The Wolf Den #485 - Bubbles, Cycles And Liquidity

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The adoption of a new currency or technology follows an interesting path.

In an attempt to describe this growth, investors use words like “bubbles and “cycles.”

Tomato - Tamahto.

Bitcoin’s growth is no different from various other technologies and currencies which have benefited from network effects. Historians have made compelling cases as to why Bitcoin’s growth is strikingly similar to that of religion, gold, automobiles, personal computers, cellphones, and so on and so forth. 

But what exactly causes Bitcoin’s cycles and sporadic growth? The answer is liquidity.

Prior to Bitcoin’s mainstream explosion, there was always a source of liquidity. Old-timers will remember Mt. Gox, BTC faucets, the Silk Road, and the Original Mailing List as some of the ways that Bitcoin found liquidity. These sources were thin and unreliable. As a result, Bitcoin bounced around from $.06 to $30, $30 to $1,100 and $1,100 to $19,800. Each time the network grew, the volatility was reduced and the chart took shape. It wasn’t always pretty, but neither is the adoption curve of anything important in its early stages.

What will drive the next cycle that we are all awaiting with bated breath?

Deepened liquidity.

You might think that we have hit peak saturation. After all, we have a 24/7 market filled with brokers, regulated exchanges, ATMs, the CME, ETFs and more. But there are important vehicles that we still lack. The most obvious missing piece for liquidity is the Spot Bitcoin ETF, but there are also other barriers that need to be broken for our current access points to reach their full potential.

Mining still needs some improvement, tax issues need resolution, institutions need regulatory clarity, and general functionality still somewhat sucks. Crypto still isn’t user-friendly. We may be “crypto native” at this point, but ask your grandmother to go buy an obscure coin on Uniswap and you will inevitably see the glaring issues with UX/UI.

Bitcoin will continue to grow, but we are going to need more liquidity. Once the above issues are improved, there really is no limit to Bitcoin’s potential growth.

Bitcoin just printed it’s 4th bearish weekly candle in a row.

The last time that happened was in June 2020 when price was chopping sideways. Before that? October, 2019.

This week’s candle barely closed “red” after rallying earlier in the week.

5 bearish weekly candles in a row would be quite a feat. I cannot find a time on the Bitstamp chart that it has happened since 2014.

After a fake out at the top of the local range with multiple wicks above and closes below, we now have a potential breach of the local range lows. Ugly, but still printing a higher low for the moment, maintaining bullish market structure. Ideally, we want to see a daily close above the $39,200 area and have yet another wick out of the range.

There is some potential bullish divergence on the daily, but it will take us days to see if it plays out.

We have significant potential bullish divergence forming on almost every meaningful time frame. This would require RSI to make a higher low and a clear elbow up to confirm, so nothing is certain yet at all. But this could be a huge bottoming signal if we get confirmation of these divergences building.

Fixed mortgage rates are going bananas in the United States, experiencing their largest jump year over year… ever. It is important to note that they are coming off of historically low levels experienced during Covid, and 5-6% is still relatively low compared or average compared to historical levels. But still - a move this drastic in such a short period of time is likely to rock the housing market in the United States. Pundits (myself included) have been looking for a real estate top that never seems to come for years, so it is hard to predict when it will happen. But every metric available is screaming that housing in the US and beyond is due for a massive correction. Expensive debt + overblown prices is generally a recipe for a crash or cool off, especially when the money printer is likely to slow.

You can see that existing home sales are already falling off of a cliff. This data is from the St. Louis Fed, and shows a major slowing in purchases since the beginning of 2022, when sales peaked in January.

In line with the intro, I wanted to include some education on liquidity and SFPs (swing failure patterns). Understanding liquidity helps illustrate how whales fill their orders and liquidity is engineered. Above is a great thread on this phenomenon from @DaanCrypto.

It was a tough weekend for the Aku community. Micah Johnson is a close friend, and this is the only NFT project that I have actively tracked and participated in because I believe both in him and in the ethos of Aku.

The highly anticipated Akutar launch was victim to a coding bug and griefing attack. There is still conjecture as to what exactly happened - either there was a coding error or a hacker was able to exploit the smart contract and lock up $34M worth of minting funds for nobody to claim, not even the hacker. $34M in Ethereum was effectively burned, locked away forever never to be accessed.

Although the mint carried on and refunds are currently being processed, this is a really sad and devastating attack on a meaningful NFT project. Like a champ, Micah Johnson and the entire Aku team took full responsibility. Every single person who purchased the NFTs will receive them, and long term believers who were to receive a discount will have that money refunded. This will come out of the pocket of the Aku team, meaning that they not only lost the $34M in potential profit, but will have to come up with millions more to make good on their promises.

Knowing the team and investors, I have full faith that they will overcome this obstacle and continue to build.

Here is a message from Micah Johnson.

I’m so sorry. I’m so sorry to the Aku family. I care so deeply about the Aku family, I let you all down & I’m so sorry. I will continue to build brick by brick, continue to work tirelessly, because without the Aku community, Aku’s nothing. We’ve come too far, I cannot stop now – Micah Johnson.

This is another of those conspiracy theories that makes for good FUD, but simply isn’t true. The “evidence” is that a particular whale wallet suspected of belonging to Microstrategy was detected selling Bitcoin. For Microstrategy to sell their Bitcoin, they would have to file the sale publicly with the SEC and we would see real evidence. Michael Saylor and Microstrategy are about as bullish as it gets. For anyone still having doubts, I challenge you to listen to him speak about Bitcoin on any podcast, mine included, and hear how passionate he is.

The United Arab Emirates has become a hub for crypto companies and investors in the Middle East. Kraken has just become the first crypto exchange to receive a license to operate in Abu Dhabi, after seeing similar moves for a number of companies in Dubai. The UAE is clearly leading adoption in the Middle East.

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