Welcome to The Bitcoin Forecast #34
My last letter outlined a bullish on-chain structure with a price expectation to explore $50k+. On the 24th September, a critical expiry date for derivatives markets, we had the news of China re-iterating their ban on cryptocurrency transactions. The markets reacted with an immediate drop from $45k to test local lows of $40k before rebounding into a sideways regime.
This letter focuses on my latest work around improving the short term on-chain models. From there I’ll give an update on what the models are saying.
Top level summary for 30th Sep 2021 (current price $41.2k):
> Macro & mid-macro: Long term investors are now at their peak levels of accumulation. If history repeats, we can expect two or more months of re-accumulation followed by a strong rally.
> Short term: While price action has been locally bearish coming off China news, long term investors have been buying.
> Price action expectation: Sideways between $39k and $47k over the next 2 weeks, this may change if new changes come in, I’ll let you know.
Price action conviction: Medium.
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.
Admustments to demand and supply data
Much of my analysis of late has been focused on assessing the demand and supply of investors seen on-chain. Many of the short term signals use Glassnode’s Liquid Supply data, which gives us a high resolution view of the behavioural history of different kinds of investors as coins move between participants.
I’ve been noticing significant drift in my Supply Shock chart over time. Earlier today I wrote a tweet thread describing this drift.
The quick explanation is that the dataset takes time to stabilise as new behavioural information comes in. As more information accumulates, data on the past becomes more reliable, meanwhile the data around recent events should be taken with a grain of salt as it is subject to change as new information comes to light.
To illustrate this point, here’s a chart of Illiquid Supply, the coins held by investors that buy with little history of selling
In this chart we can see the raw data over-estimates Illiquid Supply when compared to the adjusted figure, which accounts for the eventual stabilization of the dataset.
This has ramifications to the Supply Shock charts we’ve been using. Here on in, I’ll give an update of the new findings
A clearer view into how much the market is undervaluing BTC is best seen in the chart below.
We are now in a zone of peak undervaluation by the market. In all past dips into this zone we’ve seen price rally to address the imbalance.
Investors are buying as price declines
Below is the demand and supply chart corrected for drift. It’s clear to see the adjusted chart is not as bullish as the original.
In fact the adjusted chart signaled a bearish divergence at $53k where investors were selling as price climbed. This was not picked up in the original version of the chart using the raw data
We are now in a local region where investors are buying while the price is declining, this is a bullish divergence signal…
Here’s a heatmap view of the same data. Buying is locally dominant, suggesting a price rebound.
BTC priced at moderate discount to demand and supply model
With the latest adjustments, when we run our look-back model to assess the price when Supply Shock was at similar levels, we get the valuation points below.
Overall long term investors are pricing BTC at ~$45k, while short term investors are pricing BTC above $50k.
Macro: We are in a re-accumulation phase
Using the latest adjusted data, here’s macro view of coins moving to and from HODLers that have very little history of selling (who we like to nickname “Rick Astley”). We are in a region of steady accumulation by these types of investors.
Long Term Supply Shock is now at peak levels. This macro-centric metric tracks coins that have aged in wallets for more than 5 months, which is a threshold where the probability of those coins being sold starts falling away. Historically we’ve seen this chart continue to peak for 2 months or longer before a strong rally takes place. Accounting for this, Q4 2021 looks set for a sideways accumulation phase, before a strong bullish phase late this year and into 2022.