Update #43

Welcome to Capriole’s Update #43. Where we consolidate the most important Bitcoin news, technicals and fundamentals into a 3-minute update.

Market Summary

ETF fever is coming to a head with approvals expected within the next 3 weeks. We expect a lot of volatility, and conservative position management makes a lot more sense now.

With Bitcoin up over 60% since ETF mania began a few months ago, and with every man and his dog on X.com expecting an approval on or around 10 January, we must start to anticipate much larger volatility events (up/down) in this region. Risk today is substantially higher for long Bitcoin positions than it was just a few weeks ago. In the unlikely scenario that ETFs are not approved by the SEC in January, we would expect a large pullback in price. In the more likely scenario that approvals do occur in January, we must wonder how much more short-term upside can be expected following approval?

As we have written about extensively, the ETF approval will be a major catalyst that will open up a lot of long-term capital flows into Bitcoin; but the days and weeks surrounding the announcement are less clear.

Technicals

High Timeframe Technicals: Bitcoin is trading into the mid-range resistance we have been monitoring for the last couple weeks and we just saw the first red weekly candle in 8 weeks. Mid range is a moderate resistance level, nonetheless the total peak to trough drawdown of a mere 10% is unusually low. It would not be surprising to see more volatility in this region. Weekly closes above $44K following the ETF approvals should see the trend continue to range high ($58-65K).

Low Timeframe Technicals: Bitcoin is trading in the exact region of the Wyckoff Accumulation breakout trend we marked up in these updates a couple months ago. It is expected to see at least some consolidation after the trend completes (which it has) and potentially retracement. Some more time will allow a new structure to form in this zone and direction will then become more clear. With volatility expected around likely ETF approvals, a conservative approach in this zone until mid January would make sense.

A Concerning Chart: throughout Bitcoin’s history it usually sees a 20-30% pull back once a calendar quarter. If we look at the rolling 1 year highest Bitcoin price and then calculate the current daily drawdown from that price, it’s now been 232 days since we had a 25%+ drawdown. The last time Bitcoin went this long without a 25% drawdown was following Bitcoin Genesis in 2011.

One thing we know about Bitcoin is it is highly volatile, and these pullbacks will return.

Fundamentals

Fundamentals and on-chain data help us understand which way the probabilities are skewed at important inflections, and were critical to our navigation of this cycle and identification of the bottom at $16K.

We believe the full picture of fundamentals is best summarized by Capriole’s Bitcoin Macro Index, which we publish live with weekly updates here. This Index includes over 50 of the most powerful Bitcoin on-chain, macro market and equities metrics combined into a single machine learning model. This is a pure fundamentals-only value investing approach to Bitcoin. Price isn’t an input.

Bitcoin fundamentals have continued their strong trend upwards in the last few weeks, suggesting overall sustainable price appreciation so far. The vast majority of Bitcoin’s historic returns occur when the Macro Index is in ‘Expansion’, as it is today.

Chart of the Week

Bitcoin Production Cost is telling us that Bitcoin Miner block rewards today are as high as when Bitcoin was at $64K.

The Miner Price is the effective Bitcoin price miners receive for each Bitcoin in the block reward every 10 minutes. Because Bitcoin’s transaction fees have been so high over the last few weeks (due to exponential growth of Ordinals); Miners are effectively receiving 50% more revenue than normal. This means that miners have become highly profitable in the last couple months in particular, well in excess of what standard Bitcoin price appreciation would deliver.

If the usage of Ordinals sustains and grows into the mid-term, the 2024 Halving will be the first Halving which has negligible impact on Bitcoin Miner profitability; resulting is less capitulation of inefficient miners and higher baseline growth rates in Bitcoin’s hash rate and Bitcoin’s overall security in general. It’s a fascinating development and it will be interesting to see where it goes. For now, Miners are making a lot of hay while the sun shines.

More information on Miner Price and Bitcoin Production Cost available here.

Bitcoin’s Miner Price is up over 50% in the last two months, on top of Bitcoin’s price returns. Miner Price is at $64K today making mining operations highly profitable.

Bottom-Line

Fundamentals are trending very strongly, indicative of sustained and higher prices. This is setting us up well for 2024 which we expect will be the highest returning Bitcoin year in a long time.

However, technicals have entered a region of expected higher volatility on both High- and Low-timeframes. We are also now on the longest winning streak for Bitcoin in over 12 years. This low level of downside volatility is not normal for Bitcoin, and it will return.

It makes sense to have a healthy dose of caution in the current price region until price breaks above $44K with strength and ideally until mid-late January following confirmation on the ETFs. By end of January, it will be clear how the market is processing the ETFs news and whether or not it was a sell or buy the news event in the short term.

We wish you a Merry Christmas and great success into 2024.

Charles Edwards
Founder

The Capriole Fund

The Capriole Fund has one goal: outperform Bitcoin.

We are open to professional investors, but the fund has limited spaces.

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Disclaimer

The information contained here is provided to you solely for informational purposes only. Opinions and projections included are provided as of the date of publication, may prove to be inaccurate, and are subject to change without notice. This information does not constitute an offering. Prospective investors should not treat these materials as advice regarding legal, tax, or investment matters. No recommendations are made to invest in Capriole Investments Limited nor any other investment. An offering may be made only by delivery of a confidential offering memorandum to appropriate investors. Past performance is no guarantee of future results. Investing in digital assets in general involves risk. Digital asset risks include, but are not limited to, exchange risk, legal risk, hacking risk, market risk, liquidity risk, trading risk and default risk. As with any investment, investing in digital assets could result in loss of investment. Additional digital asset risks are outlined at www.capriole.com/legal. Decisions or actions based on the information provided are at the reader’s own account and risk.

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