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After strong performance from lows, bears claim this is a “bear market rally”; we discuss recency bias and the opportunities for long-term investors.
- After a strong July and first half of August, the late summer week offered investors on opportunity to take intermittent profits into the notoriously quiet weeks of late August
- Bears have dismissed the strong move from the lows, citing a “bear market rally” and “dead-cat bounce,” despite signs of bitcoin and ether outperforming as the market normalizes (last week’s note here)
- We offer the significance of recency bias and reflexivity during market reversals, particularly for digital assets
- We highlight bitcoin’s valuation and deviation from long-term trend to highlight historically attractive opportunities at current levels
THE BIRD'S EYE VIEW
After a strong July and first half of August, this late summer week offered investors another “break from the action” after many months of roller-coaster type price action.
Broadly, with the S&P 500 and the technology sector bouncing off their lows and into their 200D moving averages, traders found reason to take intermittent profits into the notoriously quiet second half of August.
Within digital assets, bitcoin has experienced resistance around the $25,000 level, particularly as ether’s Merge has taken much of traders’ interest as of late.
The pullback seen last week (bitcoin -11.7%, ether -16.7) is likely much to do with some “profit taking without FOMO,” as bitcoin and ether bounced as much as 37.7% and 120.5% from their lows of $17,785 and $903 in mid-June to their recent highs of $24,495 and $1,991.
Those that were bearish for too long are now claiming that the rally in both digital assets as well as within equities is a “bear market rally” and a “dead-cat bounce,” citing that inflation, the recession, the Fed, and whatever possible will create another roll-over in risk assets.
But those calls are nothing new following a sharp decline in market prices. As history has illustrated, investors often believe what is occurring now will continue to occur in the future, maintaining a “recency bias.” This is now occurring within digital assets.
Consider that the market also experiences “reflexivity,” or the positive feedback loop of price and sentiment.
When price moves lower, sentiment declines. Scrutiny rises quickly, and questions of bitcoin and crypto’s viability rapidly emerge.
But when price is moving higher, sentiment improves. And when bitcoin is making new highs, everybody loves the technology, and “it’s going to change the world.”
This feedback loop ultimately benefits bear-market investors that focus on the fundamentals despite price weakness. We often discuss new highs in holding trends for bitcoin or resilient transaction activity for Ethereum as simple indications that things continue to improve despite the “crypto winter.”
Pair this with signs of bitcoin and ether’s ability to outperform as the macro environment “normalizes” (remember, periods of rampant inflation are not the “usual” in market or recent history), and it’s reasonable to conclude that an opportunity lies ahead for willing, long-term investors at these depressed prices.
Remember, markets rarely, if ever, provide an “all-clear signal.”
While some remain hesitant due to the possibility of more downside, consider that the asymmetry of this asset class inherently improves as prices come off their all-time highs.
This is as bitcoin has now had five 70% drawdowns or more and in four of those, the asset has not only recovered, but significantly moved higher. We’re now in the fourth drawdown. History doesn’t repeat itself, but it often rhymes.
So, is the bottom in? Well, maybe. As we discussed last week, macro stress factors have begun to improve under the surface, which can support a true reversal if these dynamics were to continue. As a reference point, for bitcoin to reach new lows, the asset must pullback by ~17% from Sunday’s close, while ether would have to decline a much larger ~44%.
But consider “recency bias,” the current calls of a “bear market rally,” “reflexivity,” and the shift in sentiment that often occurs after price moves higher, and we have an interesting dynamic through the end of the year.
To illustrate that these levels are attractive on an historic basis, we discuss bitcoin’s distance from its long term 200D moving average as well as the attractive levels in the “MVRV” valuation multiple in the following sections.
DISTANCE FROM LONG TERM TREND
Bitcoin remains at an attractive distance from its 200D moving average, a simple long-term trend indicator. When looking back at history, we can find meaningful deviations between price and this average for signs of “value” versus its longer-term trend.
