Bitcoin Takes A Break, Miners Don’t Blink, Coinbase Cashes In During Q2

Bitcoin Takes A Break, Miners Don’t Blink, Coinbase Cashes In During Q2

Dear Investors,

In this post I wanted to touch on a few major news items from the last few days.

First, this week we’ve seen the market surge to levels not reached since May. Bitcoin got to close to $47,000 and ether has been sitting comfortably above $3,000 for several days now.

As you can see in the chart below, which breaks down our Core CryptoAsset Portfolio, the market hit a brief speed-bump over the past 24 hours or so, but analysts that I speak to and technical charts suggest that the bullish momentum is far from over.

There are a lot of ways to gauge temporary exhaustion in markets. A couple of metrics that I tend to rely on are Bollinger Bands (BB) and Relative Strength Indices (RSI). BB’s use two trend lines to show the expected range of prices to be expected for an asset at a given time based on its moving average (I prefer 20-day). However, assets can move above or below the top or bottom lines. 

You will notice in the chart below that bitcoin and ether have been hugging the top barrier of its BB for about two weeks at this point. You may also see that the width of the band is much larger now than back in June and July when volatility was much lower. This suggests that a return to the mean could be expected.

The RSI, which runs on a scale of 0-100 can be used to help determine when an asset is in overbought or oversold territory. 

If you look at the two assets, there are some signals that the market might be overheating for now and is due for a short correction. As you can see above, the RSI was flashing overbought in the early part of this year for both assets before retreating around May when the crash set in. It is now creeping up, suggesting that a temporary break could be needed.

Finally, I wanted to make a note on the first chart. You can probably see that cardano has enjoyed a breakout week, separating itself from the rest of the pack. The reason for this surge is because it is getting closer to finally launching smart contracts on the platform. Cardano’s founder Charles Hoskinson, who is also a co-founder of Ethereum, is going to announce the exact date for the launch on Friday, which many expect to usher in a new wave of activity on the blockchain.

When I added cardano to the portfolio back in March, I gave a few primary reasons for making the allocation, such as the scientific rigor of its approach, the large and engaged community, and the power of Hoskinson’s personality. All of these qualities helped the project stand out among other Ethereum-killers that were perhaps more developed from a technical perspective. However, now that smart contracts will be enabled shortly, Cardano will be able to compete on equal footing.

Bitcoin Miners Are Unfazed During Infrastructure Bill Drama

Second, I wanted to touch base on how bitcoin miners are responding to the controversial language in the Senate version of the Infrastructure Bill that is characterizing them as brokers.

The TL/DR, they are not worried at all. I reached out to a couple of executives at major global firms to get their thoughts, and the overall takeaway was that this would get fixed somehow before it becomes implemented in 2023 because common sense has to eventually prevail. 

I first spoke to Fred Thiel, CEO of Marathon Digital Holdings, the newest member of our Blockchain Equity Portfolio. Here are his responses to a brief Q&A:

Forbes: What are your first thoughts about the legislation? 

Thiel: Legislation needs to better qualify the definition of broker and should (as the amendments did) clarify that miners, node operators and software developers are not brokers. 

Forbes: Does it impact your operations in any way – regarding procurement schedules, locations, overall strategy, assets supported?

Thiel: Actually we believe that the fact that Washington is looking at the crypto industry as a potential source of tax revenues is a validation of crypto as becoming a permanent part of the mainstream financial ecosystem. So a very positive sign that crypto is here to stay. No impact and no change in our strategy (my emphasis). 

Forbes: If the crypto provision becomes law, is it possible to comply and provide 1099s for instance? 

Thiel: In the case of mining, we do not transfer BTC to anyone other than if we sell it, which we currently do not as we are a believer in long term holding. If we did sell our BTC, then we would send a 1099 as the number of transactions would be very low and it would be easy enough to process 1099s.

I also reached out to Argo CEO Peter Wall. Argo is based in London and trades on the London Stock Exchange, but is planning to list on Nasdaq later this year. He provided the following statement to me:

In terms of the proposed legislation, the language in it is vague and allows lots of room for interpretation. Obviously, I think it was unfortunate that the proposed amendment was not successful, namely because it included input from the industry that would have created clarity. To me, what was also very telling was that only one senator did not vote in favor of the legislation. That said, I think it is way too early to say how this bill is going to affect crypto operations in the U.S. We just don’t know how it is going to be interpreted by the Treasury department. Because the language in the bill is vague, it is unclear if miners would be considered brokers, which clearly feels like the wrong distinction. I think it is going to be a while before we have legislation that is going to be affecting the industry on the ground and, hopefully, between now and whenever that legislation is finalized and created, there is time for Congress to get up to speed on the incredible innovative power that the digital asset economy is going to bring to North America.

It is worth noting that their stocks have trailed bitcoin in the days since the vote, but that does not necessarily reflect a loss of confidence because of the vote. As I’ve documented over the past several months, bitcoin mining stocks tend to move directionally in the same way as the underlying asset. However, they tend to overperform during bull markets and underperform when prices drop.

Both of these assets have far outpaced bitcoin this year, and it is fair to expect them to do so again as this market continues to grow.

Coinbase’s Monster Q2

Finally, I wanted to finish this post by briefly touching on Coinbase’s outstanding Q2. As you can see from the chart below, it beat most analyst expectations for the quarter, earning a $1.6 billion profit on $2 billion in revenue. Monthly transacting users also grew to 8.8 million out of a base of 68 million verified customers. 

However, it was not all positive news, as the company noted that some of these numbers will likely drop in Q3 and it slightly lowered the upper estimate for MTUs (clients that have traded in a given 28 day period) from 9 to 8 million.

The price shot up on Wednesday morning (earnings were released on Tuesday), but it has fallen in the two days since, along with the price of bitcoin.

To get a sense of what to look for in the days and months ahead, I spoke with Owen Lau, Executive Director at Oppenheimer & Co, who told me that he expects Coinbase to begin trading on its financial performance, which is outstanding, as the market matures. Specifically, he said, “I think this correlation will still maintain a high level in the near term, but at some point of time, when Coinbase can diversify away from just trading, I expect the correlation to break for two reasons. Number one, if they don’t rely too much on trading, then there’s no point correlating COIN to the bitcoin price and number two, COIN should be correlated with revenue and trading volume.”

One other point of note in the earnings was that ether trading volume surpassed that of bitcoin for the first time ever. Lau actually predicted this flip in a note sent to clients before the earnings came out, and he told that this will be beneficial to Coinbase in the long-term because it can help introduce traders to more assets beyond bitcoin. He noted how the spreads for altcoins tends to be higher than the large-cap assets, so that should help Coinbase maintain its margins. Additionally, this can serve as a defense mechanism of sorts for the exchange change the PayPals, Squares, and Robinhoods of the world that only offer a handful of assets to trade.

Of course there is much more that I can go into here, so please feel free to reach out with questions.

Published at Fri, 13 Aug 2021 03:04:48 +0000