2020 Market Update 002 - February in Review

2020 The Year of the Black Swan?

2020 might go down in the books as the most socially, politically and economically defining year of the past decades. In this months market update we'll dive deeper into the Coronavirus and its impact on the capital markets, analyze bitcoin's success as a safe haven amidst market sell-offs, and present a few scenarios of next moves for the crypto market. 

Bitcoin's safe haven nature could kick in sooner than later, but after studying gold trends of past recessions and recognizing the unusual nature of the current market environment, we are playing a bit more defensively going into March, cutting down on our leveraged positions, to give us more room to expand our position should the sell-off continue. 

That said, the bitcoin halving is mere 70 days away and we are still exactly where we should be. Even with a pull-back to the $7,600 range bitcoin will maintain its macro structure. We are likely bound for the $14,000 - $16,000 range around halving time, and could break the all time high by Q3/4 should the halving play out as expected. 

Leading Narratives: 

Few markets are as driven by narratives as the Crypto Market. Here are our hot takes on the top narratives that were prevalent in February

1. Coronavirus Market Meltdown

I'm sure one or the other reading our thoughts on the virus in January likely raised a brow or rolled their eyes. We've become so desensitized to these viruses after years of media hyping up one after the other (swine flu, ebola, zika, you name it...) However this desentization can't stop us from reading black and white trends.

In January we commented on the 40% a day transmission rate in China, which to us, when paired with a 14 day incubation period is a massive red flag for a sleeping black swan. While chinese numbers are by now with a 99% likelihood under-reported by a factor of 10 or more, the numbers from the rest of the world give us a more honest insight. At the current rate the number of cases excluding China is doubling every three days.

While it's not our job to opine on matters of health, it is our job, as capital allocators, to have an understanding of the economic implications of a virus and the panic that comes with it. From canceled events around the world, declining travel numbers, shut down manufacturing in china, to interrupted supply chains, the virus is causing deep economic tensions with every passing day.

If all the virus causes is one or two sectors to fail, say the hospitality and transportation industries, it could be enough to pop the debt bubble, which is already at the verge of bursting.

In our eyes COVID-19 is merely a needle. When a needle pokes healthy tissue, it hurts for a second at most but quickly heals. When a needle pokes a cancerous tumor, it can cause the cancer to seed, which mobilizes it to take over other cells and body parts which can ultimately kill the entire body. Yes something as harmless as a misplaced needle is lethal enough to kill. That needle could be COVID-19, or (sadly) at minimum the panic it has brought upon the world.

2. Recession Risk

The first inversion of the yield curve occurred in March of 2019. Historically, with significant accuracy, we've entered recessions 12-18 months following such an event. Coronavirus can lead many to dismiss the recent equity sell off that wiped out 2 years of growth on the Dow Jones as a mere symptom of the virus panic. We urge caution, and consider this to be the starting shot of a potential recession as forewarned by the yield curve and interest rate cuts.

While the economy may likely recover from the damages of the virus via 'good ol' stimulus', it may be too late to prevent the systemic flaws from tearing down the system itself. With global debt sitting at 230% of global GDP it only takes a few sectors or major institutions from defaulting which could set off a chain reaction leading to a global market melt-down. While this may sound overly dramatic, just remember that it takes centuries to grow a forest and only a few hours to burn it to the ground. Believe it or not the Dow was trading higher in December of 2017 than it was this week. This is no longer what if, this is "look at last week".

3. Bitcoin: Risk-on Asset or Safe-Haven?

When bitcoin started falling alongside equities, many started shouting that since bitcoin is falling it must not be a safe-haven asset. However to decide whether or not bitcoin can qualify as a safe-haven, we first need to understand how a safe-haven acts in recessionary times.

Both in the dot-com bubble and in the great recession we saw safe-haven assets like gold first drop over 20% alongside the equity markets. However, before equity markets could hit their ultimate low, gold made new highs in both of the last recessions.

Since fundamentally bitcoin has all the characteristics of gold with its mathematical scarcity, and an even higher usability, we believe bitcoin will move similarly in a recession. This motivated us to ease up on leverage a little for the near term as a short term pull-back across all markets generally happens in such a scenario. The good news is that should this be the case, your bitcoin allocation with us may be worth more than it is now, when equities will be at their lowest, allowing for some strategic rebalancing. Until that is the case it is smart to build a strong crypto allocation with us in the first place.

Why do safe-havens fall initially? Economic fear forces many investors to de-leverage. Some must sell their gold to re-fund their stock portfolio to avoid a margin call. Others have leveraged their portfolio as collateral to take out a loan, and must now pay down such loans. Yet others may be afraid of ripple effects in the housing market and look to stash more cash to be able to make at least 6 months of payments on their mortgage. The reasons can be countless, but what is clear is that the initial reaction to a sell-off after years of growth is further selling across asset classes.

Our Past & Future Predictions

Prediction from 001-2020 Update:

“For only the third time since its creation Ethereum broke over its 200 day average, while simultaneously breaking out of its bear channel that it has been trapped in since April. Being down nearly 90% from its all-time-high, we expect a lot of upside on both Ethereum and the alt-coin sector in the coming month should Ethereum manage to stay above the 200 day average for a few more days." 

Result: 

Ethereum was the only coin in the Top 10 able to close the month at a profit.

Short and Long Term Prognostic: 

Short term (2019):

While there is a chance that we bounce here and start shooting for new highs, we consider it possible that we first pull back to $7,600. Rest assured, we remain net-long as the upside far outweighs the downside, but we are ready to increase our position should price meet the 5 year trend-line we've been watching closely. For the intermediate term we see bitcoin following this 5 year channel closely, until bitcoin both crosses the halving date as well as the all-time high. Once the all-time high is cleared, the trend should shift from linear to parabolic on the logarithmic chart, as it has 4/4 times in the past.  

On the alt-coin front we are also starting to see notable growth. Most of our deeply researched alternative digital assets, particularly in the decentralized finance space have seen record breaking growth that give the sense that alt-coin winter may be over for those select alt-coins with real network traction. Pictured above we note Kyber Network which broke out of a three year consolidation in the latter part of 2019, and has since risen as much as 300% YTD. Momentum indicators also show long term healthy growth in investor interest in such smaller market cap assets. We look forward to seeing some of our smaller bets produce similar and even bigger returns in 2020

Long term (2020-2022)

Our Macro position remains steadfast. Our halving report continues to fall in line with our research, with a targeted market top around December 2021, and a target in the $200k region. The narrative we subscribe to the most is that of Digital Gold, as bitcoin can fill the role of a digital store of value amidst global economic calamity. When taking a look at bitcoin’s 11 year macro structure, it is evident that its structure is both intact and also at the ideal buying spot as we bounced off the 5 year trend line and 3 year support in January.

These positions will of course adapt over time, but they are based on taking a deeper look into similar market cycles, asset classes, and macro economics.

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