Welcome to The Bitcoin Forecast #30.
We just saw a significant deleveraging of the system resulting in a flash crash and tentative recovery of price. I’ll depart from my normal forecast format to give a brief update to keep you informed. We’ll focus on a post mortem of the unwind and also review of what investors are doing in response to the extreme market action this last day.
Top level summary for 8th Sep 2021 (current price $46.5k):
> Macro & mid-macro: Unchanged please refer back to the previous letters.
> Short term: We experienced deleveraging of long positions, the sell-off originating from speculators, in part fuelled by spot market leverage. Meanwhile investors continue to buy unfazed. I expect price will
normalise back to investor fundamentals soon. Supply Shock valuation points to $55k+ to address this imbalance.
> Price action expectation: v-shaped recovery back to mid $50k for the remainder of this month.
> Price action conviction: Medium to high.
All the best until the next letter.
DON’T GET REKT!
Please do not trade on this forecast assuming perfect accuracy. All forecasts are probabilistic
with roughly 80% historical reliability for short time frame forecasts. Short time frames are subject to unpredictable events and the randomness of markets, please use appropriate risk management.
Longer range forecasts are more reliable as it takes time for fundamentals to play out.
Investor buying remains unfazed
The BTC price is determined by two systems: (1) speculators on leverage exchanges and (2) demand and supply of investors who want to hold the underlying asset. Speculators control the short term price while investors control the long term price.
What we saw was a sudden crash of BTC price which originated from leverage markets as traders got bankrupted in a big deleveraging. Deleveraging happens when margin positions (coins that were bought from borrowed money) get forcefully sold back onto the market to cover the debt and losses. This leads to a cascading sell off as one liquidation sells price down to hit liquidation levels below it by other traders.
In the chart below plotting Supply Shock (investor demand and supply), we can see both short term investors and long term investors continued to buy through the pull back. Price action always reverts to the fundamentals of investor demand given enough time. So it’s very probable that price will rebound to follow the underlying demand and supply.
The COVID crash was a past example of leverage markets selling off in an unwind while investors for the most part did not. This resulted in a v-shape recovery. Our current situation is even stronger with not even a blink of weakness from investors.
Below is a heatmap of long term investor activity shows buying was strong…
Using our Supply Shock look-back model we can see BTC is once against discounted from investor demand and supply valuation…
We are now in a setup where all the leverage has been flushed from the system while investors are buying. With leverage out of the game, what investors are doing becomes the dominant impact on price. This is currently strongly bullish.