$57k Bitcoin & Miner Mania
After a monster rally in all things Bitcoin to start the week, let’s dive in on some charts and some additional considerations.
I know, I know. I’m going to start sounding like the boy who cried wolf soon - if I don’t already! 😬 Yes, I’ve been anticipating a pullback in the price of Bitcoin ($BTC-USD) before the halving. No, that pullback has not manifested in the way I have expected.
Of course, it’s entirely possible that the 21% drawdown in the two weeks following the spot ETF approvals was the pullback and it just didn’t last as long as I wanted it to. I have to admit, I was thrown off guard by just about every Bitcoin-proxy in the market mooning Monday. Bitcoin rallied over 5% and is continuing so far in Tuesday’s session. But the Bitcoin equities did even better:
Coinbase COIN 0.00%↑ closed up 17%
Marathon Digital MARA 0.00%↑ ripped 21%
CleanSpark CLSK 0.00%↑ had a daily candle that looks like an elevator to the sky
What the heck is going on? First, here’s an updated look at US-based spot ETF flows since mid-January approvals:
Obviously the amount of investment demand for these products has been impressive with just under 118k BTC of net investment flow adjusting for the Grayscale fee-migrants. Nominally, this BTC is currently valued at $6.4 billion while the actual dollar flows into the spot ETF products have been closer to $5.6 billion. Not too shabby. Also noteworthy; my pick of the Fidelity Wise Origin Bitcoin ETF FBTC 0.00%↑ as my preferred spot fund looks good as each of the other new funds in the top 5 by AUM have already hit their waiver limit. Fidelity’s was a set date and is still ongoing.
Bitcoin Fundamentals
Bitcoin is now up 48% in one month. This rally has been absolutely incredible. Bitcoin is now overbought on daily, weekly, and monthly time frames and has OI near 2021 highs. We could get into the weeds with TA but I’m going to instead focus on what I think are more important metrics to consider at this juncture. I think we need to look more at the cyclical ratios and metrics to gauge just how much room we have left to run. Here’s the MVRV Z-score:
This takes the market value and the realized value - the average price at which all coins were last moved - and applies a standard deviation calc to determine when BTC is overvalued or undervalued. The Z-Score, seen in orange above, is currently reading 1.87. We generally haven’t hit the cycle price top until MVRV Z-score eclipses 7.
Next we have long term holder balance, or “hodlers:”
These are on-chain addresses that have held their BTC for a least a year. At 13.6 million BTC, hodlers have a commanding share of the coins in circulating supply. Notably, hodlers have historically sold into the Bitcoin price frenzy that generally follows each block reward halving. They haven’t started meaningfully distributing yet so price has a long way to go if these ETF products keep eating supply. Here’s an interesting chart that I think speaks to the lack of a meaningful retail frenzy (at least on-chain):
This is the ten year trend in miner volume share of on-chain addresses. I think there are a couple of ways we can look at this. On one hand, it seems to indicate retail investors have completely missed out on this rally. Who could blame them after getting burned by so many frauds during the last cycle?
However, it could also be an indication that Bitcoin’s incremental retail investor simply isn’t going to be on chain any longer. This is seemingly corroborated by the spot ETF flows. Money is coming in. Price is going up. But it isn’t generally happening on chain. I’m not actually sure this is all that bullish for miners in the long run and I’ll detail why shortly.
Finding Winners In The Mining Space
The miners had themselves a session to start the week, my friends. It’s not easy to find a public miner that wasn’t up at least 12% Monday but the trend in recent months has been interesting. Here’s your top ten sorted by 1-month performance:
We’re starting to see the market favoring certain names as others lag peers. Take for instance the aforementioned CleanSpark and Marathon Digital. CLSK made a new 52 week high Monday. MARA is withing striking distance of its own 52 week. Then we have a name like Hut 8 HUT 0.00%↑ which is still 60% off its 52 week high.
To me, this is the market showing that this space is going to have winners and losers in the back half of 2024. With less than two months separating us from the halving, it’s past time to have those bets made in my humble opinion.
The ‘tutes appear to like MARA and RIOT about the same. CLSK looks like the obvious “alpha” pick from where I sit so it probably isn’t a surprise seeing the 56% rip in funds holding the name in the last 14 months. Importantly, this is aggregate holder data, not share of float data. I don’t have trends on those. But we can see HUT is the obvious outlier with more sellers than buyers of that stock since the end of 2022:
Of the 8 miners sampled above, it’s the only one with a funds holding trend that looks like this. There’s probably a signal there - and no, I’m not suggesting we fade the active managers and go contrarian here. I used to like Hut 8 quite a bit and at one time it was my largest mining stock. But since the merger with US Bitcoin, the balance sheet has become a mess, the business is positioned more as a HPC/Datacenter company than as a BTC miner, and former CEO Jamie Leverton stepped down less than a month after a short report from JCapital Research. This company is a mess. I think it’s a pass.
April Block Reward Halving
Ah, the old block reward halving. The most telegraphed headwind any equity investor could ask for. TLDR version; BTC has a set supply of just 21 million coins. There are currently a little over 19.6 million of them in circulation. “Miners” are paid to validate transactions on the ledger - these payments have historically come from new coin issuance through the block reward. But because there is a limited number of BTC in the supply, new coin issuance dwindles over time and is intentionally cut in half every 4 years.
This coded halving has historically been magnificent for the price of Bitcoin as it means increased demand can only be resolved through higher BTC prices rather than more production. However, this is generally terrible for the miners because it means less BTC over time. It’s not a great business given the current incentive model and the block reward halving is one of the key reasons why I’ve personally viewed transaction fees through network usage as the best way to solve this problem for the miners longer term.
During times of surging demand for network usage, it hasn’t been uncommon to see the average fee to send a transaction spike to up to $10 or even as high as $20-30. While this is actually a very good thing for the miners theoretically as it provides a potentially more sustainable long term revenue stream, the tradeoff from higher fees is it prices out a large cohort of users directly on-chain. And this is the big problem for miners currently.
Despite what I’d hoped from what were really encouraging fee revenue figures in November and December, fees really haven’t been all that sticky so far in 2024 and they’ve been particularly weak in February considering the previous three months.
I think what we’re witnessing right now is concerning. We see BTC flowing into spot ETFs, miner share of volume increasing, and average transaction fees headed back down. Maybe this is good for BTC’s price, but I’m not sure it’s good for the miners. If the miners aren’t incentivized to continue operating through sustainable revenue expectations, one can’t help but wonder if that means we see weak teams start turning off in May. I hope to explore this more in the weeks ahead. Until then, I’ll leave you with this:
Part of my thesis for a larger pullback these last few weeks has been the 2017 cycle analog. Following the 2017 high, BTC’s bear market relief rally took the coin’s price within 30% of what was then the ATH of $19.9k before significantly pulling back before the halving. In January, we came within 30% of the 2021 cycle high of $69k - thus, calls for a pullback made some degree of sense. Alas, pAsT peRFoRmAnCe iS nOt… you probably know the rest.
Still, following the 2020 halving, it took 7 months to take out the high from the previous cycle. We are currently less than 20% from the ATH and we still have roughly two months before the halving occurs. It would be quite the twist if Wall Street accelerates the new ATH and beats retail to the trade this time around.
Disclaimer: I’m not an investment advisor. I’m long FBTC, CLSK, and MARA.