The Breakdown - What September Has In Store For Bitcoin

Episode Date: September 4, 2024

September. On the one hand investors start coming back from the summer. On the other, it tends not to be a great month for markets. That's especially true in crypto, where September tends to be one of Bitcoin's worst months. With no strong narrative in sight, is history doomed to repeat? Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Tuesday, September 3rd, first breakdown of the fall, and I am excited to dig in. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Biddle. www.ly slash breakdown pod. Hello friends. It is officially post-Labor Day weekend here in the U.S. The summer holidays have finally wound down, school is back in session, and for us in the crypto world, market participants are heading back to their desks. And so, of course, we have to start with a little

discussion of seasonality. While the calendar effect might be a little questionable for stocks, most crypto traders believe that Bitcoin shows clear seasonal trends. August and September are generally considered the weakest months for Bitcoin. Over the past six years, August has seen a 3.6% drawdown on average, while September has seen prices drop by 5.4%. This year is no exception, with Bitcoin closing down 8.6% in August. Last month was the worst for Bitcoin since April and the third weakest monthly performance over the past 18 months. Interestingly, last September was uncharacteristically positive, showing a mild 3.9% gain. That could simply be an outlier, with the prior six years each featuring a red September. There is at this stage no example of a wildly

positive September yet. Only one-third of Septembers have been green, and they were all extremely marginal. The best performance on record came in 2016, with a fairly modest 6% gain. One of the concerning points is that Bitcoin is entering September already at range lows. Bitcoin spent most of Saturday hovering around 59,000, but dove towards 57,000 across Sunday. If September proves to be a negative month, there's not a whole lot of support below these price levels. The hope then would be that September is no longer a deeply red month, but rather a relatively flat period. Since 2020, September has been one of the three smallest months of price action each year. Of course, one of the reasons seasonality is such a focus this time of year is that fall has some of the strongest returns in the history

of crypto markets. Uptober is an established meme, and the past five years have seen an average 22% return with no red octobers. The end of the year is a little more mixed. November and December have either been highly positive or highly negative, depending on where the market is heading each year. There's a feeling that investors are holding out for just another month to see what the final quarter brings. A big question will be whether crypto markets can close the year strong, or if the dismal sentiment over summer is a sign that this cycle is already over. In prior years, hot octobers have followed a new wave of enthusiasm entering markets during the summer months. We had defy summer in 2020, followed by the NFT breakout in the summer of 2021.

Last year's summer featured a sense that the worst of crypto winter was behind us. The villains of the past cycle were facing the music, and Black Rock had applied for a Bitcoin ETF. Summer of this year has been noticeably lacking in narrative. Memecoin enthusiasm has long since faded, and no new trend has emerged to garner attention. Sure, there have been a few flashes like the launch of Bitcoin Layer 2s, but nothing that truly attracts new investors en masse. To the extent that there are new market participants, it's largely trad-5 firms excited about a lucrative new arbitrage trade.

So, will seasonality play a strong role for Bitcoin this year, or are narratives the more important factor? Dogecoin founder Billy Marcus isn't sure we'll see many green days, tweeting, Wake me up when September ends. Nedgen Tropic, an analyst that Swiss block is taking the contrarian view, tweeting, September is historically bearish for Bitcoin with many calling it the curse of September. We doubt 2024 will add to this narrative. The month is starting on a low note with upward catalysts. If everyone's expecting it, it's less likely to happen.

Benjamin Cowan, the CEO of Into the Cryptoverse, thinks seasonality is a little more random than we think, commenting, while Bitcoin monthly returns in September on average are not great, not every September is red. In fact, two-thirds of prior halving years Bitcoin was green in September. However, when the Fed cut in July 2019, Bitcoin was red, but Eath was green. Seasonality is not everything, it's just a consideration. Network economist Timothy Peterson highlighted how skewed Bitcoin price action is towards the end of the year, tweeting, August and September are the worst months? However, about 45% of Bitcoin's full-year performance comes from just the fourth quarter alone. Jamie Coutts, the chief crypto analyst at Real Vision, thinks there's a much larger seasonal effect

to underpinning Bitcoin price action. He posted a chart of Chinese liquidity injections from the PBOC over the last 10 years, which consistently showed balance sheet expansion accelerating into the fourth quarter. Couts wrote, While September is typically a poor month for Bitcoin, it is also when the Chinese central bank tends to add liquidity to the system. Historically, this ends around January. PBOC balance sheet expansion got started a little earlier than usual this year, commencing in June, however, it's still running at a relatively mild pace, nowhere near the liquidity peaks of previous years. Cryptoanalyst ELAe rearranged the calendar based on time since the halving rather than months

