Bitcoin Hits $42K: Let's Dive Under The Hood

The orange coin remains the market monster. This is where I think it makes sense to avoid getting overly exuberant.

What a start to the week for Bitcoin ($BTC-USD). After crossing over $40k late Sunday, it didn’t take long for BTC to rip up to $42k on Monday. That level does appear to be the point of potential exhaustion (at least for now) as we’re seeing yet another overbought RSI and a bearish divergence in that same indicator:

Of course, this is just a daily chart. But even looking at the longer term weekly chart we can observe a high RSI. It’s here we can also see $42k being a potentially important pivot point for bears.

We’ve also seen beast-mode runs in the bitcoin miners over the last few weeks with many of them up between 50-60% in just the last three or four sessions.

I think we’re sort of seeing a “blow off top” in some of these equities pertaining to this current Bitcoin bounce. In my view, some level of consolidation can be reasonably expected in both BTC and the mining equities between now and the end of the year, at minimum. However, even though I think we’re due for a pullback, there are some things to be excited about fundamentally speaking.

There is no question the market’s expectation for a soon-to-be approved spot ETF is a big reason for this move in BTC. CoinShares data shows 9 consecutive weeks of investment inflows into crypto - with 93% of that inflow going to Bitcoin year to date.

Ethereum ($ETH-USD), which has been a bit of “tute” darling in the past because of its DeFi and yield earning protocols has actually seen outflows year to date - though that has started to reverse more recently with some of the same fund managers who have applied for spot BTC ETFs now also gunning for spot ETH ETFs as well.

One of my favorite things about Bitcoin is it’s one of the few investments I can think of where retail beat the pros to the trade - and by several years. Saylor is finally ahead. El Salvador is finally ahead. But many of the retail holders have been ahead for much longer. 85% of the supply is controlled by hodlers who are either ahead on their BTC buys or breaking even. We’re not even close to a halving cycle top until that number gets to about 95% if history is any indication.

What has been really interesting to see play out for Bitcoin over the last month or so has been the resurgence of Ordinals. There are currently over 46 million ordinals inscriptions on Bitcoin as of December 4th.

But the biggest thing is the fees these inscriptions have been generating for Bitcoin miners. The Ordinals protocol is now responsible for over $137 million fees paid out to miners this year. With five months until the next block reward halving, a spike in fee revenue is a very good sign.

In the chart above, I’m showing fees as a percentage of total block reward. In my assessment of this same chart from my recent Seeking Alpha CleanSpark CLSK 0.00%↑ article:

Rather than observing a dramatic spike that takes transaction fees to 75% of total block reward for a brief period of time like we saw in May, we've seen virtually an entire month of the transaction fee share of block reward above 10%. It arguably hasn't come with as much fanfare, but the total BTC paid to miners from transaction fees in November was only 15% below that of May. If this continues, we may see surprise upsides to revenue in Q4.

From an address standpoint, daily actives have been steadily in the 1 million range for the last year or so. The biggest indicator of Bitcoin’s network growth though is the total non-zero addresses.

That figure is now just shy of 50 million for the first time. Time for some cold water… final chart:

90 day moving average NVT from CoinMetrics is a hair under 200. I go to this one a lot. I’m a bit concerned by this NVT ratio for Bitcoin. It’s stupid high, in my opinion. That said, it’s been high since February and that simply hasn’t mattered.

My main point is this: I really don’t think we need to chase this rally. Don’t forget sell the rumor buy the news works the other way as well. “Buy the ETF approval rumor, sell the news” is a very possibly outcome. But by all means, if you have a differing viewpoint, fire away in the comments or in the chat. Tell me what I’m missing!

Disclaimer: I’m not an investment advisor.