With a 200D moving average of $32,383, Sunday’s close of $21,475 is a disparity of 33.7%. Other notable bottoms and percent deviations include:
- -55.3% on 6/18/2022, the low of the 2022 year
- -42.5% on 3/16/2020 during the Covid-capitulation
- -49.7% on 12/15/2018, the 2018 major drawdown bottom
- -58.0% on 1/14/2015, the 2015 major drawdown bottom
This compares to large deviations above the 200D moving average at bitcoin’s highs, such as:
- +48.8% on 11/9/2021, the 2021 all-time high
- +93.9% on 4/15/2021, the 2021 April high
- +244.0% on 12/16/2017, during the runup to $20k
Even with the bounce from the lows, bitcoin remains at historically attractive levels for long-term investors.
MARKET VALUE TO REALIZED VALUE MULTIPLE
A popular valuation gauge for bitcoin is the Market Value to Realized Value multiple, which compares bitcoin’s market price to the average “on-chain cost basis” and can be interpreted as “the multiple one pays for the average store of value price.”
An MVRV multiple of less than one has occurred very few times in bitcoin’s history, with recent and notable dates including:
- 0.84x on 6/18/2022, the low of the 2022 year
- 0.85x on 3/12/2020, during the Covid-capitulation
- 0.70x on 12/14/2018, the 2015 major drawdown bottom
- 0.55x on 1/14/2015, the 2015 major drawdown bottom
This compares to multiples in the 3, 4, and 5x range at bitcoin’s highs, such as:
- 2.9x on 11/8/2021, the 2021 all-time high
- 3.5x on 4/13/2021, the 2021 April high
- 4.5x on 12/16/2017, during the runup to $20k
This suggests the current MVRV of ~1 is an attractive risk/reward for long-term investors.
Click here to download full report. As always, please reach out with any questions or comments.
Joseph Orsini, CFA
Vice President of Research
Price Volatility of Digital Assets – A principal risk in trading Digital Assets is the rapid fluctuation of market price. High price volatility undermines Digital Assets’ role as a medium of exchange as consumers or retailers are much less likely to accept them as a form of payment. The value of client portfolios relates in part to the value of the Digital Assets held in the client portfolio and fluctuations in the price of Digital Assets could adversely affect the value of a client’s portfolio. There is no guarantee that a client will be able to achieve a better than average market price for Digital Assets or will purchase Digital Assets at the most favorable price available. The price of Digital Assets achieved by a client may be affected generally by a wide variety of complex and difficult to predict factors such as Digital Asset supply and demand; rewards and transaction fees for the recording of transactions on the blockchain; availability and access to Digital Asset service providers (such as payment processors), exchanges, miners or other Digital Asset users and market participants; perceived or actual Digital Asset network or Digital Asset security vulnerability; inflation levels; fiscal policy; interest rates; and political, natural and economic events.
Digital Asset Service Providers – Several companies and financial institutions provide services related to the buying, selling, payment processing and storing of virtual currency (i.e., banks, accountants, exchanges, digital wallet providers, and payment processors). However, there is no assurance that the virtual currency market, or the service providers necessary to accommodate it, will continue to support Digital Assets, continue in existence or grow. Further, there is no assurance that the availability of and access to virtual currency service providers will not be negatively affected by government regulation or supply and demand of Digital Assets. Accordingly, companies or financial institutions that currently support virtual currency may not do so in the future.
Custody of Digital Assets – Under the Advisers Act, SEC registered investment advisers are required to hold securities with “qualified custodians,” among other requirements. Certain Digital Assets may be deemed to be securities. Currently, many of the companies providing Digital Assets custodial services fall outside of the SEC’s definition of “qualified custodian”, and many long-standing, prominent qualified custodians do not provide custodial services for Digital Assets or otherwise provide such services only with respect to a limited number of actively traded Digital Assets. Accordingly, clients may use non- qualified custodians to hold all or a portion of their Digital Assets.
Government Oversight of Digital Assets – The regulatory schemes—both foreign and domestic—possibly affecting Digital Assets or a Digital Asset network may not be fully developed and subject to change. It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, policies or rules directly or indirectly affecting a Digital Asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use Digital Assets, or to exchange Digital Assets for either fiat currency or other virtual currency. It is also possible that government authorities may take direct or indirect investigative or prosecutorial action related to, among other things, the use, ownership or transfer of Digital Assets, resulting in a change to its value or to the development of a Digital Asset.