Blockware Intelligence Newsletter: Week 57
Bitcoin on-chain analysis, mining analysis, macro analysis; overview of 9/24/22-9/30/22
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A weak Eurozone PMI report triggered a cascading breakdown for the pound, euro, and EU/UK bonds.
The Bank of England was ultimately squeezed by this data and decided to revert back to expansionary (inflationary) monetary policy despite being in one of the most inflationary environments in modern history.
Mortgage rates in the US hit 16 year highs this week, which comes alongside July’s Case-Shiller numbers which showed a decline in housing prices not seen in over 10 years.
The dollar is cooling off this week which could provide some wiggle room for Treasuries and equities to get a bounce heading into next week.
STH RP has crossed below LTH RP which signals an incredible opportunity that has previously occurred only at bear market bottoms.
A spike in realized losses provides evidence that the worst BTC capitulation may be over.
Multiple on-chain metrics show that long term holders have accumulated a large percentage of the BTC supply, and they aren’t letting go.
Bitcoin Mining Difficulty had a slight adjustment down after making new all-time highs in mid-September.
Bitcoin Energy Gravity, which estimates the mean breakeven electricity cost for modern mining rigs, sits at $0.09 per kWh, which historically has been a good buying opportunity.
General Market Update:
Following last week's fireworks, it has felt like a fairly quiet week across the general market. But there certainly were some things for investors to look out for.
Some of the biggest business news stories came from our friends across the pond in the United Kingdom.
On Monday, we saw a severe breakdown of the British pound against the US dollar. This came alongside news of severely weakening economic conditions across the UK and EU.
S&P Global Flash Eurozone Manufacturing PMI (Source)
The eurozone PMI, a measure of economic purchasing conditions, fell fairly significantly to 48.2 for the month of September and has been a major catalyst for the breakdown we’re seeing across the UK and EU.
If you don’t recall, the Purchasing Managers’ Index (PMI) is a measure of the sentiment of purchasing managers across the manufacturing industry. When PMI is rising, generally economic conditions such as demand and liquidity are improving.
A declining PMI environment often coincides with contractions in economic activity also known as the recessionary period of the Short-Term Debt Cycle (or 5-10 year business cycle).
Following Monday’s Eurozone PMI report, bond yields are spiking in the UK and EU and we saw a major decline of the pound and euro against the dollar.
In aggregate, global bonds are on track for their worst year since 1949.
Then on Wednesday, the Bank of England announced that they will be the first to do what many have been waiting for, the good old fashioned pivot.
With inflation pressuring nearly all facets of the economy, the BoE has now decided that a pivot back to quantitative easing will restore stability to their currency and economy.
This would be hilarious if the results of their decision weren’t so dire. They are quite literally attempting to fight fire with gasoline, or petrol, as our English friends might say.
Broadly speaking, the overly aggressive QE cycle that the US’ Federal Reserve undertook is what got us into this mess.
And yes, of course there are other inflationary and negative macro forces out there that played a role, but it is likely that the MAJORITY of the inflation we are seeing was self inflicted.
QE is inherently inflationary, you are creating currency in order to inject liquidity into the fixed-income market. The concern from the English should now be if the BoE will push them into hyper-inflation.
Many are calling for the US to do the same, or are at least predicting that the US will do the same. Personally, I believe that the Fed is likely not to follow England anytime soon, or at least until we can fully observe how their prices and economy react to the news.
GILS 1D (Tradingview)
As of now, we’ve seen a jump in the pound and UK bond prices since the pivot announcement. As you can see above, GILS, an ETF tracking the performance of UK government bonds, which jumped 6.80% yesterday. This was GILS largest single day performance of at least the last 10 years.
To put it into perspective, GILS was up about 6% in all of 2020.
Back in the US, mortgage rates are continuing to scream higher as the effects of higher market rates, declining demand, and consumer fear take a hold on the economy.
US Average 30-Year Fixed Mortgage Rate (FRED)
As of Thursday, the average 30-year fixed mortgage rate sits at 6.70% in the United States. This is the highest level we’ve seen since July 2006, BEFORE the decline in rates triggered by the subprime mortgage crisis of 2007.
That is without mentioning the fact that the average price of a home in the US is nearly double what it was in 2006. This means that despite rates being flat from 16 years ago, American’s signing mortgages today are now paying 2x those in 2006.
That being said, we are beginning to see the effects of higher rates spill over into prices of homes.
The Case-Shiller index is perhaps the most widely used and respected metric for measuring the prices for houses in the United States. While this index does have a fairly extreme lag, this week we finally got July’s data point.
Case-Shiller US National Home Price Index (FRED)
In the month of July, the index declined by 33bps. This marked the largest monthly decline in home prices since 2011, around the bottom of the decline triggered in 2008.
