Lessons: Delphi Digital Bitcoin Bull Case #51
Market Meditations | December 9, 2020
When Delphi Digital puts out content, it’s time to take a seat and absorb. Recent publication is “The Bitcoin Bull Case: 2021 & Beyond”. In today’s exclusive newsletter, we summarise 31 pages of analysis, help you get to grips with the technical components and draw your attention to what we deem to be the key takeaways. If you want to start 2021 with the best bitcoin trading strategy, you don’t want to miss this one.
In just 2 years, Delphi Digital have promoted themselves to one of the best research boutiques in the crypto space by consistently publishing interesting insights and perspectives on both bitcoin and promising altcoins. Earlier this week, they published their 31-page long report “The Bitcoin Bull Case: 2021 & Beyond” for free.
Learning From the Past
“History doesn’t repeat itself, but it often rhymes” – Mark Twain
On-chain data from both the past and present cycle is a tool that is not widely used yet produces some remarkable insights about market sentiment and positioning by a variety of market participants. The similarities between different cycles are remarkable at times and probably an important factor contributing to Delphi’s accuracy over the last 2 years. With prices trading close to previous all-time highs, almost every bitcoin position was in profit and naturally led to some profit-taking.
On the chart above, we see behavior similar to previous cycles. The blue line represents the % of bitcoin that hasn’t moved in at least 12 months while the white line represents bitcoins price. Basically, when the blue line goes up, long-term holders are accumulating. When the line goes down, long-term holders are selling. As Delphi wrote in their report: “While selling pressure is intuitively bad for price, what you’ll find studying history is that long-term holders on aggregate don’t sell during bear markets; rather, that’s when they tend to accumulate.”
According to Delphi, given that bitcoin just broke through previous all-time high, the outflows we’re currently seeing match up with the historical trend. A trend that has proven bullish for price, as shown by the purple circles on the chart. The report goes into way more detail on UTXO (unspent transaction output) analysis and I encourage readers to read the full report if they wish to understand the full picture.
What Can Exchange Data Tell Us?
On-chain data isn’t the only data set that can be used to take a look at the market. Publicly available data from exchanges can also prove immensely valuable in measuring the temperature of the market and can provide early warning signals about the market overextending and possible short-term pullback. Keeping an eye on open interest and the funding rate on different exchanges is a popular tool amongst traders because it shows when an imbalance between longs and shorts is increasing, which has oftentimes preceded a market-wide correction. After the recent correction, funding rates started to normalize again after almost $450 million of long BTC positions were liquidated on Binance alone.
An interesting difference between 2017 and this cycle so far has been the total amount of BTC held by exchanges. BTC held on exchanges has dropped 20% since reaching its all-time high in February, which is in stark contrast to the 2017 bull market when exchange balances started rising sharply, likely due to long-term holders starting to sell their positions. This indicates that current buyers might be moving their bitcoin to cold storage for the long-term, rather than looking for a short-term trading opportunity.
What About (Short-Term) Risks?
Although there are many more bull arguments to be found in the report, I wouldn’t be doing my job if I didn’t touch on the potential risks as well. There are a few factors that could harm bitcoin’s recent momentum which investors should be aware of. Technically speaking, it took BTC a few attempts to break its previous all-time high in 2017. Bitcoin corrected 20-30% several times after testing the $1000-1100 area before it finally broke continuing its uptrend. This all to say that patience is once again key and volatility around these levels is nothing but normal. Do not over-leverage yourself while all the market is doing is distributing supply from impatient traders to patient long-term holders.
Fundamentally, there are also a few data points to pay attention to. A lot of this year’s price action has been driven by low interest rates and an (unexpected) rise would noticeably harm assets that were positively impacted by this year’s loose monetary policy. Precious metals and large-cap tech stocks would likely suffer if interest rates were raised, which could also impact BTC given the similarities of the trade. As Delphi writes: “the flip side of a larger institutional presence is the potential spillover effect of a broader sell-off in conventional assets”. A short-term reversal for the U.S. dollar, given the high level of short positions, might be another fundamental development that could increase sell pressure for BTC.
