On Chain Analysis
Before we get into where we are today, it’s helpful to revisit what has happened thus far in 2021. Bitcoin started the year on a tear rising from $29k to over $63k by mid-April. As per usual during these bull runs, the price increase attracts new entrants looking to get in on the wave. Then, in early May, two big headlines (China banning mining and Tesla no longer accepting bitcoin as payment) led to a panic sell off by many of those same new market entrants. The veterans in the space knew these headlines were unrelated to the fundamentals of the network (China bans bitcoin every year and Elon’s rationale for removing bitcoin as a payment method were factually inaccurate). The smart money calmly watched as the price fell and began scooping up coins at a steep discount. That accumulation phase continued into October to the point where we started the month with the largest supply shock in bitcoin’s history.
How do I know all of this? The data on-chain lays it out clear as day. The vast majority of coins sold between May and October were coins that were just recently acquired. Below is a chart of the supply held by addresses that bought or sold within the last 5 months starting in September of 2020.
Here is what the experienced, smart money was doing during that same period.
In other words, we saw a huge number of coins transferred from short term market participants to long term holders between May and October. These long-term holders have a propensity to sit on their coins and not sell (hence the name). Instead, they take them off the exchanges and put them in cold storage for safekeeping. This led to the largest supply shock in bitcoin’s history that I affectionately referred to as “Shocktober” in the first Node Ahead newsletter. So, it should be no surprise to any of us to see bitcoin back above $60k. When demand is high and supply is low, price naturally rises.
The question then becomes, now that we are at or near all-time highs, what does the structure of the network look like today and where are we likely headed?
Let’s start with one of the original, most reliable on-chain metrics; MVRV. First introduced by Murad Mahmudov and David Puell, Market Value to Realized Value (aka MVRV) is a ratio that can be used to get a sense of when the price of a cryptoasset is above or below its “fair value.” Market Value (the numerator) is simply another name for market cap. We calculate this portion of the ratio the same way we calculate it for stocks, simply multiplying the number of outstanding coins by the current market price. This gives us the current valuation of the network as determined by the market.
Realized Value (the denominator) is an alternative method to measuring the value of the network and was first introduced by Nic Carter and Antoine Le Calvez of Coinmetrics in 2018. Rather than treating the value of every coin as equal, Realized Value calculates the value of the network using the price at which each individual coin (or fraction of a coin) was last moved. Realized Cap is thus a gross approximation of the network’s aggregate cost basis.
MVRV has historically been a great on-chain indicator of market tops and bottoms. A high ratio indicates that the price has appreciated to a point where holders are sitting on a lot of unrealized gains and may look to sell in the near future. Thus, as MVRV rises, the odds that we are nearing a market top increase. A MVRV of greater than 3.7 has historically correlated with a market top for bitcoin. The reverse is true as well. The few times that MVRV has dropped below 1 have historically been some of the best times to buy bitcoin.
So where are we today? MVRV is still relatively low, sitting around 2.7. In fact, the last time MVRV rose to its current level in a market where bitcoin price was rising was back in December 2020 when price was $21,000. Between December 2020 and April 2021, the price of bitcoin tripled.
But we can take a more historical view of MVRV as well. In 2013, the bull market had a “double pump” in which it went from $13 at the start of 2013 to $230 by April. There was then a pull back down to around $90 during the summer until the price ran up to over $1,000 in December (hint: this scenario should sound awfully familiar to this year). Glassnode analyst TXMC pointed out that if we isolate the long-term holders only (the cohort we care most about tracking closely), MVRV looks awfully familiar to what is playing out today. If 2013 were to repeat itself, we would be looking at a top of around $300k sometime early next year. I’m not claiming that bitcoin is going to hit $300k in Q1 (I honestly have no clue what the market top will be yet), I am merely trying to point out that the dynamics in the market right now leave a lot of room for the price to appreciate over the next few months.
Although we are sitting near all-time highs in price, the trading activity is still pretty quiet, which is also an extremely bullish indicator. Normally, we start to see coins coming out of cold storage and onto exchanges when price starts to rise as investors look to lock in some gains. However, over the last several months, we have seen the opposite. The number of bitcoins on exchanges has been decreasing (i.e. less available supply to be traded) and now sits at the lowest level since September of 2018. In other words, the market expects bitcoin to go higher, and investors aren’t ready to realize their gains even as we sit at all-time highs.
There is one more metric I’d like to showcase that indicates the market is nowhere near a fever pitch and that is Coin Days Destroyed (CDD). Every day a coin sits idle, it accumulates one “coin day.” So, if one coin sits idle for 2 days since last acquired and another coin sits idle for 5 days since it was acquired, the cumulative coin days between the two is 7. When those coins are traded, the accumulated coin days are reset to zero, or “destroyed.” CDD measures the aggregated number of days destroyed across the network.
CDD is an important metric because coins held in cold storage as a long-term store of value are considered economically important and hence have a high number of accumulated coin days. When those high value coins are spent, it serves as a strong signal in the change in long-term holder behavior. To smooth out any outliers, it helps to apply a rolling average over a period of time which gives us a clearer signal. Below is the 90-day CDD metric over bitcoin’s history.