With mortgage rates now up nearly 1.5% since July, we would expect to see a continued decline in the C-S Index for the months of August and September.
Moving onto the stock market, we saw a relatively flat week turn into a bloody Thursday with the Nasdaq closing at -2.84%, it’s worst day in 2 whole weeks!
Nasdaq Composite 1D (Tradingview)
From Monday-Wednesday, we saw both the S&P and Nasdaq flirting with their YTD lows. For the time being, there was fairly strong demand at these levels which allowed the indexes to hold that range for a time.
On Thursday, the Nasdaq broke below the range’s lower-limit around $10,730 but held its YTD lows of $10,565. The S&P on the other hand had broken its lows on Tuesday.
Unchanged from last week, we would not be surprised to see a short, and aggressive rally for the equity markets as we’ve seen both the dollar, and US Treasury yields cooling off this week.
In the Treasury market, we finally saw a somewhat substantial bounce this week.
US 2-Year Treasury Yield 1D (Tradingview)
On Tuesday, the 2-year saw its first day of declining yield (rising price), in over 3 weeks.
While yields were back on the rise on Thursday, we could continue to see a rise in Treasury prices if the dollar continues to cool off.
DXY 1D (Tradingview)
On Wednesday and Thursday, we’ve seen a fairly steep decline in the dominance of USD over foreign currencies.
Much of this has to do with the large bounce we’ve seen in currencies like the pound and euro following the BoE’s pivot. But that being said, a declining DXY does remove some of the downward pressure placed on equities and fixed-income.
DXY was able to hold its 10-day EMA on Thursday, so be on the lookout today and next week to see if it will continue its fall.
Lastly, PCE inflation numbers were released this morning. Similar to CPI in that it measures inflation, but PCE takes businesses and their expenses into account as well.
The number for August came in at 4.9%, this was up from July’s core number of 4.7% and analyst estimates for August of 4.7%.
This week was a fairly quiet one for crypto-exposed equities. For the most part, they drifted slightly higher and formed what appears to be a bear flag.
Per usual, there are a few names who have stood to me this week from a price structure perspective.
Those names are WULF, CAN, MSTR, and RIOT this week.
Above, as always, is the table comparing the Monday-Thursday performance of several crypto-exposed equities to that of BTC and WGMI.
Bitcoin Technical Analysis
It’s been an especially volatile week for Bitcoin price action.
BTCUSD 1D (Tradingview)
On Tuesday, we saw BTC attempt to break above its current range but ultimately it formed a downside reversal.
Wednesday and Thursday were the opposite in that BTC attempted to break lower but buyers were able to support price.
We’re starting to see BTC curl up here, as buyers around $18.5K have been able to support higher bids for the time being. A few areas to note are the declining 50-day SMA at $20.6K and the upper trendline drawn above at about $21.5K.
It’s very likely that this current uptick is setting up for a break to the downside. At this point, our fundamental thesis is unchanged in that BTC is more likely to retest its YTD lows than not.
But that doesn’t mean that we are expecting a straight-down move, in fact we would expect to see this sort of short, jumpy rally, as we discussed in the equity section of this newsletter last week.
While, of course, we could very well be wrong and perhaps the bottom is in, the cyclical weakness of risk assets in a period where yields and the dollar are rising together makes us believe that we likely have lower prices to come.
Bitcoin On-chain and Derivatives
Short Term Holder Realized Price has finally crossed below Long Term Holder Realized Price.
All previous occurrences of this crossover have served as incredible market entry points.
This means that short term holders, in aggregate, now have a lower cost basis than long term holders. This results as a combination of STHs buying on the way down, lowering their cost basis, as well as STHs aging into the LTH cohort creating upwards pressure on the aggregate LTH cost basis.
Take note of how both cohorts have a cost basis greater than the current BTC price.
Long Term Holders tend to not sell their BTC, and they most certainly do not sell at a loss.
HODL Waves show the distribution of the Bitcoin supply to different cohorts of HODLers. Over 60% of the supply has not moved in one or more years.
This level of unwillingness to sell by long term holders is similar to what has occurred during past bear markets. This much supply being in the hands of long term holders, whose cost basis, as previously mentioned, is, in aggregate, underwater, provides evidence to the thesis that the worst of the bear market is likely over.
The initial drawdown to $20k resulted in a large spike in realized losses.
When adjusted for market cap, this amount of realized loss was congruent with the realized losses of other peako-bottom, bear market capitulations.
It is possible (likely) that we continue to move sideways in this price range in the short to medium future, but this spike in adjusted realized loss is more evidence that the worst of the capitulation may be in the rearview mirror. Anybody willing to sell in the $20k range, either due to fear or forced liquidation, likely has already sold.
Coin days destroyed, which has been discussed in previous newsletters, is a measure of transaction volume and the age of coins being transacted. Age being “how long has it been since this coin was last moved?”.