And that’s a wrap. We’ve explored a fantastic publication today by a highly reputable research boutique. Exam question: How do we interpret bitcoin price action? On the bullish case: historical comparisons and exchange data. The bearish defence: low interest rates and a potential reversal for the U.S. dollar. As we go into 2021, these are precisely the type of fundamental and technical factors that will ensure we use the tools at our disposal to make the best possible bitcoin play. Remember, you are going up against many other market participants. Make sure you have the edge by staying up-to-date and informed.
France Is on the Verge of Imposing Mandatory KYC Rules for All Crypto Transactions. France is set to bring new and strict measures to the crypto sector according to The Block. Simon Polrot, president of French crypto association ADAN said that the finance ministry is expected to harden know-your-customer (KYC) rules for crypto firms while also regulating crypto-to-crypto exchanges. Sources told the block that the recent terrorist attacks on France were the main reason for the proposed stricter measures. If the proposed changes go through, all all crypto transactions worth more than €0 will have to go through full KYC processes, which is a lot stricter than the present €1,000 limit that only applies to crypto-to-fiat transactions.Read more.
Citi Downgrades Microstrategy Stock to ‘Sell’ Citing Lack of Confidence in Bitcoin Moves Among Management. Analysts at Citigroup, a U.S. multinational investment bank, say clients should sell their MicroStrategy stocks due to uncertainty regarding a series of bitcoin-related announcements this year. The downgrade happened a day after MicroStrategy said it would double down on its recent bitcoin buys by issuing debt in order to buy even more bitcoin. The Block obtained Citi’s note to client saying that MicroStrategy’s stock was “overextended” and described the firm’s recent plans as “aggressive” and possibly a “deal-breaker for software investors.” Read more.
Bridgewater’s Ray Dalio Softens Stance on Bitcoin, Says It Has Place in Investors’ Portfolios. Ray Dalio, the founder of the world’s largest hedge fund Bridgewater Associates, had indicated that he changed his mind on bitcoin, shortly after criticizing it on Yahoo Finance earlier this year. During a Reddit Ask Me Anything (AMA) on Tuesday, Dalio wrote that bitcoin and other cryptocurrencies have “established themselves” and were interesting “gold-like asset alternatives” that could “serve as a diversifier to gold and other such storehold of wealth assets.” Dalio said that he still has a strong preference for gold over bitcoin because it’s the asset that “central banks are going to want to hold and exchange value in when they are trying to transact.” Read more.
Crypto Exchange Lists Airbnb Derivative Contract Ahead of IPO. Crypto traders can now gain exposure to Airbnb through a pre-IPO derivatives contract directly on FXT. This comes ahead of the highly anticipated IPO tomorrow. Many are watching this IPO to also get a sense for the wellbeing of the travel industry. The performance of the pre-IPO product is linked to the market cap of Airbnb at the end of its first trading day. A nice opportunity to try something different here. FTX says these derivatives contracts “will automatically roll over to Fractional Stocks contracts” after the end of the first public trading day. Read more.
Stocks Drop Amid Stimulus Gridlock as Virus Surges. Following on from an ATH, stocks dropped today on concern over diminishing prospects for fresh stimulus amid resurgent coronavirus cases. The S&P 500 erased gains after Senate Majority Leader Mitch McConnell said Democrats “poured cold water” on his offer to set aside some issues in an aid bill and rebuffed Treasury Secretary Steven Mnuchin’s $916 billion proposal. Most major groups in the benchmark gauge retreated, led by real-estate, utility and financial companies. The Nasdaq 100 underperformed after a 10-day rally. The dollar rebounded, while bonds remained lower. Oil reversed its advance after a government report showed stockpiles growing the most since April. Read more.
#30 The Crypto Monk: Playing the Long Game and How Crypto Completely Changed His Life
The Crypto Monk is a cryptocurrency trader, investor and entrepreneur. He is the co-founder of Yellowblock and very recently became a dad after meeting his wife on Crypto Twitter.
