Thu, October 24, 2019 | 3:19PM ET

CRYPTO Still risk-off for Bitcoin, not a matter of price…

Name: FS Insight
Price range: $$$

Tom Lee, CFA ^AC

Head of Research

Still risk-off for Bitcoin, not a matter of price…

Several hurdles expected to improve before year-end. Plus, looking at mini-GBTC effect

For the most part, our current framework is that ‘crypto winter’ ended in late-2018 and Bitcoin is in a new bull market. But like prior bull markets, the rise in price is not continuous and we are in the midst of a consolidation, with potential downside risk near-term (our TA Rob Sluymer has identified several downside targets). In other words, the crypto market is not about being greedy, but rather, to keep sufficient dry powder to take advantage of dips.

The start of this risk-off period was July 31st because Fundstrat’s proprietary Bitcoin Misery Index (BMI) fell below 66. Historically, a downturn in the BMI and a break below 66 signaled forthcoming weakness (see our report dated 7/30 –> click here for report). And this has largely played out in 2019. We are now waiting for the BMI to fall below 30 before concluding sentiment has properly reset.
Other factors subsequently fueled the risk-off call for Fundstrat (Slide 3). Among the factors:
—August, S&P 500 rangebound and unpopular opinion is Bitcoin waiting for S&P 500 breakout;
—Sept. 19th, White House banned “vaping,” highlighting Bitcoin lacks sufficient regulatory protection;
—Sept. 25th, Bitcoin fell below its 200-day moving, raising questions whether bull market ended;
—Oct. 23rd, Congressional testimony/hearings on Facebook is ultimately hostile to crypto and Bitcoin.
First positive catalyst before YE is BMI falling below 27. We expect the BMI to fall below 27 within the next 6-8 weeks (Slide 4). A fall below 27 was last seen in November 20, 2018, and shortly preceded the tradable bottom. The most analogous period is 2016 and the price decline for Bitcoin is not substantial if waiting for the BMI to fall to 27—in fact, it rose in 2 of 3 cases, but fell 20% in the third case.
Second positive catalyst, we reiterate our unpopular opinion that ‘nowhere S&P 500’ constrained bitcoin—but S&P 500 rally expected. But since we expect the S&P 500 to rally into YE (decisively), this paves the way for Bitcoin to participate in a risk-on rally. The reason for this correlation, we believe, is that Bitcoin holders are largely retail investors.
What could go wrong? White House and Congress have incrementally turned hostile to crypto, particularly because of Libra. As we have noted multiple times recently, we think the US remains the central crypto story over the next few years.

Bottom line: We remain risk-off for Bitcoin and crypto but see a higher probability of conditions improving within the next 10 weeks. Thus, Bitcoin below $7,000 would be an attractive risk/reward (current ~$7,500).

Look for BMI (Bitcoin Misery Index) to fall below 27 (Slide 3)…

STILL RISK-OFF: Headwinds for Bitcoin remain same issues (Slide 6)…

Bitcoin needs to re-attain 200-day moving (Slide 7)…

2019 has more tailwinds than 2018 (Slide 10)…

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