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Analyzing crypto’s crash in contrast to key indicators
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This week we return with comprehensive insights on the recent downturn for crypto markets. We discuss investors’ high emphasis on macro factors, as well as how the market’s microstructure in order books and derivatives exchanges point to panic selling and bearish exhaustion.
We contrast this with on-chain metrics, which show buyers remaining patient and keeping their conviction regardless of the recent drop.
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Both Bitcoin and Ether recorded increases in network activity as people made more transactions following the holidays and willingness to pay for fees grew as the market downturn continued
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Bitcoin closed out the year with $1.7B in net inflows to exchanges, the highest weekly inflows in over six months, but reverted the trend this week with $950M worth of BTC leaving exchanges
- Ether on the other hand had mild net outflows of $250M last week and grew to nearly $900M throughout the course of the past seven days
Fed Fears, Panic Selling & Excessive Shorting
We had previously discussed the growing influence of macro conditions in crypto markets, and how it was leading investors to doubt Bitcoin’s potential to act as an inflation hedge.
While inflation in the U.S. has remained high and the fed stated plans to accelerate an interest rate hike, Bitcoin has crashed in tandem with growth stocks.
As of January 7, 2022 through IntoTheBlock’s capital markets ETF insights
High correlations amid fears — Risk-on assets such as the growth stocks in Ark’s Innovation ETF (ARKK) and in Renaissance’s ETF tracking recent IPOs (IPO) have mirrored Bitcoin’s price action.
- As prices began falling in mid-November, Bitcoin’s correlation with ARKK and IPO has grown substantially to a correlation coefficient of 0.79 and 0.83 respectively
- The high statistical relationship between these suggest broader macro forces are behind the recent fall rather than factors specific to crypto
- Hopes of Bitcoin acting as a safe haven or inflation hedge appear to have diminished, at least in the near-term
Panic selling — Looking closer into order books, sellers’ high urgency is evident.
As of January 7 using IntoTheBlock’s Bitcoin Trades per Side
Trades per Side — Each trade has a maker setting limit orders and a taker with market orders. The Trades per Side indicator aggregates the volume of taker orders on both the buy-side and sell-side, showing the difference below.
- Takers’ volume has been dominated by sellers as shown by the negative difference below the indicator
- Selling activity accelerated around 10PM (EST) after Bitcoin broke below $42,000 for the first time since September
- The high volume of selling orders from takers is reflective of their high urgency, likely panic selling
Perpetual swaps turn excessively bearish — Following the strong decline of crypto in the first week of the year, derivatives traders bet against Bitcoin.
- Open interest in Bitcoin perpetual swaps decreased by 7% since December 27, significantly less than BTC’s 16% price drop
- The relatively smaller decrease in open interest suggest perpetual swaps are betting against Bitcoin, because if not OI would decrease proportionally with price (or even greater due to long liquidations)
- By plotting the ratio of Bitcoin’s open interest to its market cap, this pattern becomes clearer
As of January 7 using IntoTheBlock’s Bitcoin aggregate open interest
Potential short squeeze ahead — The ratio of Bitcoin’s open interest relative to its market cap has reached the highest level in over a year, suggesting that an excessive amount of traders betting in the current price trend continuing
- The last time time the OI/MC ratio increased while Bitcoin’s price decreased was in July 2021, which marked the bottom
- Funding rates across major perpetual swaps exchanges have also turned negative for the most part, pointing to people willing to pay extra fees to short
- These signs tend to be indicative of exhaustion of the current trend, though not always the case
Long-Term Fundamentals Remain Strong
Zooming out, key on-chain indicators point to buyers remaining strong. As Three Arrow’s Capital CEO Su Zhu tweeted “Buyers are patient, sellers in panic”. This is evidenced by the growing volume held by addresses with over 1,000 Bitcoin.
Whales Accumulate — As Bitcoin dropped below $50,000 addresses with over 1,000 BTC proceeded to increase their holdings.
- Addresses with over 1,000 BTC ($41.5M) are evidently institutional players or whales in crypto parlance
- These addresses tend to lower their holdings following large rallies (as was the case in March and October) and patiently wait to buy at lower levels (like in May and over the past few weeks)
Hodling Strong — Regardless of the volatility, long-term holders continue showing their conviction.
- The number of Hodlers (addresses that have held for over one year) reached new highs with 24.2 million addresses holding 10.89 million BTC
- This emphasizes how Bitcoin holders remain patiently holding despite recent market fears
Holders are not the only ones showing conviction, as miners also set new highs.
As of January 7 using IntoTheBlock’s Bitcoin mining indicators
Hash Rate All-Time High — Bitcoin kicked off 2022 with a new record high for its hash rate
- The hash rate measures the aggregate amount of computing power miners dedicate to validating Bitcoin transactions
- The greater the hash rate, the greater Bitcoin’s security
- Growing hash rate also suggests positive expectations for Bitcoin as this is the main source of revenue for miners
Overall, this highlights the contrast between short-term panic and long-term conviction in Bitcoin. Finally, while everyone seems to be a macroeconomic expert now closely following quantitative tightening, it is worth noting how the fed increased interest rates three times in 2017 and that did not stop crypto (nor equities) from reaching new highs.
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In this webinar we will dive into the numbers behind derivatives markets in crypto both in centralized and decentralized venues. Similarly, we will uncover opportunities in each of these markets that can benefit traders and builders alike.
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The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.