Cryptoverse Weekly #6: Bitcoin hashrate model projects +109% upside next 6 months

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Bitcoin Miners have caused the $30k to $20k Crash

During the first half of 2022, we held a conservative view as digital assets were expected to experience the typical mid-cycle Bitcoin halving lull. Despite Bitcoin’s short history, we tend to see a [price] ramp up into the halving cycle with large amounts of venture capital being thrown at crypto firms into those price peaks combined with an exuberant news hype.

?This cycle has so far followed this pattern, despite the interest rate hikes from the US Federal Reserve potentially accelerating the downside pressure for longer duration assets. As recently as during IDEG’s Digital Asset Summit in April (Singapore), we have warned investors of a potential decline into the summer with the expectation that the low in crypto assets might only be achieved end of September / early October 2022.

?A month ago, when Bitcoin’s price was trading above $30,000, we have voiced our concern that the breakeven Bitcoin mining cost might be as high as 28,000 across the globe and that we could see a cataclysmic sell off with prices expected to drop as far as $15,000 to $20,000 due to pressure from Bitcoin mining firms slashing inventory.

?While this concern has been confirmed by the recent price action when Bitcoin traded at $17,000 as well as the announcement by several Bitcoin mining firms liquidating part of their inventory, we strongly believe that this story has run its course now.?

Bitcoin Hashrate Signal projects +109% in 6 months

We analyzed in previous ‘Cryptoverse’ reports that leverage positioning is low and that the only sizeable player in the crypto market who can move prices lower would-be miners by slashing inventory. We also suggested that this period could be an attractive entry opportunity for investing in Bitcoin mining as prices tend to bottom around 18-months ahead of the next Bitcoin halving (May 2024) and the industry is consolidating with mining equipment being relatively cheap.

But the better capitalized miners tend to have more efficient machines which entered the market only during the last 2-3 years and the breakeven rate for this segment of miners is as low as $18,000. Hence, we concluded that miners would switch off their old machines and we may see a subsequent decline in the Bitcoin mining hashrate.?

This is indeed what we have been seeing as miners became a) Bitcoin price and b) electricity price cost conscious. So where do we go from here?

One of the most reliable Bitcoin entry price signals has just turned bullish. When the 30-day moving average of the Bitcoin hashrate crosses above the 60-day moving average after being below it for 20+ days, the average return has been +68% over three months and +109% over six-months with a 91% success rate (one negative return vs. eleven positive return).

This ‘Hashrate’ indicator shows when Bitcoin miners are becoming more constructive on profitability prospects, after a period when the network is running with less capacity and therefore miners are deploying suddenly more resources to secure the Bitcoin network.?

The average Bitcoin price return was +68% three months after the ‘Hashrate’ signal was triggered with 10 out of the 11 signals showing a positive return while the six-months return was even higher at +109% with similar 10 out of 11 signals showing a positive return (91% hit ratio).

These returns and their historical probability are quite compelling and with the latest signal being triggered on July 4th, we view the odds for a significant rally of +68% and +109% over the next three and six months are high. This could result in Bitcoin prices of $32,320 (+68%) and $42,718 (+109%) by end of the year.

Therefore, the bearish view which has guided us, so far, for this year, should at this point be reversed with the consequence of removing market neutral and defensive strategies from our allocation recommendations (Market Neutral Quant Arb, Interest Income through Stablecoins, directional indifferent CTA and Event strategies) and rather focusing on bullish direction strategies (smart beta, multi-token tracking, yield enhancement allocations or even mining exposure).

Our roadmap for 2022 was to buy Bitcoin (crypto) either 1.5 years before the next Bitcoin halving cycle ([Time] Sep / Oct ’22 vs. Mar ’24 expected halving) and / or when Bitcoin dropped -60% from the mid-cycle halving [Space]. As the Bitcoin price drop is close to -60% (YTD) as well as we are nearing the window of Sep/Oct 2022, we reckon that the time has arrived to be bullish at this level.

Bitcoin seems to have entered the ‘buy-zone’. Investors should prepare now for the potential March 2024 Bitcoin halving rally.

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