HashKey Trading Commentary: Journey to the West

8th October 2021

Summary

A New Hope

Markets were caught by surprise late September as Chinese regulators intensified their crackdown on cryptocurrencies by deeming all crypto-related transactions illicit. Binance and Huobi have since stopped new account openings for users from Mainland China and in addition, will retire existing user accounts from the region by the end of the year. Against the backdrop of the Evergrande crisis, there were fears that a deeper correction in the crypto markets were due. However, sentiment has since turned positive, and Bitcoin broke the 50,000 USD barrier again and technical analysis now points towards a bullish ‘Golden Cross’ formation[1]

The less frigid embrace of the West

As China continues enforcing the ban, the US appears more receptive. SEC Chairman Gary Gensler reiterated that the US will not ban cryptocurrencies. Despite that, the SEC just announced that they will postpone the decision on the approval of four Bitcoin ETF applications[2] to the end of the year, leaving bulls room for pause. The SEC Chairman has a more supportive stance towards ETFs investing in futures contracts rather than spot. Hence, there is a substantial chance[3] that there would be a positive decision on the ProShares Bitcoin Strategy ETF or the Invesco Bitcoin Strategy ETF.

House View

We believe that the market structure is constructive overall and have seen the local bottom for now. Prices are trading higher now as compared to when the news for increased regulation in China first came out. Shrugging off bad news is an indication of overall strength, and we would advocate buying on dips from 49-51k with a trade horizon of about three months.

1) Seasonality

Bitcoin performance is seasonally strong in Q4, with an annualized return of 653.58% for the last 11 years[4]. BTC has had 3 halving events thus far, in 2012, 2016 and 2020. Notably in the 4th quarter of 2013 and 2017, Bitcoin was up 621.8% and 221.46% respectively. Whilst sample size is small, the results have been quite extraordinary, and it would probabilistically be better to go long than fade.

Chart 1 Seasonax – Average % return by month from 2010 to 2021

Chart 1 from seasonax – https://app.seasonax.com/

Chart 2 Seasonax – Q4 Returns by year

Chart 2 from seasonax – https://app.seasonax.com/

2) Dwindling exchange reserves and higher hash rates

There has been a steady reduction in exchange BTC reserves over the last few months from net outflows. Reserves have reached the lowest in 3 years, suggesting that investors are withdrawing their coins into cold wallets. This could potentially result in a supply squeeze and northbound prices. Concurrently, hash rates have recovered off the lows as mining operations are beginning their operations again after relocating from China. There are some theories such as the cost-of-production model that hash rate could lead bitcoin price. While hash rate is currently at 162.2M, off the 201M high on 15th of April, it has been steadily increasing off the lows in July

Chart 3

Chart 3 from CryptoQuant – https://cryptoquant.com/overview/btc-exchange-flows

Chart 4

Chart 4 from CryptoQuant – https://cryptoquant.com/overview/btc-network-data

3) Increasing adoption of cryptocurrencies

The reason there has been increased regulatory scrutiny is due to increased adoption. BTC is a legal tender currency in El Salvador and there are 3 million citizens using the Chivo Wallet there. Cryptocurrencies have gained favour particularly in emerging countries such as Kenya, Nigeria, Vietnam, and Venezuela and global adoption is up 881% from last year[1]. With increasing institutional interest as well and upcoming technological improvements within the blockchain, this trend is likely to continue.

Risks to our views:

  • Jitters in global macro, led by Evergrande
  • Further negative headline risk and actions from Chinese authorities on the crypto market/activities and contagion as other countries follow.
  • US changing its stance on cryptocurrencies
  • Investigations into Tether and Celsius

Chart 5

Chart 5 from Chainalysis – https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index

On the horizon

Events to look out for:

We look forward to hearing from you. Please feel free to send any comments to OTC@hashkey.com.

Mark Wong
Trading – HashKey Digital Assets Group


[1] Bullish breakout pattern indicating the potential for a major rally after the short-term moving average crosses above the long-term moving average
[2]Global X, Valkyrie, WisdomTree and Kryptoin
[3] 75%, according to Bloomberg senior ETF analyst Geraci
[4] Data from Seasonax – https://app.seasonax.com/

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Transactions in digital assets and derivatives involve significant risks and may not be suitable for all investors. HashKey Trading is not acting as an advisor to you or any of your agents with respect to any information provided in this material. Nothing in this material should be construed as investment, tax, legal, accounting, regulatory or other advice or as creating a fiduciary relationship. The information herein do not take into account any individual client’s circumstances, objectives, or needs and are not intended as recommendations of any particular financial instrument or strategy to particular clients. The recipient of this communication must make its own informed independent decisions regarding any financial instrument or strategy mentioned herein. Past performance is not indicative of future results.

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