Will Bitcoin Cross $100,000?

Summary

Trading View (next 2-4 weeks): We like to buy bitcoin.

Investment View (next 1-3 years): We like to be long bitcoin.

Macro Signals

• There is greater certainty behind the Fed’s hiking path.
• Crypto markets appear to be shrugging off Russia-Ukraine tensions.
• The Bitcoin and equity correlation is still over 70%.
• The macro backdrop remains neutral.

On-Chain/Flow Signals

• All six of our metrics give bullish signals.

Overall View

• With the macro backdrop remaining neutral and on-chain/flow metrics very positive, our overall signal is bullish bitcoin (Chart 1).

Macro: Bitcoin Outlook Amid Correlation to Tech

Last week, we examined the outlook for ethereum as correlations to tech reached new all-time highs. We did this by analysing historical Sharpe ratios and extrapolating potential scenarios one and three years into the future. With bitcoin’s correlation to the NASDAQ still over 70% (Chart 2), we perform a similar analysis for bitcoin – the most mature cryptocurrency with the longest price history.

The Outlook in Four Scenarios

Bitcoin is very volatile, like most cryptocurrencies. However, its volatility has settled at a median annualised value of around 64% since 2020 (Chart 3). Notably, this is less than ethereum’s at around 86%. Assuming annualised volatility remains at this level, we can derive the following possible scenarios:

• Aggressive. Three-year target = $381,000

Bitcoin’s Sharpe ratio since 2015 is around 1.6. Were this to persist, and using a median annualised volatility of 64%, it would imply a compound annual growth rate (CAGR) of around 100%. At current prices, this could lead to a price of $95,000 in a year and $381,000 in three years. This scenario is obviously very punchy given the Sharpe ratio is driven by high returns during the earlier days of bitcoin, so it is less likely.

• Aggressive post Covid. Three-year target = $536,000

After the initial Covid headwinds, bitcoin made a very bullish run up to new all-time highs in November 2021. Its post-Covid Sharpe ratio (March 2020 onward) is around 1.95. Were this performance to continue, it would imply a CAGR of 124%, which would lead to a price of $106,000 in a year and a staggering $536,000 in three years. This scenario is also unlikely given the uniqueness of the very bullish post-Covid period, but we include it for completeness.

• Reasonable. Three-year target = $111,000

Bitcoin became more mainstream after the bull run in 2017. From 2018 onward, its Sharpe ratio has been around 0.52. This would imply a CAGR of around 33%, which at current prices could lead to a bitcoin price of $63,000 in a year and $111,000 in three years.

• Convergence to NASDAQ. Three-year target = $94,000

Since bitcoin has been highly correlated to the NASDAQ recently, our final scenario is tracking the implied returns if bitcoin followed the NASDAQ’s Sharpe ratio since 1990, which is around 0.4. This assumption would imply a CAGR of around 25%, which would lead to a price of $60,000 in a year and $94,000 in three years.

On-Chain/Flow: ETF Inflows Return

All six of our metrics are giving bullish signals this week:

• Sustained period of ETF inflows.
• Bias for outflows from exchanges.
• Futures open interest rising and funding rates positive.
• Some older hands have distributed coins, but most of the supply is still in an accumulation mode.
• Increased profitability of the coin supply and realised profits on chain.
• Hash rate and miner revenue increasing.

On balance, on-chain/flow metrics are giving a very bullish signal. Here are the details of each metric (with explanations in the Appendix).

Institutional Demand: Bullish Bitcoin

Our preferred metric to track institutional demand is flows into bitcoin ETFs. We have seen net inflows everyday over the past week (Chart 4). The sustained (and increasing) period of inflows is a bullish sign for bitcoin.

Demand for Liquidity and Exchange Activity: Bullish Bitcoin

In the short term, a bias for outflows from exchanges exists. Net 12,000 and 26,000 coins left exchanges over the past seven and 14 days, respectively (Chart 5). We view this as bullish as it suggests more investors are opting to hold coins in cold storage instead of in a liquid capacity on an exchange where it is easier to sell. Additionally, only 13% of the entire bitcoin supply currently sits on exchange addresses.

Longer term, the 30-day change in the exchange balance reveals fluctuations in the supply held on exchanges month on month. Relative to the last 30 days, there has been a persistent decrease in the exchange balance since 7 March (Chart 6). This is bullish bitcoin.

A bias for exchange outflows in the short term and the longer term is bullish bitcoin.

Futures Activity: Bullish Bitcoin

Futures open interest continues to trend up – it is currently $17.1bn, up 10% and 18% over the past seven and 14 days, respectively (Chart 7). Around $11.5bn (67%) of this comes from perpetual futures contracts, so a large majority of leverage sits in perpetuals.

Perpetual funding rates reveal the directional bias of investors. They have spent most of the past two weeks above 0% (Chart 8). Indeed, 12 out of the last 14 days have seen positive average funding rates. Extending this to the last 30 days, 22 days have seen positive funding against eight negatives.

Overall, futures open interest mostly sits in perpetuals, which have had a bias for positive funding. This is bullish bitcoin.

HODLers: Bullish Bitcoin

The 30-day moving average of the coin days destroyed (CDD) metric has been trending up since 3 March, suggesting some older coins are being spent (Chart 9). Looking at the 1y+ revived supply metric confirms this – it is also trending up over the same period (Chart 10). However, splitting HODLers into those who have held for under one year and those for one year or more confirms most (63%) of the coin supply is still in an accumulation phase (Chart 11).

That some older hands have distributed coins to realise profits is somewhat expected given prices have rallied, but there is still a conviction to hold for most of the coin supply. On balance, we view this as bullish bitcoin.

