May 25, 2022

The price changes - the narrative changes too

Post by Nick Bhatia of The Bitcoin Layer. The volatility of bitcoin never ceases to inspire fear and awe in those who first time in this market.The last weeks have been no exception. Some new market entrants are understandably shocked, while veterans are probably excited about the opportunity to buy BTC for under $30k. And quickly, because it may not last long.

Today I want to calm the prospectivenew investors, based on two metrics that I used to rely on both in crashes and when the market is euphoric: the 200-week moving average of the BTC price and bitcoin’s market value to realized value (MVRV ratio).

Let's start with 200 weeks. MA (from moving average), which today is at a level slightly lower than$22,000. This moving average has never gone down in bitcoin's history, and the price rarely goes below it either. As can be seen from the graph, one such episode occurred, for example, at the beginning of the pandemic. From this alone, one can understand that the movement to $22,000 is not something completely unforeseen and out of the ordinary. It also suggests that this area should serve as a downside limit and solid price support.


Realized price is less intuitiveunderstandable to the uninitiated. This is the name of the average cost basis for all bitcoin investors, that is, it is the average price at which all existing UTXOs were last moved on-chain. This is another form of moving average, but instead of the average market price, it takes into account the price at the time each bitcoin moved on the blockchain, rather than the exchange rate. This stable indicator has also historically acted as a reliable support, which is rarely broken. The ratio between the market price and the realized price is also known as the MVRV ratio (green curve in the chart below). As you can see, MVRV is close to 1, which means that the market price and the realized price are almost on the same level.


When there is a big difference between them,we get big price swings. Many, myself included, have predicted a softening or contraction of bitcoin's cyclicality stemming from halvings that occur every four years. Unfortunately, we can only confirm this thesis after the fact, so we are waiting for the next halving in 2024. Until then, you can use MVRV to determine the likely bottom when you can no longer be afraid.

I don't think finding realized price(~ $ 24 thousand) and 200 weeks. MA (~$22 thousand) is approximately at the same level - this is a coincidence. Somewhere in here, apparently, is the “fair value” of bitcoin today. This is also why this area is so important from the point of view of the price reduction limit.

The narrative needs to be derived from the price, and the currentThe narrative around bitcoin is largely based on the fact that it is an asset that shows exponential growth in the long term. But if bitcoin falls below $20,000 for an extended period of time, below the 200-week. the moving average, the realized price, and the 2017 market high would mean that something is broken. That's why these levels are so important: if $20k doesn't bounce, the narrative of an exponentially rising asset will be in doubt. That is why panic begins around these areas.

And one last thing about BTC price:trend lines matter. The reason everyone pays so much attention to the big lows is to identify the level at which the uptrend breaks and ceases to exist. And I'm far from the only one who attaches importance to such parameters. Technical analysis works much like a self-fulfilling prophecy because all traders behaviorally react to each other.


This week we have seen how altcoin with$40 billion cap (LUNA) has literally evaporated, but crypto investors with a conservative allocation of 100% BTC would not notice this. Some of the readers who have some ETH in their portfolio may have wondered: what if Ethereum also dies, evaporates in a couple of days like LUNA? Let's take a look at the chart.


After an initial increase in relation tobitcoin in 2017, ETH/BTC failed to break that high in 2018 and then again failed to break the peak of 2018 in 2021. I don’t see a clear trend here despite the smaller highs: the price could stay in this range for many years, or the chart could break out, and bitcoin will face another challenge in terms of dominance in the crypto market. Or ETH/BTC could start to decline and return to deeper bearish territory. This chart matters for bitcoin because the narratives around Ethereum at least drew off a significant amount of capital that could otherwise have been directed to BTC. This is not to say that the future rise in the price of bitcoin depends in part on the relative decline in the price of ETH, but I cannot guarantee that this is not the case. On a closer look, the movement of the ETH / BTC price this week looked extremely weak and prompted me to even think about the likelihood of the death of Ethereum and how it could look like.

In Conclusion: About the Fed

With a 2-year yield of 2.6% and a ratewith federal funds still below 1%, the Fed should hastily raise rates until it faces pressure to pause as the economy slows. Weakness in the stock market doesn't seem to be stopping them, but the GDP contraction could turn the spotlight on itself and prompt the Fed to change its priority. At the moment, the Fed is going to raise the rate by another 50-75 bp on June 15. To get an idea of ​​how much room the Fed still has to raise, I look at the 2-year yield: if it declines significantly to a level less than the Fed's target rate hike, then the rate hike will stop. With the difference between the Fed's rate and the 2-year yield now at 175bps, the Fed still has quite a lot of room to raise rates further. This should put pressure on risky assets, which, as we all already know, has a big impact on the price of BTC.

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