The World’s Greatest Trade?
The price action in bitcoin over the past few weeks has been noteworthy, continuing an excellent year for the cryptocurrency. Year to date bitcoin is up roughly 91% (priced in US dollars), making it the best performing asset class.
What makes this so impressive to me is how the price continues to confirm the widely publicised stock-to-flow model, making the short-to-medium term attractiveness of bitcoin so immense. You can read about my bullish thesis for bitcoin here, wherein I detail the stock-to-flow model put forth by pseudonymous hedge fund manager, Plan B.
An updated chart of this stock-to-flow model can be seen as follows:
Source: @100trillionUSD
Indeed, it appears as though bitcoin’s price is repeating the pattern seen in its previous halving cycles. If we look at how similar bitcoin’s performance in this halving cycle compares to what occurred during the previous cycle (2016-2019) and its price proposed by the stock-to-flow model above, it provides an encouraging outlook for the next 12-18 months.
Source: Bitwise
What’s more encouraging is we are seeing bullish technical confirmations of this trend on both the short-term and long-term charts, which as I noted here, the most recent of which resulted in me adding to my position.
On the daily chart, we have seen numerous bullish breakouts of pennant patterns over the past 12 months, the most recent of which occurred in early October and has preceded a roughly 20% gain thus far.
Source: StockCharts.com
These shorter-term breakouts come amid a long term bullish breakout which occurred mid-year. There is important overhead resistance around the $14,000 mark, which if broken could see the price move up to match the all time highs of around $20,000 in short order.
Breaking the $14,000 resistance level would be a an important technical breakout, as it too is roughly the 61.8% Fibonacci retracement level from the all time highs set back in late 2017. This is something to keep an eye on.
If we look at the performance of other major assets and markets relative to bitcoin, a clear pattern is emerging. Gold, perhaps bitcoin’s biggest competitor at present and my favourite trade for the foreseeable future, is breaking down relative to bitcoin.
The Nasdaq is about to test its long term trend line and could soon follow suit.
The Australian share market has already broken down.
So too has the S&P 500.
And European equities.
Even treasuries are breaking down.
Need I go on?
From a fundamental perspective its not hard to see why bitcoin offers an attractive alternative to traditional risk assets. With US equity valuations at all time highs and bond yields at all time lows, those looking for an attractive investment are starved for choice. All traditional valuation metrics and fundamental projections will tell you the outlook for developed market equities is poor. This puts us millennials in a difficult position. As we begin to earn sufficient incomes that allow us the opportunity to invest surplus cash, traditional risk assets in all likelihood are guaranteed to lose value over the next 10 years. The tailwinds for most developed markets are few.
The millennial generation has not been afforded the once in a lifetime opportunity the baby boomers who came before were so lucky to receive. For the most part, as the boomers entered their working lives during the 1980s and they began buys of risk assets, they were given equities at single digit valuation multiples and bond yields at all time highs, a combination which has resulted in the richest generation in history. Fortunately for those of the younger generations, bitcoin may offer some form of opportunity it seemed we may not get.
To be sure, my short and medium term bullishness for bitcoin is evident, however, I do have some longer term concerns for bitcoin and cryptocurrencies as a whole. I can confidently say we are in the (early) process of moving to a digital based monetary system. The future of money itself will be digital and will most likely be in some form of central bank issued digital currency. This is something I intend to write about in the future, and thus in order to keep it brief for now will note that I do expect there to become a point in time whereby the decentalised cryptocurrencies of today, namely bitcoin, will grow large enough in market capitlisation that the US government will try to intervene in some capacity. To be clear, I do not expect them to put a stop to bitcoin in any capacity, but they will certainly be incentivised to promote a digital currency of their own which they have full autonomy over.
For now, bitcoin remains far too small of an asset to warrant any such intervention by governments. In fact, you could argue at this stage the exact opposite is true. Bitcoin’s share of global market liquidity is still less than half a percentage point.
Source: Teddy Vallee - Pervalle Global
Cryptocurrencies are still a speck of dust in the vast financial system of today. What is encouraging though is we are continuing to witness some of the smartest minds in finance, technology and entrepreneurship become involved in bitcoin, blockchain technology, decentralised finance and digital currencies in a similar manner to what has occurred over the previous half century in the realm of personal computing, internet and technology. The famous hedge fund manager Paul Tudor Jones recently heeded this very same point.
For the meantime, the skew of the risk-reward for bitcoin remains far greater than any alternative risk asset and certainly has the bigger upside. One need only commit a small amount of capital to participate.
