Fundstrat’s Tom Lee Claims “Next Leading Indicator” for a Bitcoin Breakout
Fundstrat’s Tom Lee claims to have found the next leading indicator for a bitcoin breakout. In an interview with CNBC’s Melissa Lee on Fast Money, Tom Lee explained one signal that could indicate whether a bitcoin breakout was upcoming.
Tom has one chart that could foreshadow the next bitcoin breakout.
“We think mining and fundamental factors like network effect really drive bitcoin’s value, but macro factors have an effect on network value.”
Tom Lee’s chart shows two lines. One line is the MSCI emerging markets index relative to the S&P 500. The other line is the price of bitcoin.
The first line shows the value of emerging markets relative to the value of the S&P 500, which tracks America’s biggest 500 companies.
The two lines track each other surprisingly closely. As bitcoin’s price rallied throughout 2017, the MSCI emerging markets index versus the S&P 500 rose as well. As bitcoin’s price fell throughout the first 8 months of 2018, we’ve seen similar correlation.
“You might wonder what’s the linkage? Why do we think they’re connected? Well there’s two factors. The first is hedge funds. Hedge funds typically rent emerging market stocks.”
Tom goes onto explain that hedge funds will “rent” emerging market stocks during “risk on” and “risk off” cycles.
When hedge funds are risk off, they’re not buying emerging market stocks. During risk off periods, the price of bitcoin also suffers because hedge funds aren’t exposing themselves to risk during this period.
This leads to another effect: when hedge funds stop buying emerging market stocks, it causes the value of emerging markets to fall. People in emerging markets have less money to buy bitcoin.
“That affects the network effect because you can’t buy bitcoin.”
In other words, when institutional investors invest in emerging markets, it causes the price of bitcoin to rise. When institutions stop investing in emerging markets, it causes the price of bitcoin to fall. We saw this occur in 2017 when hedge funds were in a “risk on” cycle and investing in emerging markets. In 2018, as hedge funds have reduced investments in emerging markets relative to the S&P 500, we’ve seen bitcoin’s price fall.
When Will the Next Bitcoin Price Surge Occur?
Tom Lee’s theory is based on the idea that bitcoin’s price is driven by institutional investors like hedge funds as well as emerging markets.
“This implies that the greatest percentage of bitcoin trading and bitcoin buying…comes from hedge funds as institutions and also emerging markets,” explains CNBC’s Melissa Lee while interviewing Tom Lee. “Do the numbers bear that out?”
“I think that in 2018 trading has shifted,” answers Tom Lee. “I think there’s actually a lot more trading in the US now and I think on the margin, exchanges like BitMEX have attracted macro hedge funds. So I think hedge funds are playing a role right now until we get other on-ramps, there’s incremental demand for crypto.”
Yes, hedge funds are investing in bitcoin in 2018. Many of them are participating in bitcoin futures markets on regulated exchanges like the Cboe.
If Tom Lee’s theory is to be believed, then the next bitcoin price surge will occur when hedge funds enter a “risk on” cycle. The best way to anticipate that “risk on” cycle is to look at hedge fund investments in emerging markets.
As hedge funds invest in emerging markets, the price of bitcoin rises. If you believe Tom Lee, then you may want to pay close attention to the MSCI emerging markets index versus the S&P 500, which shows the relative investment in emerging markets.