Bitcoin has seen a sharp downturn in recent days, taking it below $8,000 from $14,000, a 40% pullback.
As our clients know, since late July, a variety of factors (see below) have argued to us Bitcoin is more of a “waiting game” rather than expecting a full on upside breakout. The two most important factors:
First, Bitcoin Misery Index (BMI) peaked early in 2019 and then fell below 66 in late July, and was a sign that holders of Bitcoin had become too confident of the upside. Hence, we have been waiting for this BMI to fall in the 40-53 range to signal a better risk reward. Generally, the BMI is like the PMIs (which measures business confidence) and a reading at 50 is balance sentiment.
Second, our work has also shown that “trendless macro” environments are bad for Bitcoin. Hence, the rangebound S&P 500 and the lack of an upside breakout for S&P 500 is a headwind for Bitcoin. The primary explanation for this, in my opinion, is that Bitcoin is still largely held by retail investors. And these retail investors are not using Bitcoin as a hedge, but rather, as a way to add upside volatility (its risk-on).
Thus, we are waiting for two things — (i) a BMI reading and trend change and (ii) an S&P 500 upside breakout.
The technicals for Bitcoin are probably not screaming “buy” but we do not think this is necessarily a change in trend. We believe crypto winter is over. But new headwinds emerged in 2019. In particular, opposition to Bitcoin by the White House and the ground swell of anti-Libra by governments.