Market Update: 17 Nov 2020

After Thursday’s break above 16,000 we’ve had strong follow-through momentum. This move is becoming the trendiest (longest & most stable) rally in BTC’s history — 73 days and +73% now with only two 10% retracements along the way (Prior rallies were shorter with sharper 20–30% retracements).

1. Last night Chinese crypto watcher Wu Blockchain on his Weixin blog confirmed our hunch that a large part of this rally has not only been the demand side (which has received the most attention lately), but more importantly the supply side as well. He reports that Chinese miners have been facing dire challenges converting their BTC/USDT into RMB, and that 74% of miners he surveyed have now been unable sell their BTC to meet their electricity bills, with some miners already shutting down their rigs for a month. The Chinese crypto industry has been affected since June by the CCP’s crackdown on fraud and money laundering. This has intensified into Q4, with the cross-hair now on the large exchanges and prominent OTC brokers.

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Chart 1

Mining pools were selling large chunks of BTC in early Sep through exchanges, but this was hastily halted as their last remaining fiat off-ramp avenues were impacted with the arrest of large exchange heads like Star Xu and other OTC brokers (Chart 1). Since then it has been a huge challenge for miners to clear their coin, and the lack of supply (Chinese miners are 72% of BTC hashrate) has fed extremely well to the trendiness of this rally, without any of the large sell-downs typical of miner activity in the past. This spot market imbalance driving price has also allowed the leverage funding market to remain very stable throughout the move.

However we know miners are not the target of the crackdown, and it is not in China’s interest to sink the local mining industry either, having quietly removed it late last year from the list of industries Beijing plans to outlaw. It is possible that we see post-halving miner capitulation into year-end once investigation accounts are cleared and possibly a larger risk next month as the year-end bills for miners come due.

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Chart 2

2. Grayscale (GBTC) would also next month see a large chunk (~7–10%) of outstanding shares complete their mandatory 6-month lockup (from June). With no redemption process, GBTC will never be selling any BTC — which is great for the long-term price floor. However with the large lock-ups ending we will be watching for any compression of the NAV premium — which has hovered around 10% in recent months (Chart 2). Should premiums compress closer to par, there will be a lot less new share creation, and mark a potential reversal of the demand/supply dynamics of the past months — with GBTC representing the biggest consistent BTC bid out there vs. a lack of miner offers.

3. The current narrative driving this Q4 rally has been that of BTC being Digital Gold — a fixed supply store-of-value in times of extreme USD devaluation. Gold itself saw a similar narrative play out for 3 months in May-Aug, following the twin Fed bazookas in Mar & Apr and Congress passing the $2.2 trillion fiscal stimulus CARES package. Nevertheless we eventually saw Gold top out into the overly consensus narrative, on a technical pattern we know here as the “TD Royal Flush” — a daily, weekly & monthly 9–13–9 all aligned at the same time. BTC too will experience this TD Royal flush of daily, weekly, monthly 9–13–9 from next week and into Dec. With BTC having taken on the high profile store-of-wealth mantle from Gold in Sep, we lagged the price of BTC by 4 months to match its narrative timeline with that of Gold (in May), and find that this TD Royal flush will coincidentally coincide at the same point. (Chart 3)

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Chart 3

4. Putting this together, we continue to be bullish into the medium & long-term and will keep selling 12k and 10k puts for June 2021 and out, accumulating BTC in the process whilst keeping a core long. However we have stopped chasing this rally near-term and instead look for cheap protection to own into end-Dec or Jan.

The strength of the trend is still intact and dips still very supported we are loathe to call a top until momentum looks to have petered out. We’ll be watching this Thursday again, and any news on the China front for clues as to that.

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