Investor Profit and Loss: Bullish Bitcoin

The percentage of circulating supply in profit (PSIP) has now exceeded 80% (Chart 12). That is up 12pp over the past 14 days.

Net unrealised profit/loss (NUPL) is 0.49 (Chart 13). That is up 10pp over the past 14 days. We still want to see a sustained break above 0.5 for this metric to signify further upside.

SOPR is displaying a bias for realised profits on chain with values above one (Chart 14). Indeed, all but one day out of the past 14 have had a SOPR value above one. Given we have seen some older hands (1y+) distribute their holdings into market strength, a portion of these profits will be from those gains.

Mining Activity: Bullish Bitcoin

The hash rate has been climbing less aggressively than normal (Chart 15). However, it is still up 7% over the past 14 days. The rally has helped miner revenues, which are up 32% over the past two weeks (Chart 16). These are both bullish bitcoin.

Bottom Line

We have introduced a framework for understanding the flow and microstructure dynamics of bitcoin markets. The six key metrics are:

1. Institutional demand: sustained ETF inflows. Bullish bitcoin.
2. Liquidity demand: long-term and short-term bias for exchange outflows. Bullish bitcoin.
3. Futures activity: positive funding rates and increasing open interest. Bullish bitcoin.
4. HODLer behaviour: some older coins being sold but most of the coin supply remains in an accumulation phase. Bullish bitcoin.
5. P&L of investors: increased profitability of the coin supply and realised profits on chain. Bullish bitcoin.
6. Mining activity: hash rate and miner revenue increasing. Bullish bitcoin.

Appendix

Institutional Demand

Perhaps the largest institutional vehicle for bitcoin is the Grayscale Trust, with over $27bn in assets. It invests solely in BTC, and so many investors, notably institutional, who cannot hold BTC directly can get exposure through investing in Grayscale. Consequently, if the trust trades at a premium to BTC prices, it may imply ‘excess’ demand from institutions, but ‘excess’ supply if it trades at a discount. Alternatively, the discount may suggest investors have found other ways to get exposure to BTC, whether through ETFs or directly holding BTC. We therefore focus on how the discount has changed in recent months to gauge investor interest.  Alternatively, investors may be using other vehicles to get exposure such as ETFs or holding BTC directly. We put more weight on BTC flows than the Grayscale premium.

Liquidity Demand

Another measure of cryptocurrency bullishness is whether investors are willing to hold it in illiquid form (e.g., a private wallet) or prefer a liquid form (e.g., on an exchange). The former would suggest investors are bullish, as they are comfortable with being unable to sell easily. Conversely, holding it in liquid form would suggest investors are bearish, as they prefer being able to sell easily.

Therefore, large flows onto crypto exchanges would suggest investors want to convert their holdings to a more liquid form, implying more bearishness.

Futures Activity

We track the growing market of bitcoin futures. Open interest – the sum of long and short contracts – is a good measure of investor interest.

Perpetual funding rates reveal the directional bias of investors. Exchanges set funding rates to prevent a lasting divergence in the price of the futures contract and the underlying since perpetual contracts have no expiry date so never settle in the traditional sense. Consequently, we can interpret funding rates as the cost of holding bitcoin via perpetual futures. Positive funding rates imply longs pay shorts and vice versa. We use it as a proxy for trader sentiment since a positive funding rate implies traders are paying a premium to keep open long positions.

HODLers

In our introductory bitcoin flow framework, we explained ‘HODLers’ and ‘HODLing’. HODLing refers to buy-and-hold strategies in the context of bitcoin and other cryptocurrencies. Those who HODL for extended periods are die-hard adherents.

We can categorise HODLers by the length of time they have held BTC. We define long-term or staunch HODLers as those who bought BTC five or more years ago and have held it ever since, medium-term HODLers as those who bought 6-12 months ago, and short-term HODLers as those who bought 3-6 months ago.

The coin days destroyed (CDD) metric is defined as the number of coins in a transaction multiplied by the number of days since the coins were last spent. So, increasing CDD suggests older coins are being spent (more coin days are destroyed) and vice-versa.

Profit and Loss

• The percent supply in profit (PSIP). This tracks the share of circulating BTC supply in profit. That is the percentage of circulating BTC whose current price is higher than when it was last transacted (movement).
• Net unrealized profit and loss (NUPL). This is the ratio of unrealised profits over total market capitalisation. While PSIP just focuses on whether BTC coins are in profit or not, the NUPL focuses on the size of profits. So, we could have a situation where the PSIP is low – that is, a low share of supply is in profit – but the NUPL could be high if the size of those profits is large.
• Spent output profit ratio (SOPR). While PSIP and NUPL focus on unrealised profits or mark-to-market, this measure focuses on realised profits. SOPR is the realised value of a transaction divided by the value at initiation (or creation) – more simply, price sold divided by price paid. If SOPR is above one, investors in aggregate have realised profits, while below one means they have realised losses. In broad uptrends, SOPR spends a significant amount of time above one, whereas the opposite is true for broad downtrends.

When SOPR is rising, sellers are increasingly realising profits. The opposite is true when it is falling. A price rally with a flatter SOPR trend indicates investors are not yet realising their profits with the rally. The reluctance of investors to sell and realise a profit may be because they believe the price will increase further, which would be bullish. At the same time, more profit taking could precede a correction. Typically, buying as SOPR moves around one during bullish periods has proven to be a profitable strategy.

Mining Activity

Computing power is central to the crypto market. Miners use advanced computing hardware to solve complex problems that confirm BTC (and other coins) transactions on the public ledger or blockchain. The miners are rewarded with new coins for their efforts. A measure of the complexity of the problems and so the computing performance required to solve them is the hash rate. The higher this rate, the more computing performance is needed to maintain the blockchain. The rate can fluctuate depending on demand for crypto.

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.