The Crypto Bear Market is Over
Following a dramatic surge higher in cryptocurrency prices beginning on Tuesday April 2, we believe that the crypto market is now at an important turning point - and the roughly 15-month long cryptocurrency Bear Market is now over.
There were a series of conditions that we had identified and awaited to signal the end of the Bear Market. Those have now been triggered - and the result is that the risk/reward of investing in crypto at the present time now strikes us as extremely compelling. We feel that a new Bull market is still in its early stages and there are expected events in the coming months that may bring considerable increase in market participation.
We have written extensively about our fundamental, structurally bullish outlook on the space in recent months. We have long been confident about the tremendous medium to long term opportunities in the space - but were cognizant of the fact that in capitulation markets, fundamentals and valuations play little role in determining when and where the market could stop falling. For example, from Bitcoin’s $20,000 high in Dec’18, the difference between a $3,200 or a $4,500 bottom in Bitcoin was relatively insignificant - one is a 78% drop, the other 84%. Both levels represented enormous crashes from the pre-crash highs, and a bottom of $3,200 or $4,500 would be immaterial to where prices may be in the long term (2+ years from now). But having fallen to $4,500, further lows - or many re-tests of those lows - were normal, and of course a 30% drop from $4,500 to $3,200 is enormous. Because of these considerations, we remained tactically flexible in recent months and varied our net exposure level in order to capture gains during rallies and reduce risk during technically weaker periods, while waiting for clear signals that the Bear Market had ended.
What specifically drives our positive call?
Technicals are very strong:
$4,200 was a significant resistance level for Bitcoin. It had approached and failed to break that level 4 times in the past 4 months. The decisive move through that has turned $4,200 from resistance to support. (chart here)
Bitcoin is trading above its 200-day Moving Average (currently $4,612) for the first time since May 2018.
High trading volumes from December through March indicate that Cryptocurrencies moved from ‘weak hands’ to ‘strong hands’.
Bitcoin's mining reward will be halving, this is set programmatically to happen in May 2020, historical data indicates the process tends to put a bid under the cryptocurrency at least a year in advance. (The protocol automatically reduces new issuance after a certain number of blocks are processed, an event that occurred most recently in 2016)
Institutional infrastructure rollout is expected to accelerate in coming months:
Fidelity soft launched their Bitcoin custody product in recent weeks
Bakkt & ErisX await CFTC approval, which is expected in 2Q19
Recent pro-crypto initiatives and statements by cutting edge business ‘missionaries’ (Jack Dorsey from Square/Twitter, Elon Musk, Facebook token initiatives, JPMorgan coin) which show that belief in the transformative potential of Cryptocurrencies continues to expand, and is gaining very high profile and influential voices at the top of the ‘traditional’ business world.
Cryptocurrency’s Highly Asymmetric Risk/Reward profile
There are two parts to the Cryptocurrency Asset Management puzzle: Top Down and Bottom Up. The Bottom Up piece involves asset and token selection, and requires deep domain knowledge and a combination of diverse skills: These skills include Tech and VC investing, cryptography, financial markets expertise, legal and regulatory understanding, game theory and investor psychology.
The Top Down analysis post-crash can essentially be summed up in a question - “Are cryptocurrencies as an asset class going to survive?” The answer to this question should also answer the question “will the 2018 cryptocurrency crash be followed by a recovery?” We believe the answer to both questions is yes, as historically asset classes that crash and do not recover belong to one of four categories:
Hyperinflated currencies (Weimar Germany, Zimbabwe, Venezuela)
Asset destruction (war, natural disaster)
Technological disruption (horse buggy whip manufacturers)
None of those categories characterize cryptocurrencies. In fact, in two of these categories, cryptocurrencies appear to have the opposite characteristics. Bitcoin’s defined, fixed and low inflation schedule means that it is the opposite of a hyperinflated currency, and that feature is one of the main use cases cited by Bitcoin bulls. And cryptocurrency/blockchain in general are on the bleeding edge of Technological disruption - crypto is the disruptor, not the disrupted.
We believe that as fears of further sharp losses recede from investor psychology, market participants attention will again be focused on the extraordinary opportunity in the technology and market adoption potential of cryptocurrency. And while the ‘success’ of cryptocurrencies is by no means guaranteed, attention will again focus on cryptocurrencies’ asymmetric upside potential. The great cryptocurrency experiment can of course still fail, and many risks remain. However, if it succeeds, the upside potential is enormous, with reasonable parallels to the recoveries seen in post-dot com crash equities.
In line with our belief that the Bear Market is over, we have shifted to a structurally bullish posture in the fund. Our tactical caution in recent months meant that we ran relatively high cash positions (note: despite doing this during an up market, we still managed to outperform Bitcoin and cryptocurrency indices). Unofficially, Decentral Park Capital LP posted a positive return of 16.2% during the 1Q19, while BTC was up 9.8% and the Coinbase Index was +14.1%. This performance was recently rewarded by BarclayHedge, who named Decentral Park Capital LP ‘#1 in the Discretionary Traders’ category for the month of February 2019.
While we have shifted to structurally bullish positioning, we still expect market volatility to be high in the coming weeks and months - and we intend to continue to tactically trade around large market moves. The current rally may last for a few more days or longer, but we see a high likelihood of a pullback as well, possibly back to the recently broken resistance levels. Key levels for Bitcoin are $4,200, ~$4,600 (the 200 day MA, currently at 4,612), and ~$6,000 (the key support level throughout 2018, whose breaching in November led to the ~$3,200 recent low).
In summary: We believe that the cryptocurrency Bear Market is over, and we expect to be trading from a structurally bullish outlook for the foreseeable future. The current risk/reward for cryptocurrency investment strikes us as very strong right now due to a special combination of success probabilities and very low post-crash valuations.
We note that the press - both the crypto press and the traditional financial press - have been scrambling to point to a specific ‘trigger’ for the current rally. This is what the press (and brokers) does - they have to tell stories and come up with explanations, as the worst possible thing they can say is “We don’t know why”. In this current rally, there have been two main themes pushed - one that the buying frenzy was triggered by a $100m Buy order placed across three exchanges on Tuesday morning, the other that a ‘fake news’ April fools story about the SEC approving Bitcoin ETF’s triggered bot-based buying. But both of these stories are nonsense, as is the notion that there ‘must be’ some identifiable trigger in the minutes or hours before the rally to ‘justify’ the action. $100m Buy (or Sell) orders are very frequently placed across exchanges. Most of the time, they may have a short term impact, pushing prices up or down a few percent. Only rarely do they trigger a wider move, and when they do that wider move is caused by the underlying market set-up. We have written extensively in our letters in recent months that we are structurally bullish on market recovery, and that it was a matter of time until.
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