of the year. We're currently five months out, same as October 2020 and November 2016. The six months that followed those points were the strongest part of each of the previous cycles. Bitcoin Investor Freedom by 40 put some numbers around the concept, tweeting, let's take a look at this scary, scary September. Since 2013, average September drawdown is 4.78% and the next six months, October to March, combined for an average of 107.59%. For the seasonality bears, does this look like a good risk to reward or no? One thing that is interesting is an analysis from Coinbase research that honed in on the disconnect between stocks and Bitcoin last month. Both asset classes suffered a crash at the beginning

of the month, but the S&P 500 is now up almost 9% since the crash, knocking on the door of a new all-time high, while Bitcoin is decidedly not at all-time highs and spent the month chopping around 60,000. Analyst commented, Bitcoin prices have struggled to fully recover since early August. The lack of narratives in the fact that September is a seasonally tough period for crypto is keeping traders on the sidelines. One of the telltale signs of Bitcoin weakness over August was ETF flows. US-based funds actually notched a minor outflow for the month, losing $94 million to redemptions.

The month was accented by BlackRock suffering its first day of net outflow since May, losing $71 million last Thursday. Most of the outflows indeed came over the past week, with 277 million leaving the funds. The situation was mirrored in global markets. According to coin shares data, global crypto funds saw 319 million in net outflows over the past week. Curiously, short Bitcoin funds also saw a second consecutive week of outflows, suggesting that this is a broad derisking rather than a directional bet. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless.

is the conference for crypto-natives by crypto-natives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the US, the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political parties platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders, and perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th

to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use Code Breakdown 10 to get 10% off. While Bitcoin funds are seeing major outflows, the narrative folks, focus has shifted to the Ethereum ETFs. Over the first few weeks of trading, the story was about strong inflows to new products, being overshadowed by massive outflows from grayscale's ETF. Now, the story is resounding apathy. Overall flows have dwindled to almost nothing. Over the past week, none of the products recorded more than 10 million in daily flows in either direction.

Even BlackRock's products saw less than 10 million worth of flows over the past seven trading days. Trading volume has fallen to less than 15% of levels from launch week. The apathy was on full display on Friday with zero flows across the board. Martin, the host of the Stacks podcast, tweeted, the ETH-EFTF flows chart is wild. No major outflows, no major inflows. Flows have dwindled down to virtually zero, and it's only been one month since launch.

Quinn Thompson, the founder of Lekker Capital, is still seeing a lot of disbelief, tweeting, the inability for crypto investors to not see the unmistakable lack of interest in ETH-EFTF flows tells me there remains a deeply embedded bias favoring ETH that still needs to be rinsed further. The difference in the first weeks of Bitcoin flows

versus ETH is glaring. Sure, gray-scale outflows are abating, but there is zero interest and inflows to the other ETFs to offset. Keep in mind, the ETH-E overhang was significantly less than GPTCs due to things like bankrupt entity for selling. This makes the ETH ETF performance even worse when accounting for that additional headwin that Bitcoin faced. There is simply no smart money, traditional investor, whatever you want to call it, demand for ETH at its current valuation. Take a step back from your bias and view the data for what it is. CoinShare's head of research, James Butterfill, noted widespread negative

sentiment last week across all crypto products and regions. He wrote, we believe this was driven by stronger than expected economic data in the U.S., which has diminished the likelihood of a 50-bases point interest rate cut. We continue to expect the asset class to become increasingly sensitive to interest rate expectations as the Fed gets closer to a pivot. Let's talk about the Fed cycle for a minute. One of the reasons this September is somewhat unique is a combination of narrative factors. We are in the midst of a deeply contentious and close-run presidential campaign, something I hardly need to tell any of you. And while Bitcoin has certainly shown some correlation to Trump's chances at the ballot box, more than anything, markets hate uncertainty. Through that lens,

it's difficult to see a lot of capital entering markets until the election result is more predictable in either direction. We also have the Fed poised to begin their cutting cycle. Opinions differ on whether rate cuts will be positive for asset prices, but the argument is largely surrounding the state of the economy. For those who think the U.S. is heading for recession, rate cuts are an extremely bearish sign. For those who think these are normalization cuts to reflect reduced inflation, there's no reason that markets shouldn't rally as rates come down. There isn't really an example of the rate of a normal cutting cycle getting underway with a presidential election looming. Rates were slashed in the lead-up to the 2008 election, but that cutting cycle was anything but normal. The previous

