Crypto – Currencies

     

 

 

Bitcoin Gets Juiced

The prices of gold and silver were up $19 and $0.48 respectively last week. But that’s not where the massive inpouring of groceries went.

 

When Friday began (Arizona time), Bitcoin’s purchasing power was under 75 grocery units (assuming a grocery unit is $100). By evening, speculators added 25 more grocery units to the same unit of bitcoin.

 

Bitcoin, daily – shortly after breaking below an obvious lateral support level, Bitcoin did an about-face on steroids and rallied $3,000 from low to high in the space of a few hours. Interestingly, this rally was presaged by a number of subtle technical signals – bullish divergences with several of the major “alt coins” emerged on occasion of the seeming break-down on October 23, while concurrently a stealth rally in BSV that had started a day earlier refused to be derailed by the sell-off. These are the types of signals we tend to follow in the cryptocurrency markets – we consider them to be traces left by the biggest traders in these markets. Both breakouts and break-downs of resistance/support levels always have to be closely examined for divergences. Note that technical analysis is the only sensible approach to trading in cryptocurrencies, as it is impossible to gauge their “fundamental” value. The latter depends on all sorts of assumptions, all of which could be wrong. Clearly though, cryptos remain an excellent playground for nimble traders. [PT]

 

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Bitcoin – An Exceptional Asset

When I first heard about Bitcoin (BTC) in May 2011, it was trading at 8 US dollars. Today, more than eight years later, BTC trades at around 8,000 dollars. A thousandfold increase! An investment of 1,000 dollars at the time would have resulted in a gain of more than a million  –  a dream result.

 

Bitcoin went from 10,000 BTC for a pizza to around 100 BTC for a Lambo in what appeared to be an unseemly hurry… [PT]

 

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A Noteworthy Sentiment Change

Bitcoin and other cryptocurrencies have declined quite sharply in recent days. Here is an overnight snapshot of the daily chart:

 

Bitcoin corrects again…

 

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Too Much Excitement?

The prices of the metals fell last week, with that of gold -$9 and silver -$0.32. Of course, it was a week of stock market exuberance. Why would anyone want to own money, or seek safety when the Fed can seemingly push interest down / assets up indefinitely? As the old TV ad for Lotto proclaimed “you gotta be in it, to win it!”

 

“Stablecoin” Tether is used as a dollar stand-in on cryptocurrency exchanges that offer no fiat currency pairs. There has been a lot of speculation about the extent to which Tether is actually backed by US dollars. Despite these rumors and a recent admission by the company managing Tether that is is actually not fully backed with USD, it continues to be popular. It should be noted that BTC has a market cap of USD 224 billion and daily trading volume of USD 25 billion. [PT]

 

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Shifting Patterns

In the last issue of Seasonal Insights I have discussed Bitcoin’s seasonal pattern in the course of a year. In this issue I will show an analysis of the returns of bitcoin on individual days of the week.

 

Bitcoin, daily – since bottoming in early December, BTC has advanced quite a bit. It remains an excellent trading sardine. [PT]

 

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Learning From Other People’s Mistakes is Cheaper

One benefit of hindsight is that it imparts a cheap superiority over the past blunders of others.  We certainly make more mistakes than we’d care to admit.  Why not look down our nose and acquire some lessons learned from the mistakes of others?

 

Bitcoin, weekly. The late 2017 peak is completely obvious in hindsight… [PT]

 

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Digital Asset Rush

The only part of our April Fools article yesterday that was not said with tongue firmly planted in cheek was the gold and silver price action (though framed it in the common dollar-centric parlance, being April Fools):

 

“Gold went down $21, while silver dropped about 1/3 of a dollar. Not quite a heavy metal brick in free fall, but close enough.”

 

Bitcoin, hourly – a sudden yen for BTC breaks out among the punters. [PT]

 

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Defending 3,800 and a Swing Trade Play

For one week, bulls have been defending the 3,800 USD value area with success. But on March 4th they had to give way to the constant pressure. Prices fell quickly to the 3,700 USD level. These extended times of range bound trading are typical for Bitcoin Bottom Building in sideways ranges.