As price rises, we typically see CDD start to elevate as long-term holders start to sell their coins. However, something very interesting has happened since late July. The price of BTC has risen from $30k to over $60k and yet CDD has continued to decrease. This means the only ones selling right now are holders of younger and younger coins. Long term holders are standing firm which means we have not reached prices at which they are willing to sell yet.
In other words, long term holders are waiting for higher prices before they start to liquidate, which is another indication of just how strong the holding behavior currently is. Long term holders seem to be completely uninterested in liquidating at $60k and have yet to do so in any significant way. Let me put it this way, we have never in the history of bitcoin seen a market top when liquid supply, CDD, MVRV and percent balance on exchanges is this low (let alone all four simultaneously). This is an extremely bullish signal for the future price of bitcoin, and the crypto markets in general, for the coming months.
As hard as it is to believe, the behavior of the market suggests that $55–60k isn’t just a new high, it might be the new floor.
As always, the on-chain data is provided by Glassnode. If you would like to have access to the data yourself, you can sign up here:
Here Come the Pension Funds
Retail investors have been investing in bitcoin for years. Wall Street, hedge funds and endowments have recently started moving into crypto. Corporations have begun adding bitcoin to their balance sheets. Governments are buying and mining bitcoin. One of the few holdouts has always been pension funds. Well, that dam appears to be breaking now too.
A couple weeks ago, The Houston Firefighters’ Relief and Retirement Fund (HFRRF) announced that it has invested $25 million in bitcoin and ether.
Now this isn’t the first pension fund to invest in the crypto industry. Three have done so to date. Two public pension funds in Virginia invested in crypto funds managed by Mark Yusko’s Morgan Creek Capital. The Municipal Employees’ Retirement System of Michigan also allocated to Dan Tapiero’s 10T Holdings growth equity fund.
However, each of these three public pension funds was investing in venture capital style funds rather than holding cryptoassets themselves. What is unique about HFRRF is that they appear to be the first pension fund to invest in and hold cryptoassets directly.
Why did the HFRRF decide to invest in crypto? Basically, because they realized it was too risky not to. Ajit Singh, the chief investment officer for the fund said that he “sees this as another tool to manage my risk. It has a positive expected return, and it manages my risk. It has a low correlation to every other asset class.”
This is an important milestone because it proves that bitcoin and cryptocurrencies are maturing to the point where public pension funds, along with financial institutions and corporations, are comfortable holding the assets directly. The infrastructure is finally at a point where even the most conservative institutions are beginning to become comfortable with custody, insurance, and compliance in this asset class. Furthermore, there is a growing realization that adding a non-correlated asset that allows an investor to make a small allocation and still have an outsized impact on the portfolio is the most prudent financial decision they can make. I’d go so far as to say it’s riskier not to have exposure to this asset class then it is to invest in it.
While the infrastructure has matured incredibly in recent years, we are still very early in terms of adoption and price appreciation. There is still a lot of educating we as an industry need to do to get more public pension funds, their investment teams and their investment committees up to speed on the benefits of allocating to this asset class. But we are making progress and that is exciting to see. Huge congratulations to the Houston Firefighters Pension Fund. Something tells me their courage to evaluate the current environment and think from first principles will be immensely rewarded over the next decade.
Lord Fusitu’a is a Bitcoiner
In the first Node Ahead, I highlighted a popular theory within the bitcoin community that once a sovereign nation publicly adopted bitcoin, it would lead to many other governments following suit out of self-interest. It was a big risk to be first, but because there is a finite amount of bitcoin, it would be an even bigger risk to be last. So, when El Salvador made bitcoin legal tender earlier this year, several people within the crypto community including myself started eagerly waiting to see if this theory would turn out to be true.
Not only is it playing out as predicted, I would argue it’s happening faster than anyone previously anticipated. More citizens in El Salvador now have bitcoin wallets than bank accounts and the purchasing power of the country has increased by 30% since the law went into effect.
The success of El Salvador is opening eyes throughout the world. After El Salvador, Panama recognized bitcoin as a legal payment method, Ukraine legalized bitcoin, Cuba legally recognized cryptocurrencies and a couple weeks ago Brazil announced its intention to recognize bitcoin as a legal form of tender. All that has happened in only 5 months!
Now we can add Tonga to that list. Tonga’s parliament is now planning to draft a bill to make Bitcoin legal tender in the Pacific Islands nation. The leader driving this initiative is the Lord Member of Parliament for the Niuas, Lord Fusitu’a (great name by the way) who believes he has the support of 12 of the 14 Legislative Assembly members he needs to pass the bill.
And believe me, this isn’t a publicity stunt. Lord Fusitu’a has an impressive level of understanding of bitcoin and the potential impact it could have on Tonga’s economy. Similar to El Salvador, 38% of Tonga’s income comes from remittances and services such as Western Union can take 30–50% in fees. According to Lord Fusitu’a, adopting bitcoin could increase the income of the people of Tonga by as much as 30%.
