Why Traders Predict Ethereum at $20K #70
Market Meditations | January 8, 2021
Allow us to explain what Raoul Pal’s bullish argument is based on. Then, through technical analysis, we will guide you through how to implement it into your trading portfolio.
Dear Meditators
We hope you are all looking forward to the weekend. And by the weekend, I mean a fantastic opportunity to take advantage of the crypto market ?
In that spirit, today we explore Raoul Pal’s bullish statements on Ethereum climbing $20k.
Allow us to explain what his argument is based on. Then, through technical analysis, we will guide you through how to implement it into your trading portfolio.
If you enjoyed this article, remember to hit like and we always look forward to your thoughts and feedback in the comments!
Global Cryptocurrency Market Cap Hits $1 Trillion ?
The market capitalization of all cryptocurrencies combined has reached $1 trillion for the first time ever. During the 2017-2018 bull market, the total market cap topped out at $812 billion dollars which the crypto market has now properly exceeded, according to data from Coingecko. Bitcoin remains the clear market leader with a market cap of over $700 billion, with Ethereum in second place following with $136 billion. Read more.DeFi Integration and Layer-2-Tech Back MATIC 92% Rally ?
MATIC price has rallied by 92% since multiple decentralised applications opted to use the network’s layer 2 solution and traders have looked to DeFi tokens for big returns. Backed by Coinbase Ventures and Binance Launchpad, the project raised $5.6 billion during its initial exchange offering in April 2019. Read more.Ripple ‘Tried’ to Settle With SEC Ahead of XRP Suit, CEO Says ☝️
In a Twitter thread, Ripple CEO Brad Garlinghouse said the company tried to settle charges of conducting unregistered securities transactions with the U.S. Securities and Exchange Commission (SEC) before the federal regulator sued it in December. In the thread, he answered 5 key questions about the pending lawsuit but warned that was limited in what he could say as the case is ongoing. Read more.Bill Miller Invokes Warren Buffett’s ‘Rat Poison’ Criticism of Bitcoin ?
In a new investment letter, fund manager Bill Miller writes that bitcoin’s price performance last year shows promise and if more companies were to move portions of their balance sheets to bitcoin, wider adoption could move very quickly and bitcoin is still early in its adoption cycle. Bill also warned that the market is likely underestimating the risks of inflation. Read more.Could NFTs Become 2021’s Biggest Crypto Trend? ?
NFTs are making a comeback. By September 2020, weekly volumes of transactions had hit the $1 million mark. By December 2020, that number had risen to $2 million. Furthermore, unlike in 2017, when trading volumes were driven out of a single application, transactions are now distributed across a diverse swath of apps and use cases. Read more.
The Real Reason Traders are Targeting $ETH at $20K
On the evening of 6 January, Raoul Pal published a bold and unapologetic Twitter thread suggesting that $ETH could climb to $20,000 during this cycle of the bull market. In another tweet, he even writes that $5K is “way too conservative.”
Whether you’re a passionate investor in $ETH or have been considering adding it to a diversified portfolio, in this segment of Market Meditations we’ll unpack Raoul’s rationale and help you interpret it for your trading strategy.
Raoul Pal: Who is He and What Has He Been Saying
Pal proved his prowess in financial markets by co-heading hedge fund sales in equities and equity derivatives at Goldman Sachs, co-managing the GLG macro hedge fund in London, and predicting the 2008 mortgage crisis.
Crypto Twitter recently welcomed Pal into its community with its open wassie arms, and the legend of inversebrah.
In his Twitter thread, Pal posits that $ETH is at:
“The SAME point [as BTC] in its adoption cycle with the exact SAME price.”
He supports his claim by invoking Metcalfe’s law and behavioral economic theory. Sounds fancy, but let’s break the concept down in simple terms.
Metcalfe’s What Now?
Metcalfe’s law suggests that the effect of a network is proportional to the square of the number of nodes in said network. In other words, as a network grows bigger it gains more value and as more people connect to that network the rate at which that network gains value gets faster.
The network’s “users” in this case are represented by the number of active Bitcoin or Ethereum addresses.
