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The Good

After nearly two months mired in a range-bound slog, the largest crypto has broken through, thanks in part to a billion-dollar short squeeze that sent Bitcoin soaring above the embattled trench of resistance that is (or was?) $40K. 

Despite weekly gains of almost 14%, BTC slipped off its high-horse as of Monday morning, trading at roughly $39,500. Remember those dreaded gates of hell otherwise known as $29,000? Neither do we.   

And as for that supply shock we’ve been talking about, well, it’s ramping up, fast, with several well-followed metrics suggesting this re-accumulation phase may be wrapping up, thereby unleashing a new phase in its wake: extreme price appreciation. 

Bitcoin’s illiquid supply ratio (LSR) is about as sure-fire of an accumulation metric as you’re going to get. As the name would suggest, LSR measures BTC’s illiquid supply (i.e., coins being HODLed) against its liquid supply (i.e. coins with a high likelihood of swapping hands). With these dynamics at play, an increasing LSR would suggest a heavy period of accumulation in which more coins are being “locked up” than sold on the open market. As of 8/1, Bitcoin’s illiquid supply ratio is at its highest level since early April, having rebounded more than 50% from May’s market collapse. That may hint that this recent period of accumulation is waning, creating a sort of “stretched-to-the brink slingshot” dynamic. 

Back in April, those LSR levels supported a $1 trillion valuation (a $60K spot price) for the world’s largest crypto. Right now we are seeing a slight divergence at those same levels with BTC’s market cap struggling to reach $750 billion. If history is anything to go by, a big move could be on the horizon.  

Per Glassnode, exchanges experienced their second-heaviest outflows of ALL TIME this week averaging a daily discharge of 15,174 BTC for the 7-day period ending 8/1. 

Binance alone parted ways with 37,100 BTC over the past week. Likewise, exchange net position change continues to belt out a bullish tune. As of Sunday night, there were roughly 101,000 less BTC present on exchange wallets than this time one month ago. For context, the last time we saw a net position change this high was November of 2020. In that case BTC responded by catapulting above $20,000.  

Why exactly does exchange activity (outflows in particular) matter in the context of re-accumulation? People move their digital assets onto an exchange to sell them. Hence, heavy exchange inflows would paint a bearish picture, signaling a large percentage of the market is ready to take profits. On the flip side, a series of repeated exchange outflows (as we are experiencing now) would suggest investors are moving their coins back into illiquid, non-custodial wallets to be held, or “HODLed.”       

Market participants, meanwhile, are paying attention to the proposed $1 trillion U.S. infrastructure bill making its way through Congress, specifically, to the bill’s proposed amendment to cryptocurrency taxation under the IRS. Besides improving the reporting practices of U.S.-based crypto exchanges, the infrastructure bill aims to facilitate the tax filing process for ordinary U.S. investors. The bill will effectively classify centralized U.S. crypto exchanges as brokers, thereby improving their information-sharing and tax-reporting standards. These regulations will hopefully translate to an easier tax-filing process for businesses and individuals that transfer value via BTC. While the legislation looks to increase compliance costs across a number of exchanges, it certainly points to the growing credibility of these firms as important players in financial markets. Going forward, as long as this tax process becomes increasingly streamlined and simplified, it might incentivize additional private-sector adoption. Overall, this amendment looks to clear up some of the FUD currently surrounding BTC’s regulation in the U.S. 

Now then, turning to Central America, what to make of El Salvador’s recent adoption of BTC as legal tender? A recent Bank of America research report tackled that topic. The piece underscores how, just like many other emerging market economies, a sizable portion of the Central American country’s GDP (about one-fourth) can be attributed to cross-border remittance flows – funds sent home by El Salvadorans living abroad. Given the complexities surrounding exchange rate fluctuations, varying national tax structures, and bank fees, the costs of sending remittances under traditional cross-border payment networks are prohibitive. In fact, the Bank for International Settlements recently reported that cross-border payments sent through traditional remittance agents incur a 10% fee, on average. 

El Salvador’s recognition of BTC as legal tender could considerably reduce costs associated with international transfers. Lower burdens for remittances in turn would ultimately translate into higher disposable incomes and living standards for a strife-torn, impoverished nation. 

In the coming years, El Salvador’s experiment will be closely watched by other emerging markets looking to expand public access to savings and investment vehicles.  

The Bad

Binance – the world’s largest crypto exchange – is in the crosshairs of government regulators around the globe, reflecting a growing push to tamp down on crypto markets. Leveraged positions on BTC offer potentially astronomical gains, sure. But watchdogs know a tinder box when they see one. It’s all fun and games until markets go south and selling pressure cascades, as central bankers learned in October of 1929.

The 200-day Simple Moving Average is a real son-of-a you know what. Despite repeated rallies above $40,000 over the past week, Bitcoin simply can’t surpass the average which is currently standing at roughly $44,702 as of 8/1. The 200-day is closely tracked by sophisticated investors and retail traders, meaning a sustained price rally most likely will not be able to be sustained until a breakout ensues. Per Cointelegraph, it seems the market isn’t totally set on BTC’s next plan of action. If downside momentum takes over, support will likely be found at $38.5K and then $36.5K after that. 

