If the price changes, so does the narrative
Can bitcoin go below $20,000?
Dear readers,
This week, I was honored to make the following announcement:
My new class is part of USC’s new digital assets initiative, and I was very proud to place the word “bitcoin” at the front of the course title. I’ll share the syllabus with you all toward the end of this year.
How did this course happen? After reading Layered Money, USC Marshall Dean Geoff Garrett asked me how I can work my thesis into the curriculum and teach students about the transformations taking place in our monetary system. A grand honor! Now, let’s get into bitcoin valuation sanity checks.
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Sanity check
Bitcoin’s price volatility never fails to shock and awe. This week has been no different. Some newer bitcoiners are understandably shaken up, while the veterans are probably relieved they got to buy more bitcoin below $30,000. Quick, it might not last.
My goal today is to calm the newer investors by citing two metrics I’ve come to rely on when facing both crashes and utter euphoria: bitcoin’s 200-week moving average and the ratio of bitcoin’s market value to realized value (MVRV).
Let’s start with the 200-week moving average, which today sits at just under $22,000. This moving average has never declined in bitcoin’s history, and is rarely surrendered. It does happen, as we can see at the start of the pandemic. On this alone, we should understand that a move to $22,000 isn’t unforeseeable. It also suggests that this area should serve as a floor for the price.
Bitcoin’s realized value is less intuitive for the uninitiated. Realized value is the cost basis of bitcoin investors, or the aggregate price at which all UTXOs were last moved on-chain. It’s another form of a moving average, but instead of using the average market price, it considers when bitcoin’s blockchain is used, not when bitcoin is traded on an exchange. This steady metric has also served as a floor and is rarely breached. The ratio between market value and realized value is known as MVRV and can be seen in green below. You can see that MVRV is close to 1, meaning that the market price and realized price have almost converged.
When they diverge is when we get big price spikes. Many, including myself, have called for a potential end or softening or shortening of bitcoin’s cyclicality, which stems from its every-four-year halving events. Unfortunately, we’ll only be able to confirm this thesis ex-post, and so we wait for the next halving in 2024 to retest the hypothesis. Until then, we can use MVRV to tell us when a bottom might be in and when it’s no longer time to fear.
I don’t believe it’s a coincidence that realized value (at around $24,000) and the 200-week moving average of $22,000 are around the same level—this area is bitcoin’s “fair value.” It also makes this area extremely crucial as a price floor.
We must infer narrative from price, and the current narrative around bitcoin is an asset experiencing exponential growth. However, if bitcoin were to fall below $20,000 for an extended period of time, below its 200-week moving average, realized value, and 2017 all-time-high, something would be broken. That’s why these levels matter so much—if a bounce doesn’t occur for bitcoin in the $20,000s, the narrative of an exponentially growing asset begins to fail. This is also why panic sets in around these areas.
Last comment on the bitcoin price: trend lines matter. The reason why I went on for weeks about bitcoin’s higher lows was to define the level at which the bull trend would fail. By the time I saw the chart lose support at $35,000, the price was already at $32k. By the time I pulled the chart and started writing about it, it had already fallen below $30k. I’m not the only one looking at them—technical analysis is a self-fulfilling prophecy, because all traders are behaviorally reacting to each other.
The ETHBTC chart
We saw a $40 billion altcoin evaporate this week, but those with the conservative 100% bitcoin allocation wouldn’t have noticed. Readers who have some Ethereum in their portfolio might be asking themselves, what if ETH dies also? Let’s look at the chart:
After ETH’s initial run up versus bitcoin in 2017, it failed to eclipse that ratio in 2018 and then failed to reach 2018 levels again in 2021. I don’t see a clear trend here despite the lower highs: the ratio could remain in the above range for years, it could break to the upside and bitcoin could face another dominance challenge, or it could start breaking down and sink back into deeper bear-market territory. This chart matters for bitcoin because Ethereum narratives have, at the margin, prevented plenty of capital from being allocated to BTC. I’m hesitant to say that some of bitcoin’s future price success depends on a relative price decline of ETH, but I’m also hesitant to say that it doesn’t. Zooming way in, the price action of ETH versus BTC this week was legitimately ugly and had me pondering the death of Ethereum and what that might look like.
Final thoughts on the Fed
With 2-year yields at 2.6% but Fed Funds still below 1%, the Fed has to hike rates in a hurry before faced with pressure to pause due to a slowing economy. The stock market weakness doesn’t seem to phase them, but a GDP experiencing contraction could cause them to shift focus away from sky-high inflation. For now, the Fed is going to hike another 50-75 basis points on June 15th. I’m watching 2-year yields to see how much room the Fed has to hike—if yields come down materially and happen to pierce through the rate to which the Fed is hiking, the hikes will stop. Right now, with 175 basis points between Fed Funds and 2-year yields, the Fed still has a full green light to hike. This should keep pressure on risk, which as we all know by now has its firm grip on bitcoin prices.
Until next time,
Nik
This post was sponsored by Voltage, provider of enterprise-grade Bitcoin infrastructure.