Dormancy takes the volume variable out of coin days destroyed; becoming essentially a metric showing the age of coins that are moving. This metric reinforces what we learned from HODL waves: only young coins are moving right now and long term holders are holding.
We can observe the HODLer trend further by looking at HODLer Net Position change, which has been nothing but green every day for the last year with just a couple of exceptions.
In the midst of economic uncertainty, failure by central banks to maintain stable market conditions, and a collapse in the currencies of powerful nation states (Japan and United Kingdom), Bitcoiners are choosing to hold BTC as insurance against central bank shenanigans.
Liveliness is a measure of how many coin days are being accumulated by holders.
Liveliness has been in a strong downtrend this year and the past few months in particular. This shows that HODLers are not letting go and their coins are accumulating age.
Realized Cap HODL Waves are the same as HODL Waves except the HODLing cohorts are weighted by their realized price.
So while HODL Waves show the percentage of coins belonging to each hodler cohort, Realized HODL waves show the percentage of the Realized Cap that is captured by each hodler cohort.
Currently ~74% of the Realized Cap is comprised of UTXOs that have not moved in 6 or more months. Long term holders, who don’t tend to sell at a loss, make up ~74% of the Realized Cap that is currently underwater. That’s a large percentage of the network's cost basis that is not available for sale.
Realized Cap HODL Waves at these levels have historically signaled bear market bottoms.
The Short-To Long Term Realized Value Ratio is used to measure bull and bear markets; and potentially to time peaks and troughs.
This metric takes the realized cap hodl wave (above metric) of the 24hour cohort and divides it by the realized cap hodl wave of the 6m-1y cohort. Essentially this is calculating what is the ratio between the cost basis for traders and the cost basis for newly convicted long term holders.
Historically this metric has bottomed slightly before price. It does not appear to have bottomed yet, so that is a point in favor of the belief that the lowest low has not yet occurred.
A massive slow down in Entities Net Growth is an indication that we may be near the bottom of the bear market. We have recently seen a huge drop off in the 30 day moving average of said metric. It is important to note that new entities are still joining the network, but just at a slower rate than during the bull market.
Perpetual futures open interest relative to BTC’s market cap has been steadily increasing throughout the bear market.
More market participants are using leverage now relative to BTCs price. This is slightly concerning for short term price action as a “leverage cascade” could occur, causing a nasty, quick wick down. This much leverage is evidence in favor of the “we haven’t bottomed yet” thesis.
Downward Difficulty Adjustment
Over two weeks ago, Bitcoin mining difficulty adjusted to a new all-time high. The previous all-time high was set in May of 2022. Since this peak, mining difficulty fell 11.4% and as of mid-September it completely recovered due to new generation machines coming online, less power curtailment, and inefficient miners selling their rigs and getting them plugged back in by a more efficient miner.
The downward difficulty adjustment that occurred this week likely won’t start a trend of downward adjustments unless Bitcoin’s price makes new lows forcing another wave of miner capitulation. However, miners are rejoicing at this small adjustment as it does mean they now earn more BTC than a week ago.
Energy Gravity Update
Bitcoin Energy Gravity, a metric created by Blockware Intelligence, estimates the mean breakeven electricity cost for modern mining rigs (average efficiency of rigs released in the last two years). This metric allows miners and market participants to visualize miner operating profitability.
This is critical to understanding where Bitcoin is in its market cycle. When miners are highly profitable, it’s usually a sign that the price of BTC is overheated and more hash rate is soon to join the network. Currently, Energy Gravity is at historic lows, which indicates that now is ironically and historically the best time to start mining BTC as rigs are cheap and margins are thin. During the next bull run, rig prices will likely soar and margins will likely increase as well.
Compute North Bankruptcy
One of North America's largest private Bitcoin mining hosting providers filed for bankruptcy Thursday afternoon, September 22, 2022. Compute North has Bitcoin mining facilities in Texas, North Dakota, and Nebraska with some of the largest mining clients in the world including Marathon (NASDAQ: MARA). This is yet another example that puts emphasis on setting up mining operations with a trusted hosting provider like Blockware Solutions.
Many mining companies used the 2021 bull market to take on excessive leverage, which has, unfortunately, put them in a poor position to survive any prolonged bear market. The next mining difficulty adjustment, expected to come in the next 24-48 hours is expected to be negative.
As Warren Buffett once said, “be fearful when others are greedy, and greedy when others are fearful.” Some of the largest players are experiencing major hardships. Now is the time to average in by purchasing mining rigs and dollar cost averaging into BTC at a discount.
All content is for informational purposes only. This Blockware Intelligence Newsletter is of general nature and does consider or address any individual circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal, business, financial or regulatory advice. You should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.