The Ethereum network is valuable because people connect to it.
When the number of active addresses increase, the value of the Ethereum network also increases.
As more and more active addresses are added, the rate at which the Ethereum network gains value quickens. The same line of thought applies to Bitcoin.
But how does this indicate a parabolic rise to $20K for $ETH you might ask?
Pal argues that Ethereum’s growth closely follows that of Bitcoin.
His model demonstrates that the price structure of $ETH today looks identical to the price structure of $BTC in 2017 when $BTC has the same number of active addresses that $ETH has today.
His thesis is rooted in the theory that whilst Bitcoin and Ethereum have different narratives (digital gold vs programmable money respectively), they both follow the same adoption and behavioral economic theory governed by Metcalfe’s law (as described above).
It’s important to note that other reputable figures disagree with Pal.
John Pfeffer, former partner at private equity firm Kohlberg Kravis Roberts and Chairman of the Executive Board of leading French IT company Groupe Allium S.A, for example, does not buy the argument that Ethereum and Bitcoin have different narratives. Rather, Pfeffer claims that both try to replace digital gold, but Ethereum falls short. To be convinced by Pal’s findings ask yourself the following:
Do you accept that whilst Bitcoin and Ethereum have different narratives they are driven by the same human behavior? Do you believe that $ETH will continue to follow the $BTC price structure as Pal’s model demonstrates that it has to date in log and linear terms since 2017?
Applying Raoul Pal’s Theory to Your Trading
If you are convinced by Pal’s findings, you would increase exposure to $ETH during this bull market (no need to FOMO, I will walk you through potential setups shortly).
As I’ve mentioned before, $ETH is higher beta $BTC, which means the greater potential upside comes with the danger of greater potential downside.
It’s worth considering your risk tolerance and time horizon as you’re constructing your plan.
If you want to see how I am personally positioning my portfolio between $BTC and $ETH, please feel free to watch the ? YouTube video I did on the subject.
Now let’s jump into technical analysis to see how you may find an entry to get long.
ETH/BTC (WEEKLY)
ETH/BTC has maintained weekly bullish market structure by printing higher highs and higher lows consistently since 2019 September.
That being said the structure is still not clean relative to BTC. The most recent test of the 0.023 level has taken out the previous HH resulting in a messier structure. Notice the loss of the 30 week moving average.
The most significant resistance on the weekly chart remains the 0.04 level.
If $ETH can break the 0.04 level, we will have printed another higher high and, more significantly, broken a massive range in which ETH/BTC has been consolidating since 2018 September.
I’ll be looking to aggressively play the breakout of this level.
ETH/USD (4 HOUR)
So while the ETH / BTC pair doesn’t present immediate opportunities. ETH / USD is another matter.
We’re maintaining a bullish structure above the 0.5 level of the recent move. So we expect continuation.
The higher risk play is accumulating a position in the $1100-$1250 and using $1000 as an invalidation of our bullish bias.
The key resistance on this chart is $1250 level which can be played for a confirmed breakout.
This breakout play reduces risk of being trapped in a position and provides a higher probability play at the cost of a slightly less optimal entry.
Conclusion
Raoul Pal has offered a highly interesting and fresh bullish fundamental viewpoint on ethereum. Using Metcalfe’s law to argue that Ethereum’s growth closely follows that of Bitcoin.
Whilst it might have seemed complex at first, we hope you have a stronger understanding of it now. As with all difficult concepts, we need only break it down into its smaller building blocks, understand each block and then put it all together again.
If you were convinced by Pal’s bullish argument, the technical analysis provided insight for entry points. Once again, remember the basics: $ETH is higher beta $BTC, which means the greater potential upside comes with the danger of greater potential downside.
2020 Review: Trading Insights
For today’s episode, I wanted to look back and search for the best trading insights we’ve received from our guests in the first 20 episodes of the Market Meditations podcast.
My team and I went over every episode and collected our favourite snippets to combine them in an episode full of alpha on mindset, risk management and trading strategies for you to fully prepare yourself and make the best out of this year’s crypto bull market.
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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.