example was the 1990 cutting cycle, which continued for more than two years right up to the 1992 election. With an excess of uncertainty, economic data could provide a roadmap. QCP believe that Friday's jobs report should provide clarity, writing, in the lead-up to this week's U.S. non-farm payroll report, we expect market volatility to continue its downtrend as the market positions itself for potential rate cuts by the Fed. After a week job sprint for July, the August numbers should provide information about the likelihood of recession. Consensus estimates are calling for a slight rebound, betting that July numbers were in aberration rather than the start of a negative trend. Fed Fund's futures are still pricing a single

rate cut when the FOMC meets in two weeks' time, suggesting it's not quite time to panic. Still, QCP analysts noted that Bitcoin traders are hedging to the downside over the coming month, adding, risk reversals until October are still skewed towards puts in both Bitcoin and Ethereum, indicating that the market remains cautious about the downside. C Group is taking the other side of the trade, pivoting early and calling a bottom in sentiment during last month. Andre Dragosh, the head of research at DTC, wrote, We think the combination of the macro and crypto sentiment capitulation in early August, most likely marked a significant tactical bottom in Bitcoin and consequently also marked the beginning

of a renewed bull run. August was definitely blighted by awful sentiment. Alongside recession calls the detonation of the Yen-Cerry trade at the beginning of the month cast a long shadow over-crop markets. Draghosh believes were past the worst of it, with recession fears overblown and central bank easing on the horizon. He wrote, Our own market-based measures of monetary policy expectation is now clearly signaling positive expectations. This is bound to provide a positive tailwind for Bitcoin and other crypto assets over the coming month. For now, it seems that uncertainty and risk aversion are the prevailing factors. Haddle Magoo tweeted, we are seeing the follow-through with risk being taken off the table

here broadly across the board. This doesn't mean the economy or risk assets are going to nuke overnight, but it's a pretty clear signal that speculation is being tapered in favor of safety. While Bitcoin volatility has been low over the summer, on-chain analyst checkmatey sees a change coming. He tweeted, The Bitcoin chop consolidation is evolving. The swings are getting larger and more sustained. Screams to me that this price range is becoming unstable, and the market is ready to move somewhere else. Lastly, just to really wrap up this negative theme, Bitcoin miners saw their worst month in almost a year, as revenues plunged in August.

Minor revenue came in at $827 million for the month, falling by over 10% from July. This represents a 57% decline from the recent peak in March when Bitcoin was trading above 70,000, and the halving was still in the future. Alongside the halving miners are being squeezed by a low-fee environment in high difficulty. Hash rate hit an all-time high in late July and barely eased off through August. There was a slight downtick in mining difficulty for the second half of the month. However, the last difficulty adjustment, which occurred last week, pushed difficulty back up to its second highest level in history. Fees are currently only 1% of mining rewards and have been trending down for several months. By way of comparison, fees were consistently more than 10% of mining rewards

for the entirety of the past two bull runs. Similar levels of fees were observed for a few months in late 2023, but we really haven't seen consistently high fees so far this year. Confirm transactions per day are still quite high, historically speaking, but are down around 5% since their all-time high in late July. While the numbers are getting worse, some urged a longer-term view. Tal Harrell, a crypto marketing professional, tweeted, worth putting into a wider perspective. monthly average minor revenue in 2024 stands at $1.2 billion, higher than 2023, 811 million, and 2022, 784 million, while only 8.9% less than 2021 at $1.3 billion. In total, 2024 has four months left and still saw almost as much as 2020 and 2022.

So what is the net story here? I do think that seasonality is a bit of a thing, both in regular markets and in crypto. I think that we are now at the period where everyone is sloughing off the summer holidays, and it takes a little while to get back into gear. I think that crypto is particularly attuned to that sort of cycle, and so perhaps over-excentuates it. I think it is undeniably true that there has not been a catalyst for new entrants to come to the market, or frankly, for old entrance disgusted by the chaos of 2022 to come back to us. But I also think it's just hard to estimate how challenging the uncertainty around American political futures is for markets in general, but particularly for crypto. Whether this

ends up being a highly consequential election or not, it is certainly felt by many to be so. And that creates a bit of a self-fulfilling prophecy when it comes to a lack of action. Still for my money, even if September is historically a bad month, at least people are back in front of their screens again and getting back into it. And so I am happy to be here and fall with you all. And I think, even if it takes us a month or so, good things are in store. That's going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.