure is changing. Hodlers and speculative investors have been selling down while price is ignoring this sell pressure and continues to rise. This selling is contrasted by exchange data showing sophisticated passive buying on spot exchanges and movement of coins to whale controlled wallets. One explanation is that retail have been selling this bounce while institutions redeploying capital have been buying.
> Additionally futures markets are suggesting a sell-off. If you recall, our 3 months of downward price action was initiated and led by futures traders and our recovery started when futures sellers relented. As of the last week, price no longer responds to the pricing of futures markets. This may suggests to me that market neutral quant traders have been entering the market at scale and a new balance is being discovered.
> Shorter term price currently is responding best to spot exchange data, which for now has been consistently bullish.
I’ll do another update once the market finds a new balance, for now all is weird in the Bit-corn fields.
All the best.
-W

Analysis Breakdown

BTC is recovering from extreme levels of undervaluation

The chart below compares BTC price to the underlying on-chain demand and supply exhibited by two types of investors. Green denotes hodlers, while red tracks speculative investors. The last 2 weeks has seen a very rare event where both speculative investors and hodlers have been at extreme levels of strength relative to a low relative price (2 standard deviations below the norm to be precise).


These events do not happen often. I’ve annotated 3 events in the chart with blue markers, to see a forth event we would need to go all the way back to Jan 2015 when BTC capitulated to $150 before rallying to $20k over the subsequent 2 years.
While this does not tell us much about where the price may go in the future, experience sides with the $33k being a solid bottom. In fact using the my look-back model which finds how the market priced BTC in similar regions of on-chain demand and supply gives a $50k price level. Over the longer term I do expect this level to be regained.


It’s a cautious time with conflicting signals

Having seen how the price has been recovering from extreme levels of oversold, we are in a cautious regime where hodlers and speculative investors have been selling coins on this bounce.
This is compounded by quarterly futures markets, reflective of sophisticated traders, continuing to sell down. I’d note this is attained from tracking the futures pricing above spot price, this premium is compressing and could be explained by other changes to the market structure. For example rather indicating selling, it could be a sign of more quant funds entering the market to provide sell side liquidity in exchange for gaining yield on USD.

Spot markets are buying

While we are seeing hodlers are selling on-chain we are seeing buying on exchanges. When I say “buying” I’m referring to the more sophisticated participant as every buyer meets a seller.
Analysis of exchange data is showing the more patient trader is passively buying. Further, this view is supported by coins moving away from exchanges to cold storage.


Meanwhile whales who hold more than 1000 BTC ($45m) are accumulating. This hints at institutional money deploying capital.