Bitcoin Positioned for Rally, Larry Fink Makes Investment Thesis Clear

Bitcoin tops resistance from a rare cluster of moving averages, influential asset managers calling bitcoin a safe haven, plus China changes credit rules

This week’s topics

• Bitcoin headed for volatility in context of imminent ETF approval

• Larry Fink’s “flight to quality”

• Chinese changes credit rules to avoid defaults

Bitcoin Poised for Volatility

It has been a wild ride already this week for Bitcoin. Monday, on false rumors of a spot ETF approval, price shot right through the most consolidated grouping of moving averages in bitcoin history.

To reiterate my theory of technical analysis, it is a collection of Schelling Points, or behavior we all tend toward in the absence of communication or central planning. Moving averages attract attention, and hence, become important to market behavior. Price recently found resistance on the 200-day and 200-week moving averages for a whole week starting on October 1. It then found support on the 50-day.

This grouping of these 6 highly-relevant moving averages has never occurred in Bitcoin’s history. Less intense squeezes occurred in 2015 and 2020, both before massive bull market rallies.

Another moving average, the 20-month shown below as the default midline of Bollinger Bands, was also just crossed. The monthly bands are back to historically low width as well meaning volatility likely lies in the months ahead.

We have to put Bitcoin’s posture and potential for a big move in the context of the impending spot ETF approval. Is it more likely that volatility will move price down or up?

The SEC deciding not to seek a rehearing in the Grayscale case started a 7-day clock last Friday for the court to make a final ruling. It looks extremely likely that GBTC will be turned into a spot ETF very soon. The timeline following the court’s ruling is still unclear, but Grayscale is ready for a quick turnaround to launch. The market agrees, as the discount to Net Asset Value (NAV) is shrinking rapidly. We should expect the discount to be zero prior to launch.

GBTC’s imminent conversion brings up the question, what will happen to all the other applications and how soon? Will the SEC only approve GBTC, effectively letting Grayscale have a first-mover advantage and corner the market? Since Grayscale is already ahead of the others with 600,000 bitcoins in the trust, this would threaten to create a winner-takes-all situation. It has been a consistent message, however, from the SEC under Chair Gensler that they do not pick winners and losers. Therefore, one would think the SEC approves all ETFs at the same time.

Flight to Quality

On Monday, after the false rumor specifically about an approval of Blackrock’s ETF, CEO Larry Fink was scheduled for an interview on Fox Business that afternoon. 

Some people are stuck on the fact that he kept referencing “crypto” instead of bitcoin. He is trying to launch a bitcoin-only spot ETF after all. Fink said things like, “there is so much pent-up demand for crypto.” It’s not that Fink doesn’t know the difference between Bitcoin and crypto, he is bound by current filings with the SEC to not specifically talk about Bitcoin, so he uses “crypto” as a general term for Bitcoin.

Secondly, and more importantly, Larry Fink called the recent rise in bitcoin a “flight to quality”, or as some say, a flight to safety. He squarely puts bitcoin in the category of gold, government bonds and cash here very similar to Paul Tudor Jones who I wrote about last week. He is thoroughly indoctrinated into the bitcoin value prop.

We can add another big name saying essentially the very same thing. Cathie Woods of ARK was on Natalie Brunell’s podcast, and pointed out bitcoin rallied like a safe haven in March during the banking crisis with Silicon Valley and Signature banks.

China is in BIG Trouble

Back in August, I reported on Fed Watch that Chinese Local Government Financing Vehicles (LGFV) were in big trouble. Beijing-based Caixin reported that over 80% of these LGFVs could not meet the interest payments alone on their official debt. This year and next year are record years for maturing of this kind of debt.

As of August, the official debt in LGFVs came in at 37 trillion yuan ($5.1 trillion), but it is well known that there is a large amount of “hidden debt” that does not show up in the official numbers. The International Monetary Fund (IMF) has estimated this hidden LGFV debt to be 30 - 70 trillion yuan ($4.1 - $9.6 trillion).

Last week, the People’s Bank of China (PBOC) ordered lenders to LGFVs to reduce rates and do what they can to keep these vehicles from defaulting, according to a Reuters source. 

LGFVs are bad, but local governments in China have even more debt than that. All told, official local government debt reached 92 trillion yuan ($12.6 trillion) in 2022, growing 62% in only three years (adding hidden debt to this total could bring it to 120-150 trillion yuan). 

Today, from Reuters, we learned that Beijing has ordered State-owned banks to roll over troubled local government debt at lower interest rates and longer terms. Also, instead of using the word “non-performing”, these worthless loans are to be labeled “normal”. Just like that, fixed.

China has very deep structural problems. Beijing requires local governments to hit GDP targets of central planners, forcing overbuilding and debt on a massive scale. Local governments raised the money for these wasteful projects through LGFVs and land sales to big property developers. With the real estate sector in free fall, developers are not buying land, leaving local governments unable to pay existing loans and, without revenue, to meet current year targets.

China is such a massive international player, everyone is extending and pretending in the hope that the Chinese Communist Party (CCP) will step in with stimulus. The whole world is holding its breath over this.

If that weren’t enough, there is more bad news. Chinese imports and exports continue to decline, declining for most of the last year, only briefly positive at the reopening hype earlier this year.

Source: Financial Times

The situation looks bleak. There are some rumors of a stimulus package in the works, but the figure being thrown around is 1 trillion yuan which will not be enough. That could avoid the biggest defaults, at least pushing them out a little longer, but it won’t fill the 100 trillion yuan hole.

The China crisis is not going to have a quick resolution. It has knock-on effects for demand for commodities and supply of credit, making a global recession very likely: one where we will need the safe haven of bitcoin.