Capriole Newsletter - Issue #8

Jan Uytenhout
May 28, 2021
8 min min read

Fear, Uncertainty and Capitulation

Welcome to Issue 8 of the Capriole Newsletter! 

Bitcoin is trading at more than 40% below the all-time high for the first time since October last year. Time for a quick overview of what has happened in the past month.

The News

The past month has been filled with fear, uncertainty and doubt (FUD). It started with Tesla selling 10% of their Bitcoin holdings to ‘test liquidity’. Elon then stated Tesla would no longer accept Bitcoin as a payment method due to the high energy cost per transaction. This was unusual. One would expect Tesla to be aware of this, given their $1.5B Bitcoin purchase and because the energy spent is not dependent on the number of transactions, but rather the total value the network secures.

Whether his concerns were genuine, or a strategic decision to improve odds on their green energy subsidy applications, we will never know. But it did lead to the formation of the Bitcoin Mining Council, with the aim to promote energy usage transparency and accelerate sustainability initiatives worldwide.

Speculation on whether Tesla would sell the remainder of their Bitcoin caused further volatility, which was compounded by the IRS reporting announcement, Mongolia banning Bitcoin mining, and China banning Bitcoin mining and trading. 

Here’s this month’s highlights:

  • Tesla sells 10% of their Bitcoin to “test liquidity”
  • Tesla suspends Bitcoin payments
  • Apple is hiring crypto specialist for their alternative payments team
  • Crypto transfers of over $10K to be reported to IRS
  • China to ‘crack down on Bitcoin mining and trading’
  • Michael Saylor and Elon Musk set up Bitcoin Mining Council
  • SEC has started reviewing Skybridge and Fidelity Bitcoin ETFs
  • Texas Bitcoin bill gets senate approval 
  • Coinbase hits No.1 in the Apple Store
  • Goldmann Sachs unveils new cryptocurrency trading team
  • Citibank launches new crypto services due to client interest
  • India crypto ban is challenged by National Payments Corporation of India
  • Hong Kong regulator looking to ban retail traders from Bitcoin speculation
  • US Treasury states need to report all $10,000+ transactions to IRS
  • Ray Dalio states he owns Bitcoin and it's better than bonds
  • Carl Icahn states intention to purchase $1.5B+ in crypto

The Markets

The traditional markets are trading near all-time highs, with the CBOE Volatility Index (VIX) near the 2021 lows. Bitcoin is highly correlated to the stock market at present, so we can expect significant movements in stocks to have a corresponding and likely larger impact on Bitcoin.

One of the main influences on the stock market recently has been inflation. First, there would be no inflation. Then, inflation would stay below 2%. Now, inflation will be higher, but only temporarily. 

Yellen caused market jitters earlier this month stating rates will need to rise. She quickly reversed her statement the next day after seeing the negative impact it had on markets. These tremblings, combined with inflation exceeding Fed expectations are starting to reveal the cracks in the inflationary monetary printing actions of the last year.  It shows that the current approach cannot go on forever. While it may be some time before any tightening action, this is a fresh reminder that it won’t last forever, and when action is finally implemented, could have ugly impacts on both stocks and Bitcoin.

With President Biden’s announcement of a $6 trillion budget this week, taking the U.S. to the highest sustained spending since world war II, tightening actions have been allayed for the time being.

The Fundamentals

Hash Rate

The past two months, one of the most important metrics to watch was Bitcoin’s hash rate. In April, an accident at a coal mine in China was the cause of a big drop in hash rate. This was immediately reflected in the price of Bitcoin, which dropped up to 15% within a few hours. This event once again showed how centralized the Bitcoin mining industry is and in hindsight marked a good exit point. 

With this crash fresh in our minds, news headlines of China banning Bitcoin started to pop up. This time it was a direct order of the state department saying they will ‘crack down on Bitcoin mining and trading’. Several exchanges have already announced restrictions for Chinese customers, and the hash rate has since dropped significantly as miners relocate out of China. 

In the long term, redistribution of hashing power should lead to a more decentralized network, which is good for Bitcoin. However, in the short term the situation is less clear. China has implemented many Bitcoin bans in the past but most have had negligible enforcement. If China swiftly enforces the mining bans, we could see substantial hash rate drops, which correspondingly will reduce Bitcoin’s Energy Value - the value of the Bitcoin network - so the near term downside risk is significantly heightened under this announcement and depends on the speed at which any enforcement is enacted.  Key things to watch here are further announcements of any enforcement, and Bitcoin’s hash rate.

Bitcoin Hash Rate from

Open Interest

The recent flash crash might have been centered around FUD entering the markets, but it was fueled by the large amount of leverage. Open interest on Bitcoin futures has been going up steadily during the bull run, creating more fuel for a potential crash.

Lately, as price was trending lower, the open interest remained relatively stable. Before the flash crash to $30K, every dip led to an increase in open interest. On top of that, funding rates went up on many of the down moves. These metrics suggest that dips were bought up by futures traders, who either get stopped out or liquidated when price moves further down, leading to a long squeeze. 

Data suggests that this is exactly what happened, as price dipped to $30K on spot exchanges, but as low as $27K on derivative exchanges.

Glassnode Open Interest

Net Realized Profit/Loss

The most explosive part of the flash crash was caused by liquidations and stop losses, but there was a lot of on-chain selling happening at the same time. This selling was done at record levels of loss. Generally, people tend to avoid selling assets when they are trading at a loss, as a net realized loss usually marks the bottom. Last week, we saw the biggest capitulation in the history of Bitcoin (in USD terms), multitudes larger than March 2020. Interestingly, there were a few more spikes in the realized loss during some relief bounces last year, likely from panic selling out of fear for another leg down. The same might happen in the near future, as people will finally be able to close positions at an acceptable loss or breakeven.

The Glassnode Net Realized Profit/Loss

Spent Output Age Bands

Bitcoin saw an incredible run up to $65K in a very short period. Six months ago, Bitcoin had never passed $30K yet. So to achieve the net realized loss, a lot of relatively young coins must have moved. This is confirmed by the Spent Output Age Bands. This metric checks all coins that moved, and categorises them based on when they last moved before. During the dip, the share of old coins (last moved 2Y+ ago) decreased significantly. Strong HODLers remained relatively calm. They have been through this before, and know that this is not the right time to sell.

The Glassnode Spent Output Age Bands

The Technicals

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

High Timeframe

On the high timeframe, Bitcoin took a step down to the range it was in at the beginning of this year. For now, the $38K to $32K range represents no-mans-land with regards to macro direction.

Low Timeframe

On the lower timeframe, the range can be defined between the daily closes at $32K and $40K. Between these levels, some more choppy price action can be expected. But in general, the longer the consolidation takes, the more likely a breakout becomes. For higher risk reward trades, it is recommended to wait for confirmation of the breakout.

The Bottom-Line

Bitcoin has taken two steps back and is trading at levels last seen at the beginning of this year. Leverage traders kept buying the dip, until the flash crash to $27K that wiped out a lot of the open interest. On spot markets, it was mostly the young coins that moved around, while HODLers did what they do best: stay calm.

There is still uncertainty about the situation around China banning Bitcoin mining and trading. It is trading at a large discount right now, though for higher risk reward trades you might want to wait for the break out of the current range.

One thing is a given though: the Bitcoin network is resilient, and whatever happens, it will find a new equilibrium from which it can grow to new highs. 

Content we love

  • Skew article on how institutions are searching for crypto yields
  • Nic Carters’ collection of Bitcoin articles
  • Sam Trabuccos’ thread on the flash crash and how Alameda bought the dip
Newsletter Disclaimer

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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