Looking Beyond the Bitcoin Selloff
Bitcoin’s price declined from an all-time high of $64,900 on Wednesday to an intraday low $51,707 on early Sunday.
Bitcoin’s run higher had likely been partially fueled by the COIN headlines and an over leveraged market (as indicated by basis levels). The price momentum was corrected this weekend. As the saying goes, “the faster the rise, the harder the fall.” As the fundamentals remain strong, there are clear indications of a potential price retracement and trading should be managed accordingly.
Price Action. On Wednesday April 15th, Bitcoin rose to new all-time highs in advance of the Coinbase (COIN) direct listing. It appeared as if Bitcoin investors were “buying the rumor” and “selling the news” with Bitcoin rising into the direct listing before receding as Coinbase trading progressed. Ultimately, Coinbase retreated from its intraday high of $110bn market cap to close the week at $63bn and Bitcoin reacted similarly, slipping from its new all-time-high just shy of $65k (red line in chart below) into the low $60k range Friday. Early Sunday morning, a selloff pushed Bitcoin down into the low $50k range.
Observers pointed to several factors as precipitating the decline, including an unsourced and still uncorroborated tweet from an anonymous news account called “FXHedgers” announcing that U.S (yellow line in chart above). Treasury officials would soon charge financial institutions for enabling money laundering via crypto.
Although the U.S. Treasury did issue a press release announcing new sanctions against the Russian government Thursday which mentioned the use of cryptocurrency for illicit transactions (orange line in chart above), there’s no indication that was the basis for the Tweet. While Janet Yellen has previously acknowledged the need to curtail any possible money laundering through digital assets, we’ve seen no news to substantiate the widely shared Tweet.
Liquidations. The price drop wiped out $4.6bn of leveraged long positions, according to data from The Block.
Futures/options. Options volumes on Sunday, April 14th were $90mm, almost 2.5x much as a normal day’s and significantly greater than the $10-30mm range for volumes typical of the last few Sundays. Open interest has maintained near the lower end of the average range at ~$300mm. After funding had consistently remained elevated the last few weeks, basis has finally cooled. CME rolling 3-month leveled off, while Huobi rolling 3mth temporarily went negative, demonstrating a pullback in investor desire for leverage.
Vols. 1-week implied vols saw the biggest increase on Sunday, April 17, up from ~57 to ~91, and now hovering around 63 last. While the temporary jump to around 90 may seem high, implied volatility was at these levels less than one month ago. 1-month saw a slight uptick to ~80 and it has hovered around high 70s since. Preference for topside has come off as depicted by the chart below measuring put minus call skew. Most notably, 1-week downside now shows a premium for puts, as investors have been driven to put on protection.
Signs this Bull Market Still Has Legs
While not necessarily predictive, examining data from the blockchain can reveal patterns in user behavior and identify insights that can inform trading strategies. Below, we share several analyses that suggest this bull market still has legs.
Cyclical coin activity shows bull market is in early stages. Highlighting the activities of coins last moved in the previous 24 hours, week, and month shows a clear pattern leading into each prior price peak. In each cycle, the market top coincided with the last of 3 spikes in activity from these coins. The historical data suggests that any market top in this bull cycle should be preceded by at least 2 more peaks in short-term coin movement.
Exchange balances keep declining. A phenomenon new to this cycle is the decline of bitcoin held in exchange wallets. In prior cycles, particularly 2017, the balance held by exchanges rose into the market top. Indeed, the amount of BTC held on exchanges rose consistently through 2017 and peaked in March 2020. Since then, however, the amount of BTC held on exchanges has consistently declined even as price has risen, suggesting that purchasers are putting their coins in long-term cold storage. Exchange outflows have continued throughout 2021, including during last weekend’s dip.
Bitcoin use and ownership is growing. Broadly speaking, Bitcoin usage continues to increase. The number of addresses with any balance continues to make all-time highs, and daily activity remains at its highest levels ever. (Note, we show the active addresses with a 30d average due to significant daily variance).
Long term holders are accumulating. On-chain data shows that the number of long-term holders is growing and that they are increasing their holdings. The number of addresses with >1K BTC has risen consistently since the 2017 market top and is near alltime highs. Examining the distribution of Bitcoin’s total supply based on “age bands,” or the various intervals in which coins have moved, also shows that longer term holders are accumulating. A greater share of coins has not moved in each of the in 2+, 3+, 4+, and 5+ year bands than ever before. Despite a recent decline in younger coins, which also occurred well before the 2017 market top, we continue to see consistent growth in the supply of coins in older age bands.
Coin movements show the dip is worth buying. Looking at the ratio of spent coins in profit vs. spent coins in loss shows a reset as occurred. Essentially, this metric shows the ratio of price sold vs. price paid. When SOPR is greater than 1, the spent coins are in profit (higher than their prior move), else they are at a loss. Historically, a SOPR above 1 is rejected in bear markets and a SOPR below 1 is rejected during bull markets. Thus, the indicator can be useful to identify local tops and bottoms. In this case, the dip to 1 suggests a local bottom.