This week in Crypto
What a difference a week or so makes in crypto. Glancing through social channels and main stream media this past weekend, one could be forgiven for thinking that the end of Bitcoin and crypto was upon us as the market entered free fall, slumping down to previous weekly support ~$42k per Bitcoin and dragging the wider crypto complex with it. At the time of writing, the Bitcoin market is ~30% off the all-time high with sentiment understandably subdued.
Market commentators will forever try to explain the cause of market moves with specific market events and this latest price collapse is no different with the blame being squarely laid at the feet of Elon Musk. The centibillionaire took to Twitter over the weekend and argued with and goaded Bitcoiners, infamous for their ‘’toxicity’’ in the way they defend Bitcoin’s principles and philosophy, which appeared to rile Musk as he tweeted back and forth with the community. Musk, as we have commentated in this Weekly, had recently become another high-profile supporter of Bitcoin, but for reasons we are unsure of has recently publicly backed the meme-crypto, Dogecoin. This weekend he created intense controversy by seemingly walking back his support for Bitcoin, stating concerns with the environmental impact of Bitcoin, its centralization and its inability to scale due to small blocks, slow block times and high fees.
‘’Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emission of any fuel….Tesla will not be selling any Bitcoin and we intend to use it or transaction as soon as mining transitions to more sustainable energy’’
Whilst it’s clear that Musk and his inconsistent messaging certainly have had an impact on the market, it’s also clear that from a technical analysis standpoint this market correction was actually quite predictable with momentum indicators all showing a downturn was expected and ~$42k being an obvious support level for Bitcoin to hit before potentially recovering. Musk’s confusing and antagonistic comments were not necessarily required to cause this correction but likely to have just accelerated it, much to the distress of the newly minted crypto advocates and leveraged retail traders unable to manage risky positions in heightened volatility.
We’ve often commented in this Weekly that this cycle’s analysis differs slightly as there is a tension playing out. On one side we have on-chain metrics that have become a very popular method of gauging market conditions and sentiment, largely in part due to the impressive on-chain data tools that are now available from Glassnode, CryptoQuant and Coinmetrics. On the other side there remains the traditional charting and technical analysis tools that have been used across markets for decades. On-chain metrics have been shown to be consistently bullish in the bull market, whereby traditional TA has recently been less so. It is therefore not surprising which tool set has been shared and advocated for in recent months by the masses.
The above charts show the popular traditional technical analysis tool, the LMACD momentum indicator, warning that BTC momentum had stalled and predicting a long-time frame decline in price. The LMACD is also currently observing an 8-year momentum trend (1st chart) which strengthens the conviction of this lagging indicator. A bearish cross occurred on 22nd March (as seen by the white line on the 2nd chart) but it has taken weeks for the effects of a reduced weekly time frame momentum to materialize into price action. Based on the uproar across social channels this weekend, this standard TA warning sign has been drowned out by the exuberance and euphoria of the market sentiment and expectation that the journey to the moon still had some way to go. Clearly the path is not a straight line and this market correction was attributed to Musk’s rather abrupt interference in the market instead of TA such as above. Hindsight is a wonderful thing.
Unsurprisingly the market is a bit of a mess at the moment and the dominant sentiment is one of fear and concern. The 1st phase of this bull market has pulled in huge numbers of new investors, traders and speculators and the recent ‘’Musk induced bear market’’ is hard for new retail money to stomach and even harder to understand the long-term implications that an individual with the stature of Musk can have. Market prices are elevated at historically high levels, held up with new, skittish and often fleeting retail capital that is easily scared away by such manipulative antics as showcased by Musk.
In a nutshell, this correction was entirely expected and predictable (albeit not guaranteed) when interpreting traditional technical analysis, LMACD as a case in point, however very likely accelerated and amplified by Musk. Bitcoin and almost all other crypto assets are still significantly up on the year and adoption will continue regardless if Musk supports Bitcoin or not. The losers in this market volatility are the retail newcomers who would have taken their first steps into crypto behind Elon Musk only to now feel that the rug has been pulled out from under their feet with Musk’s contradictory messaging and about turn, regardless of the TA. On-chain data, specifically Average Coin Dormancy calculations, shows this to be the case with short term holders accounting for the majority of the selling pressure and longer-term holders actually adding to positions. Thus, the current pain is felt by those least able to deal with it — new retail investors.
The most interesting part of this weekend’s comments on Bitcoin are the themes that Musk has generated conversations around. These are the scalability of Bitcoin and specifically relating to block size, transaction speed and fees and the environmental concerns of the Bitcoin protocol’s energy usage.
We would make the argument that there are crypto markets and then there is Bitcoin. Bitcoin stands alone as the world’s first internet native, digital store of value that is sufficiently decentralized that it sustains immutable and seizure resistant properties that investors and users find value in. Then there are the crypto markets where innovation and invention are proliferating at breathtaking speeds with DeFi emerging as the highest profile, most profitable and disruptive of sectors within crypto.
What Elon is confusing are these 2 markets, Bitcoin and Crypto. One person can’t materially change Bitcoin at a whim, Elon can’t improve the fundamental characteristics of Bitcoin design without market consensus, which is probably why he is looking at Dogecoin (crypto) where he can use his influence to design his own vision of a cryptocurrency. If you want to innovate then the crypto market is where you need to go. Bitcoin has shown throughout the years that it is resistant to change and that is THE point of it. Whenever there has been some form of attack on the protocol, the market has rejected it and Bitcoin has survived and hardened in the process. The details of the various attacks over the years (blocksize civil war in 2017, Mt Gox, SilkRoad, corporate takeover attacks etc) make for interesting reading away from this Weekly, but the takeaway from either being part of these events or studying the history of these events (which Elon likely hasn’t) is that the free market demanded, discovered and subsequently forged the characteristics that make Bitcoin what it is and have rejected changes to it when not held by consensus. If that means that the protocol consumes increasing amounts of energy via Proof of Work in order to achieve digital scarcity which can then form the basis upon which a new financial infrastructure is built then it is supremely misguided to assume one individual knows better than the collective free market does over 13+ years.
The colossal waste of energy via annual global inflation is many magnitudes greater than ASIC miners’ tax on the electricity grid to secure a potentially game changing technology for the human race.
“Scarcity on the internet was a one-time discovery. It cannot be repeated because resistance to replicability is the invention.”
Knut Svanholm, Sovereignty through mathematics