Tradecraft August Newsletter

The crypto market was up for the month of August. At the end of the month, Bitcoin is trading well above its 200-day moving average which is a bullish sign from a technical perspective. Market structure continued with risk assets doing well in the current environment. The Fed’s massive liquidity and backdrop is still protecting asset prices. Other investment themes within the crypto market are gaining traction with DeFi (Decentralized Finance) in the lead. The biggest event of the month was at the end when bitcoin surpassed the $11,775 level, which had been a past level of resistance. The crypto market is now classified as a bull market with bitcoin trading above the 2019 high of $11.6k.

Price of Bitcoin YTD w/ Long-term trend

Fundamental Indicators

These 9 metrics — 5 indicators and 4 ratios — are used for fundamental analysis. The indicators give us a window into the network utility of the Bitcoin network which we are using as a proxy for the overall crypto market. The ratios give us a view into relative value. For the fundamentals to show value, we want to see each “Ratio” is green. This will occur when the Indicators are green for a long enough period of time.

Long-term Relative Valuation Ratios (These ratios track long-term relative value) — this month is indicating that long-term value is present, and indicators major long-term value is present.

Current Valuation Ratios (these ratios track current relative value) — the current valuation looks attractive. The NVT Ratio is showing value and the MVRV Ratio is showing value is present.

Current Indicators (these indicators measure direct network usage and utility) — these indicators are all positive. Usage (Unique Addresses) and Utility (Transaction Volume) are green/positive in trend and the Profitability is bullish in trend as well.

Directional Indicators (these indicators show continual direction of 2 major short-term indicators) — the Directional Indicators showed a new trend cycle began in at the end of August.

Outside the Fundamental Factors, the TFA Model is showing: the Macro environment is light green, showing that global macro risk is low, and Technical Analysis of bitcoin is bullish based on technical indicators, like breaking above of the 200-day moving average as well as higher highs/lows.

Market Summary

Decentralized Finance (DeFi) Continues to See High Growth

Decentralized finance (DeFi) is growing significantly. Smart contracts from MakerDAO, Compound, dxdy, Synthetix, Uniswap and InstaDApp are delivering exchange, lending and derivatives services that are taking hold. Over the past 12 weeks, DeFi has grown from $1B to $9B in locked collateral! Most of this growth in DeFi is happening on the Ethereum blockchain and is driving much of its growth in usage and utility. We are seeing a new crypto investment idea of ‘yield farming’ taking place, where high yields are generated through a mash-up of several DeFi tokens and services. This continues to be an important theme developing in the crypto markets. For more detailed information, check out https://defipulse.com/.

Global Macro-Environment

The global macro environment seems to be calm for now. The Fed’s injection of capital into the system is continuing to keep asset prices up. As long as the Fed continues with its liquidity injections, the system seems to be holding up. Many bankruptcies have been filed, from retailers to energy companies, but nothing is taking the market down (yet).

Bitcoin is outperforming the S&P500 YTD. We’ve seen a pretty steady march higher for BTC after the Bitcoin Halvening event on May 11th with one period of drawdown that lasted about a week. Based on the stock-to-flow price regression model, fair value for bitcoin is $16,080.

A key risk to follow is whether or not the US Congress is able to pass legislation to continue payments for unemployment and other benefits. If Congress continues the $600 per month addition to Unemployment Benefits, that may stave off risk for now. The administration has announced a temporary solution possible. If there’s a hiccup in the passing of legislation, that may be the key risk factor for H2.

In Closing

Crypto assets are proving their worth as an alternative asset class. As global central banks continue to provide stimulus and as the world becomes a more chaotic place, bitcoin is rising in value and taking the entire crypto complex with it. Ether is the best performing crypto asset between the reserve assets, bitcoin and ether. Much of rise in crypto asset prices revolved around DeFi with those specific protocol tokens rising the most early on. We are also seeing a new investment theme arising — one that will play out big in 2021. That investment theme is digital scarcity. We’re seeing NFTs (non-fungible tokens) that represent digital items for games, art, collectibles and virtual worlds being auctioned off for big money. The NFT space has drawn in $100m of investment to date. That’s a big deal. I think it will outperform bitcoin in the medium-term. As we continue into this bull market run other crypto asset classes like the Platforms will start to outperform bitcoin as well. The main investment themes to watch are autonomy, DeFi and digital scarcity.

Right now, I’m watching the fundamentals of the Bitcoin network and the technical charts of Bitcoin the most. The global macro risk appears subsided for the time being as the global central banks’ monetary actions have worked to stabilize the global asset markets. I want to see the daily unique addresses trend to revert to a growing trend, and I want to see the NVT Ratio below 85 for a sustained period. From a technical perspective, I want to see higher highs and higher lows put in bitcoin.

We’re seeing a lot of positive momentum after the Bitcoin Halvening event. I see global macro risk as a bigger threat than anything internal within the crypto markets. The entire world is watching the crypto markets. Bitcoin is now being used in corporate treasury management of S&P500 companies. New investors like Fidelity are coming in to play a more active role as they try to bring a Bitcoin ETF to market. I continue to be cautiously optimistic for the crypto markets. So far, Q3 is playing out like we forecasted almost a year ago.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Please do your own homework.

Jake Ryan is the CIO at Tradecraft Capital, a startup advisor, an angel investor & writer on investing. If you enjoyed this article “clap” to help others find it! For more, join us on Facebook and Twitter.

CIO at Tradecraft Capital & Author of Crypto Asset Investing in the Age of Autonomy, published by Wiley