Market Update: 9 Dec 2020
No change to our big picture view — so this post will largely be a rehash of prior ones.
- We’re still looking for an extended consolidation a la the Gold top in August, with 16k as interim support and a close above 20k as the invalidation for a further trend extension (Chart 1). Although looking less likely now, we still remain open to the possibility of a blow-off top above 20k, and will only be reacting on a close above 20k basis.
2. From an Elliot wave perspective, we see this as Wave ((4)) of III with a longer drawn-out & shallower correction as compared to the sharp 78.6% Wave 2 retracement for the March low. A 50% retracement of Wave ((3)) would take us to ~12k which lines up with the end of Wave ((1)) without overlap between them (Chart 2).
3. Going into this month/quarter/year-end expiry on 25 Dec we see as a risk still, considering the magnitude of this quarter’s rally as well as the expected record open interest for all derivative markets across the board in both options (Chart 3) & futures (Chart 4).
4. Looking back, Q417 was the largest absolute quarter gain in BTC history (gaining up to $15,500 in the quarter alone vs. $9140 this quarter). Back then the market started the decline in the 3rd week of Dec, falling from $19,378 to $10,400 in a week before closing at $14,221 on Christmas day. Granted we don’t expect near the same kind of volatility as back then, but the precedent is worth heeding.
5. We think BTC would need a fresh catalyst to break 20k sustainably, regardless of how much Michael Saylor and his company tries to push it. No doubt he’s trying to make Microstrategy to BTC into what Naspers was to Tencent, but even after all his expected fund-raising would own just 0.3% of the total BTC supply. Huge by individual standards, but not near enough to determine the BTC price. The next likely catalyst in-line we think would be a Fortune 500 company or a major Sovereign wealth fund signalling interest in diversifying into BTC. A G20 central bank would of course be an absolute game changer, but that’s clearly a step too far for now.
6. Like it or not, its merely just a form of greater fool theory that drives the so called store-of-wealth assets like Gold or BTC. This means ultimately its about trust in the asset, and as crazy as it is, we cannot ignore far-out news that has the possibility to drive/erode that trust/sentiment. Just like this week’s news of the claimed Chinese quantum computer breakthrough, or Space mining of the gold asteroid in August (Chart 5).
7. Regardless of the reason for the further break in correlation, Gold and BTC are now trading at the most negative correlation (-25%) since the start of the BTC exponential rally in October. This means tomorrow’s likely ECB bazooka or next week’s FOMC meeting might not matter much to BTC at all as it would to Gold.
8. Longer-term however, we are believers that the market would have to embrace proof-of-stake over proof-of-work if this quantum computing trend continues. Perhaps the community that PTJ was unwittingly referring to when he said it was “like investing in Steve Jobs in Apple or Google early”, was ETH rather than BTC. In any case, ultimately its about timing and the wider market is definitely nowhere near ready to move there yet. In the meantime the higher beta ETH and risk of being classified a security by the new SEC Chair still leaves BTC the king of crypto for the very foreseeable future.
9. In-line with our big picture view, we still like selling vol across the board especially on the longer-tenor contracts. We think that should the current mania deflate, its the call tails that will come off the hardest — the June 72k, 64k & 60k strikes being the clearest candidates. For puts we are keeping our strikes safe still at 16k, 14k & 12k, and looking for a deeper dip to put these on at excellent premium levels.