Dear Valued Investors and Friends,
First and foremost we would like to apologize on behalf of the entire Ragnarok Crypto team for skipping the Q1 deadline when we usually release a little overview and our thoughts on the past quarter and expectations of what is to come in the next one.
We have, just like the rest of the world, been busy doing damage control and trying our best to react adequately to the news surrounding the coronavirus pandemic and state issued compliance measures.
To best address everything that has happened inside of our fund as well as what we see (&saw) on the markets, we have decided to release this “Halving Special” article, which elaborates on everything we felt deserves proper attention.
We would like to address the worldwide economy and market interdependence especially, as the correlation between leading stock indexes like the S&P 500 tightens significantly with Bitcoin. We felt the need to dive deeper into this to summarize all possible outcomes we are facing in these unprecedented times.
As most of you probably know the financial markets have seen one of the largest and fastest declines in history. S&P 500 fell over 30% with the drop commencing on February 19th. And although the index has since partially recovered, we are still looking at a 13% decrease in value since its 2020 high of USD 3,386 (as of May 11th). The story doesn’t stop there. The recovery is unfortunately, although expectably, caused by government bailouts, central banks, and FED, in an organized move to buy a variety of junk bonds, probably junk stocks sooner or later as well. The same happened during the preceding of what we now know as the housing market collapse of 2008.
Long term outlook
We at Ragnarok Crypto are not macroeconomists, but that does not prevent us from doing black magic and crystal ball forecasting. And in the name of the latter, we have prepared the following three scenarios:
60 % Economy will be badly affected for a long time, similar to the 07/08 crisis but equity prices, stocks, properties will not get much cheaper. Of course with all this money printing, inflation (though wrongly calculated, as governments calculate it in a way so they don’t have to spend more on pensions). Kind of a Japanese situation — stagflation, but the US is stronger so stocks will not be cheaper. This scenario is a good one for Bitcoin and cryptocurrencies in general, as people will sooner or later uncover all the disadvantages of the centralized fiat money system and will be at least hedging against that. It may take 5, 10 years, but the price of Bitcoin will be much more than what it is today. Another reason backing this claim is that according to some surveys Bitcoin is among top 5 investments for millenials, which will inherit large portions of money from baby boomers in the coming years.
30 % Economy will recover quicker than we expect and everything goes to where it was. This is very unlikely as there are signals it will not be quick and the government debts are rising sharply. However, if it does, it is not a very good scenario for crypto, as it is at the current state of things generally still not needed, and adoption is minimal.
10 % We will see a 1930s style crisis, with stocks going -80 % from ATHs, 30 % unemployment rates even for higher educated people etc. This is not very likely, as central banks have unlimited resources. In this scenario we actually have no idea what would happen with prices.
Correlation with stocks
Bitcoin has historically low correlation with stocks, which is regularly measured against the S&P 500. Sometimes the correlation ratio is actually negative. However, in these uncertain times, the correlation has risen significantly. This might not necessarily be a bad thing as the traders behind the selloff on 13th March were mostly active traders and short term speculants. We can say that, because numbers of Bitcoins held in long term wallets have increased at the same time. Bitcoin is still considered a risky asset, but this opinion is slowly changing.
In summary though, despite the correlation we witnessed in March, we do not expect the S&P 500 to have a significant impact on Bitcoin’s price in the long term.
Let us start off by summarizing the history of previous halvings, with the first dating back to November 2012, when the network reached 210,000 blocks. That year Bitcoin’s price opened at roughly $4 and closed at $13.
Second halving occured in July 2016, which resulted in a sell off starting a month before the halving occured. At the time of halving the price was around $660, then rose to the magical $1,000 mark by early 2017, and then sky rocketed to unimaginable $20,000 per coin by the end of the year.
After sliding back to the mid-$3,000s at the start of 2019, prices have been increasing steadily in anticipation of the third halving.
Looking at the history of halvings, the reduction of supply on the markets increases the price of Bitcoin in the long term. However, as the future price expectations at the time of the halving are usually priced in, there is a tendency for correction after halving itself within a few months.
2020 Bitcoin outlook
The price is currently up more than 35% (YTD) at US $9,650 at the time of writing. With certain market watchers expecting the current halving to add significant value to Bitcoin, in line with the previous events.
Our moderate expectations include the following. As long as the price stays above $6,000 per coin, we hold generally bullish expectations. In case it is going to consolidate, we expect bigger movements in altcoins. To take a shot at estimating the price of Bitcoin though, we believe we are looking at $10–15K per coin by the end of the year.
Our long term positions stay bullish, and we trust we’ve entered the roaring 20s rather than a great depression 2.0. Supporting evidence points to another two halvings we are to expect in the upcoming decade, undisputed popularity of Bitcoin and crypto in general among millenials, and the fact more and more investors and portfolio managers look at bitcoin as a viable alternative in the still fairly new asset class.
The altcoin markets situation is traditionally more complicated than the one of Bitcoin, as there are just so many of them. Now obviously, there are two possible paths-up or down. To delve deeper into this topic, we feel it is important to bring up the fact that we have observed short lasting altseason lately, though these are usually attributed to very few high quality projects or,trading of whales trading after accumulating enough of a particular coin, which contrary to the first reason, has nothing to do with the project’s quality.
1st scenario-altseason In contrast to Bitcoin, most altcoins are at their historic lows, and chances of altcoins increasing in value while Bitcoin consolidates, are very considerable. If Bitcoin does in fact consolidate we may expect an increase in altcoin values preparing for a bull market. The problem with this scenario is, that it may all happen very quickly as seen in the last market cycle.
2nd scenario-long winter Altcoins may not be a very attractive asset to conventional portfolio managers, especially during times of crisis, leading to further downfall of many projects as they run out of funding. They are without a doubt one of the riskiest assets, and just like any other startup, face not-so-complimentary valuations during financial crises. On the other hand, they offer higher risk and higher returns, and the question remains, how much risk tolerance will be spared in the markets in the coming months.
Of course, there are other possible scenarios, but these two are the ones we subjectively expect to play out in the near future.
Our strategy for the rest of 2020:
We will be positioning ourselves more defensively throughout the summer — sell in May go away. We plan to rebuy our positions once prices hit our targets. We will be betting on ETH 2.0 and other staking coins as well as other fundamentally strong projects.
Now to give more perspective and look back at what we could have done better:
Since December 2019 but especially in March, we’ve been too risk averse, and we passed on an opportunity to liquidate our TUSD hedge in lieu of allocating a bigger portion of our funds into riskier assets. And although we feel overall well prepared for the various scenarios this year is to play out, we wanted to mention this and clarify our positions.