Bitcoin Market Status Analysis: How to Deal with This Bear Market

This article will cover everything you need to know about the current state of the Bitcoin market.

Bitcoin is now down 70% from its all-time high in November last year, one of its deepest price corrections in its short 12-year lifespan.

This article is not about doing any macro criticism and parroting what is already known. Global inflation is a problem; the Fed is raising interest rates to address it while trying to achieve a "soft landing" without causing serious economic damage.

Let's talk about relevance.

Since 2020, Bitcoin has largely been negatively correlated with the U.S. federal funds rate.

It is also negatively correlated with the US Dollar Index DXY and positively correlated with the Nasdaq and S&P.

All of these correlations are working against Bitcoin at the moment.

The market has proven that Bitcoin is not necessarily a hedge against CPI inflation, but a hedge against currency depreciation. (Correlation below)

With this in mind, there are a few ways (roughly) long-term capital allocators might take a stab at Bitcoin.

1. Waiting for a clear change in monetary conditions

2. Check out Bitcoin native methods to determine valuation and momentum

3. Regardless of price, invest evenly

If you choose #1, my guess is as good as yours; I can't predict what the Fed will do. (Few people do.)

If you chose #3, then you don’t need to pay attention to this article.

For #2, hopefully I was able to help think about these approaches and provide some value in this post.

Regarding valuation, I believe there are two general approaches that can be taken: price and network-related (Bitcoin-native) valuation approaches.

The chart below is a simple price structure chart. Bitcoin is trading sideways above the 2017 all-time high (for the first time ever), with the next major support level below 12K-14K.

Looking at Bitcoin's 4 year trend and the standard deviation from that trend, this is the 4th time ever that it has been below the trend.

Bitcoin also achieved its second-lowest deviation below its 200-day trend, second only to the 2015 bear market.

Next comes network statistics. These methods are a combination of data related to Bitcoin miners and wallet movements (tracking behavioral dynamics).

The market price of Bitcoin (set by marginal buyers/sellers * supply) is lower than its realized price (last price paid per coin * supply). The realized price is a proxy for the market's cost basis.

Being below the actual price (green area) means that mkt is generally underwater.

A more granular way to apply realized price is to look at short-term and long-term holders. The cost basis crossover of the two has become a good bottom signal. They are currently within $6,000 of the crossover point.

Reserve risk measures the confidence of long-term holders relative to market prices. This also falls into the realm of deep value.

This chart looks at the size of the major stablecoins (USDC + USDT) relative to the overall cryptocurrency market cap.

Used as a proxy for reserve vs. market deployment volume, this is in the bottoming/accumulation zone.

Ok, now let’s talk about miners. We will discuss the cyclical dynamics between miners and the market, and then introduce methods for valuing BTC using miner dynamics.

Miners are a very procyclical force in the Bitcoin market. They hold Bitcoin in bull markets and become forced sellers in bear markets.

There are delays from buying a mining machine to getting it up and running for a variety of reasons, including manufacturing/shipping times and building up shelf capacity for the machines to run. As a result, periodic peaks in hashrate have historically lagged behind peaks in Bitcoin price.

You can think of miners as shorting hashes, difficulty (the product of hashrate twice), and energy costs; while being long the price of Bitcoin. As more new machines are plugged in and the price of Bitcoin falls, miners' profits are squeezed.

The same effect is happening now, as miners continue to come online at an aggressive pace in late 2021 and early 2022, but the Bitcoin spot price is down about 70%. On top of that, there is a new variable adding to the margin compression: inflated energy costs.

One way to look at miner profitability is the hashrate price. (Miner Revenue / Hashrate Price)

This is the lowest level since the end of 2020.

(1/3) One way to view hashrate in an actionable way is to look at hashrate ribbons. The hashrate ribbon juxtaposes the 30-day and 60-day moving averages of hashrate to create a proxy for miners’ dynamic momentum movement. When the 30 DMA crosses below the 60 DMA, it is a bearish crossover.

(2/3) indicates that miners are unplugging quickly (or miner capitulation), thus also reducing the energy cost to mine 1 BTC. A bullish crossover is one where the 30 DMA crosses back above the 60 DMA (using the example of late summer 2021).

(3/3) Currently, we are seeing a bearish crossover, indicating that we are indeed in a period of miner capitulation.

(1/2) In the event of a margin compression, miners may first shut down rigs that are no longer operating profitably and then, as a last resort, sell some of their rigs or even their Bitcoin holdings, depending on their personal circumstances and strategies.

(2/2) In addition to the hashrate drop, we actually saw some miner selling on-chain, as well as Bitcoin flowing from miners to exchanges. Since then, that behavior has cooled off a bit, but that doesn’t mean they’re still not having selling pressure.

(1/2) Ultimately, we should expect miners that survive the bear market to emerge stronger; (and the Bitcoin network) including some that may acquire weaker/less conservative businesses. For now, though, the public markets have punished mining stocks.

(2/2) At these depressed prices, getting some higher BTC exposure through these mining stocks might not be a bad idea, depending on their balance sheets.

An excellent breakdown for a single public miner can be found here:

To wrap up all this talk about miners, let’s look at some valuation methods. The first is the market cap of termocap. This compares the premium that Bitcoin is trading at relative to the total security spend of miners; and also adjusts for the growing supply.

We can also look at the Puell Multiple created by my good friend @dpuellARK.

This compares the USD value of issuance to the 365 DMA of issuance to measure miner profitability.

The last topic of interest is contagion. This started with Luna, spread to 3 ACs, and then the major lenders. It’s hard to say with confidence if it’s all over, but one thing is for sure: once all the leverage and bad investments are removed, the crypto industry will be stronger.

That being said, the bulk of this forced selling appears to have already occurred, at least for now, with some significant capitulation occurring by multiple measures (forced selling + fund redemptions).