This 60 minute chart of Bitcoin shows (represented by the yellow candlestick wicks) how the bulls defended 3,800 USD :

 

BTCUSDT 60 minute chart as of March 4th, 2019

 

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Looking for Opportunities

The last time we discussed Bitcoin was in May 2017 when we pointed out that Bitcoin too suffers from seasonal weakness in the summer. We have shown that a seasonal pattern in Bitcoin can be easily identified. More than a year has passed since then and readers may wonder why we have not addressed the topic again. There is a simple reason for this: the lack of extensive historical data for cryptocurrencies in combination with their extreme volatility.

 

The three Magi: Melchior tries to move with the times. [PT]

 

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Quantity Theory Revisited

The price of gold fell another ten bucks and that of silver another 28 cents last week. Perspective: if you are waiting for the right moment to buy, the market is offering you a better deal than it did last week (literally, the market price of gold is at a 7.2% discount to the fundamental price vs. 4.6% last week). If you wanted to sell, this wasn’t a good week to wait. Which is your intention, and why?

 

Gold vs. TMS excl. memorandum items (the latter add several 100 billion dollars to the recent total, but currency & deposit money represent the bulk of TMS-2 – we chose this version because it allowed us to make a longer-term chart). It is obvious that there is no 1:1, instantaneous correlation between the quantity of money and prices – in this case, the gold price – far from it. However, no-one is saying that anyway, as far as we are aware. The purchasing power of money depends on four factors: the supply of and the demand for money, and the supply of and demand for goods and services. Nevertheless, it is undeniable that prices are not independent of the money supply. With respect to the gold price, the chart above simply shows that there are leads and lags between the quantity of outstanding dollars and the gold price – these can certainly be lengthy, but that is what the periods when the two drift apart represent. The gold price (and all other nominal prices in the economy for that matter) would not have experienced such a large long term increase if the money supply had remained stable. Most of the time, changes in the money supply growth are not very useful for forecasting short term trends in the gold price, but the size of the money stock and the price of gold do correlate over the long term. Mises described the effect of inflation (inflation = an increase in the money supply) on prices as follows:

The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.” 

Elsewhere Mises remarks that economic productivity has often matched or even outpaced monetary inflation, and in those periods nominal price increases were occasionally suppressed altogether:

A sharp rise in commodity prices is not always an attending phenomenon of the boom. The increase of the quantity of fiduciary media certainly always has the potential effect of making prices rise. But it may happen that at the same time forces operating in the opposite direction are strong enough to keep the rise in prices within narrow limits or even to remove it entirely. […] As an actual historical event credit expansion was always embedded in an environment in which powerful factors were counteracting its tendency to raise prices. As a rule the resultant of the clash of opposite forces was a preponderance of those producing a rise in prices. But there were some exceptional instances too in which the upward movement of prices was only slight.” [emphasis added]

Gold is a monetary asset, i.e., the market-chosen money commodity. As such, it behaves like a currency and its long term correlation with USD money supply growth is actually quite pronounced. The supply of gold grows at a very slow pace, and as long as the market treats it like money, its price will tend to rise in the long term relative to currencies with a faster growing supply. In the short to medium term other macroeconomic factors are most of the time more important gold price drivers. It should be noted though that in today’s central bank-administered fiat money system, these other factors also tend to have a lead-lag relationship with money supply growth rates. After all, the latter are driven by central bank policy, which in turn is generally formulated in response to macroeconomic developments. [PT]

 

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A Purely Technical Market

Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing appropriate (and potentially more stable) exchange rates relative to state-managed fiat currencies is still underway.

 

A snapshot of cryptocurrency market caps as of June 12 – they made local lows two trading days later. After the small rebound since then, market caps are now slightly higher than those shown on this map, but it is still roughly in the right ballpark. Note: XRP has the third highest market cap, but we do not regard it as a true “cryptocurrency”. It is not a decentralized currency at all, it is a token under control of the company that issued it (it can be traded though and for a while there was a big burst of speculative demand for it, oddly enough mainly from South Korea). Bitcoin Cash (BCH) is the most important fork from the original BTC blockchain and in our opinion the better Bitcoin. It has a much larger block size, avoiding the scaling problems BTC encountered late last year (which were associated with long waiting times for transactions and soaring fees). BTC still enjoys a first mover advantage and trades at a far higher level as a result. There is no logical reason why it should, but that is a topic for another occasion.

 

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The Global Community is Unhappy With the Monetary System, Change is Coming

Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek’s idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them will be winners and losers.

 

Claudio Grass

 

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