In this episode, we discuss how The Crypto Monk survived and thrived after the bear market by consistently following his plan. We take a look at his background and how his experience helped him become a profitable crypto trader. Monk shares a lot of tips for newer traders and later in the episode, we expand how Monk’s life completely changed by meeting his wife through Crypto Twitter.
Things I learned:
Trading and markets can be a bit of a dark place for some people. It can influence your mood in a very bad way if you don’t have a way to distance yourself from it.
You should never regret taking profit when your position shoots higher afterwards. It’s impossible to time tops accurately all the time.
Missing opportunities is normal. There’s nothing wrong with securing gains to thrive in the long-run. Take some risk off the table at higher time frame levels.
Not being in a position is not a bad thing. Even if you see the train leaving the station doesn’t mean that you won’t be able to get back in later.
Be careful being dependent on paper profits. It’s not profit as long as the position isn’t closed and money is safely deposited into your bank account. Profits can vanish very quickly.
Dividing your positions into portions and taking out your initial position as early as possible can be a good strategy in crypto because of the insane volatility.
Most people in crypto are still very young and don’t necessarily realize the power of compound interest. It’s not a sprint, it’s a marathon.
It’s one thing to make money, it’s another thing to keep it. Making money is easy at times, the hardest part is to keep it when the market turns around.
Your Guide To Trading Breakouts
Trading breakouts is a somewhat aggressive strategy. That being said, it can be very fruitful. You just need to make sure you have a good enough understanding of whether it is a false break and whether you have put in the appropriate orders both to get into the trade at the prices you want and to be able to cover your risk. That’s what we will discuss in today’s ‘Education’ segment, which is devoted to making you a better, smarter and savvier trader.
First, let’s make sure we are all comfortable with the concept of a breakout. When markets are trading in consolidation or ranges, traders try to look for breakouts and trading opportunities. Technically speaking, a breakout or break refers to a price movement that moves beyond/breaks recent established trading ranges or price patterns captured with trend lines. If you are more visually inclined, you can imagine a never ending battle between bulls and bears. Whilst this battle is happening, the buying and selling pressure means that markets tend to consolidate into a zone of prices or a range, where minor price fluctuations create noise. Breakouts then, represent a shift in market thinking: new information (fundamental or technical) that means either the bulls or bears have won (at least for some time).
The first step to trading breakouts is identifying the breakout. This can be achieved through technical analysis. I’ve created a full guide on this. Depending on your preference, you can use trend lines, pattern formations etc. After you have identified a likely breakout point, you can use a resting stop-loss entry order placed just beyond the breakout level to get into a position if a break occurs. Why pre-place the order? Breakouts can occur in the blink of an eye. It just takes that tipping of balance between our bears and bulls.
By placing orders, you can lock in your position. Other traders will find that by the time they react, the market has moved far beyond their desired entry level. So to get long for a break to the upside, you might leave a stop-loss entry order to buy at a price just above the upper level of the range or pattern. To go short, you may leave a stop-loss entry order to sell a price just below the lower level of the range or pattern.
So that’s the first thing to be aware of. The next thing we should spend some time on is protecting against false breaks. Not every breakout is sustained. When prices break through key support or resistance levels, but then stop and reverse course and eventually move back through the break level, it’s called a false break. To protect against a false breakout, you can follow up your stop-loss entry with a contingent stop-loss exit order to close out the position if the market reverses course. This falls into the realms of proper risk management, something my followers will know I am very passionate about.
It’s hard to know exactly when a false breakout is a false break or a real one that you can trade. A few things to keep in mind. The shorter the time frame you’re looking at, the greater the probability of a false break. Then there is the duration: longer duration, more likely to be a valid breakout.The significance of the price level is also key. The more important the price that’s broken, the more likely the market response is sustainable. If there is a fundamental theme involved it’s also helpful to get a sense of how significant the news was. Is the news legitimate? Has the response been too extreme? These are all questions that will help.
And there you have it. Breakouts, how to set up your position and how to manage your risk. I invite you to incorporate these ideas in your trading strategies.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.