The Daily Dive #009 - $30,000 Breached As Bitcoin Continues Sell-Off

The sell-off in the bitcoin market continued as the $30,000 level was briefly breached today. The ugly price action has many market participants worried that the bull market has concluded, and it is very possible that for the time being bitcoin will consolidate in a range around $30,000.

Let's take a look at what the derivatives markets are telling us.

Perpetual Futures Funding

Traders on bitcoin derivatives exchanges have flipped notably bearish, even as bitcoin approached the $30,000 level, as shown by the negative funding.

For context, with funding at -0.02%, short positions pay long positions about 22% annualized just to hold a position. It is notable whenever bitcoin perpetual futures contracts have negative funding for sustained periods of time, meaning that large holders of the best performing asset are bearish.

Below is the funding rate on bitcoin perpetual futures over the last year:

If one is looking for a solid counter indicator to allocate a large amount of funds, negative funding and a futures curve in backwardation are two things to look for.

Annualized yields on three-month bitcoin futures are currently still in contango, but have contracted significantly from the April high and are currently around 5% for bitcoin-enabled exchanges, with the cash settled CME futures contract in backwardation.

Bitcoin Futures Annualized Rolling Three-Month Basis

What should be taken away from the negative funding on perpetual futures contracts and the very depressed contango yields on BTC futures is that the reflexivity of the bitcoin bull run is no longer present.

In the early months of 2021, Grayscale was buying hoards of bitcoin, MicroStrategy was hosting a virtual conference with thousands of businesses about bitcoin as a reserve asset, and traders/speculators were margin longing their bitcoin positions, using bitcoin as collateral.

In hindsight, the ability to net near 50% annualized returns while holding a market neutral position (neither exposed to the upside nor downside of bitcoin) marked the local top, as there was not a sufficient amount of new capital flowing into the asset to capture the massive arbitrage opportunities present during the months of March and April.

Bitcoin Fair Valuation

Where is the bitcoin price going next, and how should you position yourself depending on your allocation? For many, dollar cost averaging without worrying about price or market movements is the answer. Over the last year if you had simply allocated the same amount into bitcoin every day regardless of price, you would be up 70% on your investment today. The volatility of bitcoin is your friend, not your enemy. The volatility is the price you must pay for significant returns.

Some however, like to play their hand at allocating based on cycle position and valuation metrics, and that is completely understandable as well.

Here is one to consider:

MVRV, a ratio of Market Value to Realized Value, is currently at approximately 1.6. The realized price of bitcoin takes into account the price that every bitcoin UTXO was last moved at to come up with a price. Thus, an MVRV of 1 could be thought of as paying “fair market value” for your bitcoin.

Realized Price

The only problem with this is that due to bitcoin’s ascension and rapid growth over the last decade, waiting to buy when MVRV is at or below 1.0 can take some time, as price very often rapidly increases, with the realized price following behind.

I.e., if you missed out on acquiring bitcoin at or below an MVRV of 1.0 in 2015 for around $250, you would have waited until the price touched $4,500 in 2018 before allocating again.

Currently, the realized price of bitcoin is $19,700. If bitcoin is truly in a bear market, then it is entirely possible and plausible that bitcoin trades under it’s realized price level, which would present the mother of all buying opportunities for market participants wishing to initially establish or increase their allocation. Bear markets in bitcoin usually bottom around an MVRV ratio of 0.75, which would be around the $15,000 level for bitcoin today.

Displayed below is the last seven years of bitcoin price action where MVRV is at 1.6, which is the level of the ratio today.

Bitcoin is an asymmetric investment opportunity. To reiterate once again, immense volatility is the price that must be paid by holders of the asset for the immense upside opportunity.

In risk adjusted terms, nothing comes close to bitcoin.

Bitcoin Risk Adjusted Returns vs Other Assets

Cherish the dip, because the value proposition of an immutable monetary network with an absolutely scarce supply is completely unchanged.