The game theory appears to be playing out just as predicted. Expect to see more countries adopting bitcoin as legal tender in coming months and years as this generation’s version of the arms race is just starting to heat up.
The Mayor Race No One Saw Coming
No, I’m not talking about a political race. I’m talking about mayors trying to out compete each other for who can embrace bitcoin the fastest. First, it started with an announcement last week from Miami Mayor Francis Suarez who pledged to take his next paycheck entirely in bitcoin making him the first U.S. politician to do so. Not to be outdone, the next day NYC mayor Eric Adams promised to take his first three paychecks in bitcoin. Then the mayor of Jackson, Tennessee got in on the action and promised to convert his entire next paycheck to bitcoin. Not wanting to be left behind, Jane Castor from Tampa, FL announced she will being accepting her paycheck in bitcoin.
This all happened over the course of a few days. Everyone wants to be portrayed as bitcoin friendly because they are realizing that it not only can be positive for their local economy (just ask Texas) but bitcoiners are a growing demographic and political force. I’ve talked about game theory playing out on an international level, I guess I should have applied that same theory to mayors across the US. Go figure…
Turf Wars Brewing
Historically, the biggest challenge with regulation in the crypto industry has not been harmful or poor regulation, it’s been a lack of clarity from US regulatory bodies. Regardless of what the headlines might lead you to believe, the few formal laws that have been introduced by U.S. lawmakers and agencies have had a positive inclination to the use of Bitcoin and other cryptoassets. However, the explosive growth of the industry over the last couple of years and that lack of clarity is now leading to a power grab among various regulatory agencies.
The challenge facing regulators is that cryptoassets are not a monolithic asset class. Some assets resemble securities, some behave more like currencies, and others are best characterized as commodities. Then there are assets that have features of some, if not all the above. As a result, every regulatory body believes they have jurisdiction over this asset class.
Let’s start with the SEC, whose chairman has publicly stated in the past that he believes most cryptoassets other than bitcoin and ether are securities. Many have interpreted this to mean that the SEC believes that any cryptoasset not “sufficiently decentralized” should fall under their jurisdiction (though again, what qualifies as sufficiently decentralized has not been made clear by the SEC). Gensler recently said his agency would “be very active in trying to bring this market into what I’d call the investor protection framework.” Gensler has even gone so far to say this includes stablecoins. His argument is that stablecoins should be considered stable-value funds, a framework that the SEC already claims jurisdiction over.
Which brings us to the CFTC who is in charge of regulating commodities. And yes, you guessed it, their acting chair Rostin Behnam believes the majority of cryptoassets fall under his jurisdiction. In fact, the day after Gensler said he believed most cryptoassets are securities, Behnam said he believes 60% of cryptoassets are commodities and that the CFTC should be the primary regulator of the crypto markets. Behnam is currently pushing for a broader mandate to give the CFTC more authority over the crypto markets.
And then there is the FDIC and OCC who recently proposed new oversight of stablecoins by suggesting congress should bring stablecoin issuers into the U.S. federal deposit insurance system, making them very close equivalents to traditional banks. If a token is considered a banknote, then it will be exempted from regulation as a security (which won’t make Gensler very happy). The OCC previously set the stage for this by issuing guidance that banks are allowed to use stablecoins as part of their normal business and that they can hold reserves for stablecoins. While this new proposal represents a welcome acknowledgment of the validity of stablecoins as a useful financial and technological innovation, this legislative focus feels like a backdoor route to disguise what is really a regulatory power grab.
At a high level, all this recent regulatory development is a sign that the crypto industry is here to stay. Two years ago, the crypto industry was largely ignored by regulators and now every one of them are fighting amongst themselves to get as big of a slice as they can. I don’t know who will win, what legislation they will enact or even who should be in charge of regulating this industry. What I do know is we need clarity. The single greatest thing any regulator could do is simply provide a clear framework that would eliminate a lot of the uncertainty surrounding the crypto markets. Hopefully we will get that sooner rather than later.
In Other News
All-Pro Quarterback Aaron Rodgers joins a growing list of professional athletes now taking a portion of their salary in bitcoin.
U.S. regulators are exploring how banks could hold crypto assets according to the FDIC chairman.
The long-awaited FATF crypto guidance is not as bad as it could have been, but it’s still flawed.
Crypto trade associations reported an unprecedented third quarter for lobbying spending.
How Lobster NFTs and a DAO helped the crypto industry’s lobbying efforts.
Coinbase hits number 1 spot on Apple’s US App Store.
Mastercard is making crypto moves by partnering with Bakkt and then calling their acquisition of crypto analytics firm CipherTrace as a “massive services opportunity.”
Square’s Cash App generated $1.8B in bitcoin revenue in Q3.
Bank of America COO says that offering loans against crypto assets could be a possibility in the future.
Bitcoin miners score their second-highest month of revenue ever with $1.72 billion in October.
Energy providers will have improved economics from the existence of bitcoin mining as an additional source of offtake.
Quentin Tarantino to offer seven uncut scenes from ‘Pulp Fiction’ as NFTs.
Someone took out a $1.4 million loan with an NFT as collateral.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
BACK TO INSIGHTS