Stan Druckenmiller, one of the all time great market traders, recently mentioned that the current investing environment is the hardest he has ever experienced to predict for the next 6-12months. When even the greats are on the back-foot, it really highlights just how tough markets are right now.
As a result, we really have to consider any and all possibilities. Here are just a select few that cross my mind each day:
- Inflation + Rising Interest rates break the economy – markets puke March 2020 style, Fed pivots, then moon
- Inflation persists making markets chop sideways for 10-years – This is the late 60’s to 70s era for stonks. Volatile crab chops everyone up.
- Inflation dies down but economy breaks due to already baked in rate pain – Feds already rapid rate rise has structurally broken the economy, we just don’t know where yet. Rates pause, economy slows rapidly, and easing returns.
- Energy crisis in Europe/Japan brings global markets to a halt – Fed forced to print money and bail out EU and Japan to avoid backing down on energy sanctions.
- World collapses and everything moons – because it is 2022 and nothing makes sense anyway
For most of us, upside is more fun than downside, and downside is closer to maximum pain. Since all of the above are plausible scenarios (and just a sub-set of them), lets just focus on some potential bear cases for Bitcoin, to gauge the magnitude of the risk.
First, lets look at the supply distribution, broken down by Long (blue) and Short (red) term holders.
- The Good: Huge holdings by LTHs above $30k (HODLers), and the large STH cluster at $20k == genuine demand
- The Bad: Basically nothing by air below us, with the next support somewhere around $10k…
Onchain activity remains horrendously low for both BTC and ETH. We are on dregs, only HODLers remain, there is nobody left, and nobody is coming to save us.
- The Good: If there are only HODLers, who is going to sell?
- The Bad: If there is no demand…how can we go up? We are at multi-year lows here. ETH has higher gas prices before DeFi even existed…and Bitcoin activity is back to 2019-20 levels
Bitcoin is pretty much on the cost of production model, calculated from a regression between Market Cap and Difficulty.
- The Good: Extreme value zone. Essentially BTC has returned to it commodity price, and all speculating premium is flushed out.
- The Bad: prices falling further puts miners back into high stress (selling treasuries), and we have traded well below this model many times in the past (in fact for all bear markets). It is kind of air below us.
Finally, we look the the trusty MVRV Ratio, where we are currently trading at 0.884, meaning the market is at an average loss of -11.6%.
- The Good: As you can see from the black line below, we are in extreme and deep value territory. We just don’t get much more undervalued than right now.
- The Bad: It has been lower…not by much, but another -20-30% drawdown would be at the extreme end of deviation from the MVRV cost basis.
It is a tricky market, and is damn hard to get a good read on. I won’t lie, I remain 75% bullish to be honest, simply because I am a man of statistics, and I believe that the world has NO PATH out from the prevailing debt spiral aside from debasing the currency.
Over any meaningful timeframe (years), I am 99.999% sure that $20k BTC is going to be a historical buy.
Am I ready for a visit to $10k? Yes. Just in case. I don’t expect it, but I am ready if it happens.