Capriole Newsletter - Issue #7

Charles Edwards
Apr 19, 2021
8 min read

Blackout Flash Crash

Welcome to Issue #7!

Every month we write a short update on the market. We try to time this around pivotal moments for Bitcoin.

It can be hard to time a newsletter around a market top, as Bitcoin dumps quickly. A lot has happened in the last few days and this -22% flash crash represents a huge opportunity.

It's a bull market, so sometimes these updates can sound repetitive, but as we have talked about in prior issues, dips are generally for buying this year.

And this one happens to be very special.

The News

The Good:
  • Coinbase IPO launches and trades at over $100B market cap.
  • Ray Dalio, founder of the largest hedge fund in the world “Bridgewater Associates”, finally acknowledges the value of Bitcoin in portfolios.
  • TIME magazine, the 98 year-old publication, plans to start hodling Bitcoin on its balance sheet.
  • Third Point, a $17B hedge fund reveals they are holding Bitcoin.
  • Caruso, one of the largest private real-estate companies in the US, now has Bitcoin on its balance sheet.
  • Korean crypto trading volumes surpass that of the Korean national stock exchange
  • Goldman Sachs to offer investment vehicles for Bitcoin.
The Bad:
  • Turkey bans use of cryptocurrencies for trade.
  • C-Suite of Coinbase market dumps stock on IPO suggesting overvaluation. CEO Brian Armstrong alone sold $291M on opening day.
  • US Treasury sanctions 32 Russian entities over alleged digital currency-related election interference.
The Ugly:
  • Blackout in areas of Xinjiang causes a -46% drop in Bitcoin Hash Rate in just 48 hours. Highlighting the concentration of mining still in China.

The Markets

Bitcoin holds its correlation with the markets and the S&P has printed fresh new all time highs this week. Generally speaking, this is a positive for Bitcoin.

Systematic risk, and opportunity, remains tied to the traditional markets in the short-term. As we have written about before, keep an eye out for any major changes to macro-economic policy or other major risk/volatility factors in the stock market.

The Fear and Greed index printed 80 today, suggesting high levels of greed in the market. Values greater than 80, and less than 20, suggest significant correlation with Bitcoin.

In other words, expect any substantial upside or downside in stocks over the next 1-2 weeks to be reflected in Bitcoin.

The Fundamentals

This last week has seen some significant events for Bitcoin.

The Coinbase IPO on 14 April marked the local top at $65K. Many were debating if this would be a “buy the news” or “sell the news” event. In hindsight the obvious answer was sell.

But what happened over the last 5 day period?

  1. Bitcoin broke out fresh all time highs to $65K.
  2. $65K marked the 3.618 Fibonacci extension from the 2017 cycle top to 2018 bottom, a natural resistance point, which so happened to mark the exact top.
  3. It also marked the Coinbase IPO “sell the news” event.
  4. Bitcoin then closed under the daily upper bollinger band of $63K, suggesting the breakout was a “fakeout” and high risk of dumping.
  5. The upper bollinger band was re-tested and failed (bearish).
  6. News came out in China that Xinjiang had a power blackout.
  7. Over the next 48hours, hash rates dropped -46% as a result of the blackout.
  8. During this period the FUD was compounded with the news that the U.S. Treasury is charging several financial institutions for money laundering using cryptocurrencies.

Bitcoin dropped -22% over the period of 4 days, with the collapse bottoming on the news of the hash rate collapse (point 7).

As of writing, Bitcoin is trading at $55.2K and the fallout of the flash crash has left some prime entry opportunities:

  1. Overleveraged traders have been cleansed. Futures Open Interest is down -22% to $21B, a healthy correction to allow for continuation. When everyone is “long” and there are no more “sellers” to trade into, the market tops out. This is why you sell when the shoe-shine boy (today’s uber driver) is buying. This cleansing of positions over the last week helps clear the path forward for Bitcoin.
  2. Funding rates have reset and are negative for the first time in 2021.
  3. GBTC is still trading at a -10% discount (more on this here).
  4. USDT prints suggest the market has “de-risked” and identified a bottom.
  5. Dynamic Range Network-Transaction Value (DNTV) is green on the 4HR. The four other times this occurred in 2021 marked local bottoms.
  6. The Bitcoin Utilisation Indicator is green.
  7. The Mayer Multiple is the lowest it has been since $19K (December 2020).

Let’s take a look at adoption.

These are the 10 largest banks in the US. We have collated their latest public view on Bitcoin loosely grouped as BULL, BEAR and NEUTRAL based on their most recent announcements, investments or services:

  1. JPMorgan Chase & Co. ($3T Assets): BULL

  2. Bank of America Corp. ($2.3T Assets): BEAR

  3. Wells Fargo & Co. ($1.8T Assets): NEUTRAL

  4. Citigroup Inc. ($1.7T Assets): BULL

  5. U.S. Bancorp ($0.54B Assets): NEUTRAL

  6. Truist Bank ($0.5B Assets): NEUTRAL

  7. PNC Financial Services Group Inc. ($0.46B Assets): NEUTRAL

  8. TD Group US Holdings LLC ($0.4B Assets): BULL

  9. Bank of New York Mellon Corp. ($0.39B Assets): BULL

  10. Capital One Financial Corp. ($0.36B Assets): BULL

Institutional adoption is well underway this bull-run.
But as you can see, just 40% of major US banks are pro-Bitcoin (“BULL”).

We are still early.

The Technicals

[Reminder - we are an algorithmic investment manager - the below provides us insight but charting is not used in our investment strategy]

The topic of this month’s technicals is the beautiful RSI diagonal retest we are currently forming. There is some chance this retest could test lower over the next 12-24 hours, but continuation up is more likely. It has a great track record over the last 1 year plus of identifying bottoms for Bitcoin (examples below).

The key is to look for at least two peaks forming an approximately 45 degree downward line. Three or more peaks which form the trend line is even better. Ideally RSI has also penetrated sub-30 (it did last week). Great buy zones are then identified after the “Test” shown below. This is happening as of writing on the current 4HR candle.

The Bottom-Line

The current flash-crash and liquidation run is a Bitcoin bull-run gift.

Onchain fundamentals are pointing to the current price being a great buy opportunity and institutional banking adoption is still relatively low.

RSI is confirming a local buy opportunity.

This is the dip.

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The information contained in this newsletter post is provided to you solely for informational purposes only, and is not to be shared, distributed or otherwise used for any other purpose without direct reference to Capriole Investments Limited or link back to this post.

This newsletter post is provided for education and discussion purposes only and does not constitute an offering. Opinions and projections included in this newsletter are provided as of the date of publication, may prove to be inaccurate, and are subject to change without notice. Prospective investors should not treat these materials as advice regarding legal, tax, or investment matters. No recommendations are made to invest in Capriole Investments Limited nor any other investment. An offering may be made only by delivery of a confidential offering memorandum to appropriate investors. Past performance is no guarantee of future results. Additional information about the Capriole Investments Limited and its performance is available upon request.

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