Time for Cautious Optimism
Hartmann Capital December 2020 Update
To Investors and Colleagues,
Eight months ago, the average pundit snickered, rejoicing in ‘finally’ being right and calling for Bitcoin’s ultimate demise.
Fast forward to today, those same pundits are calling it the next world reserve currency.
In the grand scheme of things we are still very early, but it would be amiss to fail to recognize the recent over-heating of the market and over-eagerness of participants.
After sifting through on-chain and off-chain data, we arrived at our current outlook:
It would be foolish to short or go flat when the market is still vastly undervalued. But this is certainly a time when it’s important to be completely de-levered and prepare downside protection for what may be our next 20-40% pull back (which regularly happens in digital asset bull markets).
In this month’s update, we’ll highlight both the reasons that continue to strengthen Digital Assets 1Y+ bull case, and the data that is motivating us to protect downside more than usually during the next 90 days.
It is possible to be exceedingly bullish on the macro, and yet stay rational. So in the event that the market does indeed pull back 20-40%, it goes without saying that this will be a time to be an aggressive buyer.
Felix Hartmann, Managing Partner
The Macro case for Bitcoin and the digital asset industry could not be any more bullish:
Institutions continue to accumulate Bitcoin: $5.3bn Guggenheim Fund files for approval to invest up to 10% of assets into Bitcoin - Nov 29th, 2020
Wall Street Titans keep joining the ranks: Legendary hedge fund manager Stan Druckenmiller acknowledges that he’s invested in Bitcoin and says it may perform better than Gold if the Gold bet plays out. - Nov 10th, 2020
The first ‘Bitcoiner’ Senator is elected: Cynthia Lummis won the race for US Senator in the state of Wyoming, and is an outspoken Bitcoin advocate that aims to ensure that Congress understands that Bitcoin is a great store of value. Lummis was previously treasurer of the state of Wyoming for 8 years. - Nov 3rd, 2020
Retail Demand is Back: While PayPal had previously announced that select crypto assets would be added to their platform in the future, it was quickly flooded by demand, making them cancel their waitlist and increasing limits much earlier than anticipated. - Nov 12th, 2020
The Bank Bitcoin Bandwagon: From proclaiming fraud to calling it the next big thing, banks like JP Morgan and Citi have completely flipped the script and are now projecting lofty price targets that make my price targets (often called out for being outlandish) look conservative. At this rate the banks may have a future in politics given how fast and radically they change their outlooks. - Nov 18 & 19, 2020
When taking all these incredibly bullish developments together in a single month, no wonder markets rallied as they did. But as the saying goes, be greedy when they are fearful, and be fearful when they are greedy…
After reviewing the macro factors, we are using the word cautious instead of bearish, because using the word bearish in the current setup would be to miss the forest for the trees. That being said we have identified a few red flags that indicate it may be time for a pull back:
Relative Strength is Overbought
The weekly RSI on Bitcoin is currently sitting at 84, which is deeply overbought. Historically the only times it ever reached this level, have coincided with a medium term top, after which Bitcoin went on to correct 20-40%.
RSI, particularly in longer timeframes tends to be very reliable, with the caveat that high RSI also means high momentum, which may cause one to sit out a highly profitable week or two if one exits too soon.
On-Chain UTXO Analysis
Since the blockchain is transparent we can track at what price coins were last moved. This gives us an idea of how much profit the average holder currently has. Using on-chain UTXO analysis, we find that the average Bitcoin holder is currently over 50% in profit. This is the territory where the average holder starts thinking about taking profits or rebalancing, which leads to slowed buying and more sell-side.
Gold Narrative Falls Flat
A lot of people are buying Bitcoin because they believe it falls in line with the gold narrative, in which gold should do exceedingly well in a time of currency devaluation. The people buying for those reasons include both Paul Tudor Jones and Stan Druckenmiller.
In this case Bitcoin isn’t the problem, but gold is. With gold falling back to May/June levels despite an ever increasing Fed balance sheet, one must ask two questions:
Is the gold bet off the table, and if so, will it lead to fewer investors making the Bitcoin side bet?
If the gold bet is still on the table, some may temporarily opt for gold over Bitcoin as it is currently being sold off rather than lingering at historically high RSI levels. Don’t let the short term deceive you though, as Bitcoin is still 30-40 times cheaper than gold by market cap.
A lot of Bitcoiners see gold as an adversary. Instead we see gold as the analogue companion to Bitcoin. Strong gold communicates that the dollar is broken, weak gold on the other hand raises questions on the macro sentiment of dollar strength.
The Crypto Fear & Greed Index is an algorithmic index that combines a number of factors such as volatility, social media mentions, google trends and more. Currently the Crypto Fear and Greed Index is sitting at Extreme Greed.
Over long time frames, this index has done exceedingly well at marking market tops, as can be seen in the June/July 2019 market top. Similar to the RSI however, assets can stay in ‘extreme greed’ for prolonged periods of time.
Rumors of last Minute Regulation
Four things need to be said:
Forcing KYC on all wallets would be a massive hurdle for innovation. It could certainly lead to headwinds price wise in the short term.
However it would hurt the industry less than the country enforcing it, as the country can wish their crypto entrepreneurs goodbye as they move their domicile to another country.
It’s impossibly hard to enforce.
Mnuchin will be out of office in 50 days.
Dumb Money has Returned
A lot of us in the industry were flustered last week as we watched the worst projects rise from the dead only to post record shattering returns. From the dumb to the defunct, highly centralized tokens with literally no means to accrue value posted triple digit returns.
The common theme?
Nearly all the performers tended to be projects that once upon a time in 2017 were considered hot. It stands to reason that we just experienced the re-emergence of the 2017 retail cohort. These are the guys who bought the top, then went on to miss 3 years worth of buying opportunities, only to fomo back into defunct tokens after Bitcoin hit $19,000 again.
If I have learned anything about retail traders it’s the following:
Don’t stand in front of a steam roller - Shorting is a quick way to investing hell.
Quick to buy is quick to sell - Don’t expect current buyers to be holders.
If they are clogging up the highway, install toll booths on the exit ramps - front run their next play instead of chasing their current play.
Shields up and Two Steps ahead
The way forward in such a unique scenario where the market has enormous tailwinds, but is also starting to overheat, is to:
Keep your shield up - Pull backs can come fast
Stay two Steps ahead - Where do the Bitcoin profits flow to next?
Our focus will continue to go into identifying undervalued projects with live products, real cash-flows, and value accrual mechanisms.
The outcome is binary:
The crowds leave -> market pulls back, presenting a buying opportunity
The crowds keep coming and are forced to disperse -> capital will flow into high quality digital assets beyond Bitcoin and Ethereum, causing price impact 1-2 orders of magnitude higher than the large caps.
There is truly only one path for digital assets, and that is forward. However certain that path may be, it will continue to be volatile. While some despise this volatility, it can also be a great opportunity for those that prepare and are ready to invest when the opportunity presents itself.
TIMESTAMP 11/30 2020:
DJI - $29,638
S&P - $3,621
BTC - $19,650
For questions reply via email or write me on twitter @felixohartmann
This is not an offering. This is not financial advice. Always do your own research.
Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.