Gold investors sleep well at night… Bitcoin investors should too.
I know with the recent volatility in the crypto markets, that may seem crazy…
But the same logic behind gold investors pounding the table for higher prices validates bitcoin as well.
Don’t just take it from me… On Tuesday, a quote from Ray Dalio – one of the greatest macro investors of all time – made the rounds on financial news headlines.
At a Coinbase conference, he said, “‘I’d rather have bitcoin than a bond.”
That might surprise anyone familiar with Dalio – who’s been openly critical of cryptocurrencies in the past, and only recently softened his stance.
But to me, this quote simply validates what I’ve seen in the data… Namely, that bond interest rates have a significant relationship with both bitcoin and gold.
So today, I’ll share why this relationship – along with other factors – points to a specific price floor in bitcoin… And how bitcoin investors should use this information to profit moving forward.
Why Bitcoin Fell, and Won’t Fall Much Further
When we outlined the real rates/bitcoin relationship in last month’s essay, we stressed that as long as the rate of inflation exceeds the nominal treasury rate, both bitcoin and gold will have a price floor. And, as inflation picks up, the demand for scarce assets like bitcoin and gold should increase.
Why, then, did bitcoin plunge 50% last week?
In a word… Leverage.
Leverage is the pin that pops bubbles. The real estate bubble of 2008, the tech bubble of 2000… The list goes on.
Not only have crypto trading accounts been massively overleveraged in places like Asia, but there’s been a new trend in asset-based lending where bitcoin now serves as collateral.
That means people are borrowing fiat currency in exchange for the lender holding their bitcoin. When bitcoin drops, so does the value of their collateral. Debtors unwind their leverage – selling their bitcoin to cover obligations – and the overall selloff is exacerbated.
This dynamic is now fairly known… Even CNBC is talking about it.
But there’s another factor that’s contributed to all this that hasn’t been talked about much…
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Just like the 2017 crypto market top, the timing of last week’s volatility coincided with the introduction of a new futures product.
The CME (Chicago Mercantile Exchange) introduced a new leveraged futures product to trade bitcoin earlier this month. It allows traders to control 1/50 of a bitcoin for around $1,500. So when bitcoin was trading at $60,000, that amounted to 4:1 leverage.
Thankfully, these products have a circuit breaker component to them. If prices drop too much, the exchange shuts down trading. During last week’s volatility, that level was $30,205… And it got hit before abruptly making up most of the losses that day.
In the short term, these factors can weigh on prices. Although unnerving, long-term bitcoin investors should just completely ignore them… It’s all just short-term noise.
But I also think the effects of these factors have already run their course. And in the near term, they’re putting a floor under bitcoin at around the $30,000 level…
$30K Is the Bitcoin Dip to Buy
Take a look at this chart of bitcoin, with a volume profile overlay…
We introduced the volume profile a month ago. There, I explained why “I can’t help but stay bearish on bitcoin as long as it trades below $58,000.”
The red dotted line in the chart shows the interaction between price and this massive volume build up.
After a week of rampant volatility, bitcoin found clear support at the $30,000 mark. And, as we show from the volume profile on the left side, there was significant buying interest between $30,000 and $40,000.
This tells me that any slide below $40,000, and closer toward $30,000, will generate buying interest in bitcoin.
The $30,000 area is where the big players in the market have stepped in. We called this range in last week’s essay, citing that it seems the “whales” are buying.
So on Monday, bitcoin tested this level again and bounced off admirably. It’s trading close to $40,000, as of writing. If it can break through this level, it could trigger a new wave of investors buying back in…
I’ll go out on a limb and say if the $30,000 level breaks, it means something has gone critically wrong with the entire crypto ecosystem. That’s how strong this price floor is.
With this in mind, bitcoin investors have two options…
- Actively trade these massive price swings – being ready to buy at $30k and sell higher. That’s a tall order even for professional traders.
- Play the long game – where the continued effects of inflation and increasing crypto adoption are likely to propel bitcoin higher over time.
Either way, investors should look to the $30,000-$40,000 range as a good place to add exposure.
But at the same time, investors should be ready to sell anywhere below it.
Regards,
Eric Shamilov
Contributing Editor, Market Minute
Reader Mailbag
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