The Ugly

Bitcoin rallied nearly 20% but ugliness could be found looking at transaction volume – low – really low. We’re talking levels unseen since the capitulation of 2018-19. 

Transaction volume isn’t always indicative of price; it often lags. Still, average volume of fewer than 240,000 transactions per day doesn’t necessarily scream “super healthy” regarding the world’s foremost blockchain network. Recently, it seems as though Bitcoin’s volume is being dominated by a small number of large transactions. What could possibly go wrong?

Hoops legend/sports commentator Charles Barkley boxed out BTC during an interview on CNBC. The “round mound of rebound” coldly suggested his in-the-know investment advisors aren’t buying crypto. Although another famous Barkley, Saquon, running back, New York Giants, recently announced an agreement that will see his annual endorsement contracts paid in BTC. 

On Chain 

>Stable Coin Supply Ratio, 7-day SMA (SSR): Measures the supply of BTC relative to the supply of all stablecoins–denominated in BTC. In most cases, a ratio less than 10 suggests a lot of “buying power” waiting on the sidelines ready to spur a rally. On the other hand, a measure greater than 20 usually points to a low supply of stablecoins able to accommodate additional BTC purchases, a condition that usually precipitates a decline for the latter. The ratio’s 7-day moving average moved up noticeably from levels seen last week, coming in at 6.83. After moving sideways for most of the summer, the metric is starting to climb back up towards levels not seen since early June. When looking at the dynamics between BTC and stablecoins during the past two weeks, we’ve seen the formation of a strong bull case. With BTC still reeling through a supply shock and stablecoin allocations hitting record highs, it appears that stablecoins served their purported use as dry powder for last week’s blistering price rally–coming out to nearly 14% (between 7/26 and 8/1). The recent uptick in the SSR still doesn’t detract from the overarching message this indicator is sending to the markets. With stablecoins becoming an integral piece of the crypto trading industry, the SSR has continued to decline over the years. Ultimately, a more liquid market can only spell good things in the years ahead. 

>>Adjusted Spent Output Price Ratio, 7-day SMA (aSOPR): Examines levels of profitability/loss experienced by coins moved on-chain over a 24-hour interval. aSOPR calculates an aggregate level of daily spent outputs: the price at which a coin is sold divided by its respective cost basis. The adjusted metric ignores UTXOs with a lifespan of less than 1 hr; as a result, it provides a better window into spending activity that actually results in economically significant profits/losses. Ratio above 1 indicates that coins–in the aggregate–are being sold for profit, vice versa for ratios below 1. After hovering in a pretty tight range for much of this summer, aSOPR exhibited quite the parabolic movement over the past 7 days. On Thursday (7/29), the metric recorded its highest reading (1.29) for the year, reaching levels not seen since December 2020. As the weekend progressed, aSOPR came back down to settle just above 1. The metric’s weekly average came out to 1.09 for the 7-day period ending 8/1. The fact that aSOPR ended the week above 1 indicates that even after massive profit-taking, the market was still able to offer attractive selling opportunities. In dollar terms, this measure equated to an average daily profit of $1.58 B. 

>>Stock to Flow Deflection Ratio (S2FD): Bitcoin’s status as a relatively scarce commodity enables the Stock to Flow (S2F) model to gauge the current amount of BTC available–the stock–in relation to the amount of BTC mined annually–the flow–to project an appropriate price for the asset. The deflection ratio simply divides the current spot price of BTC by the projected price calculated by the S2F. Any reading above 1 suggests BTC is overvalued according to the model; anything less is regarded as a signal that BTC’s price is currently discounting future scarcity and thus undervalued. For the week, the movement was largely toward the upside, with the metric settling around 0.36 by Sunday. As of now, it appears that the ratio has formed a trough and is beginning the long trek up to pre-crash levels. Historically, such a condition has a solid track record of preceding a bullish price rally. 

>> Number of Transactions, 7-day SMA: Weekly moving average for the daily number of transactions on the Bitcoin ledger. On-chain transaction volume is a helpful proxy for gauging underlying network effects and mainstream adoption. As P2P exchanges grow, the thesis behind BTC’s use case is buttressed, thereby reinforcing bullish market cycles and potentially incentivizing enterprise adoption. BTC’s ledger verified 238,170 transactions per day on average for the week ending 8/1. On the positive side, transaction counts are starting to inch their way back up to mid-May levels. With total transfer volumes having made yearly highs in the past few days, it’s becoming clear that many recent on-chain transactions are involving larger balances of coins. 

>>Coin Days Destroyed (CDD): CDD is used to gauge the dynamics and length of market cycles by placing heavy attention on the trading actions of investors that hold BTC for the long term. For each day that one BTC remains unspent, its UTXO address accumulates a coin day: the balance of BTC within the address multiplied by the number of days since it was last moved. When that idle balance is eventually spent, the accumulated level of coin days on the UTXO is recorded by the CDD measurement. To calculate the aggregate level of days destroyed, CDD takes the respective lifespan of each UTXO spent on the date in question, multiplies each lifespan by the number of coins destroyed on those UTXO’s on the same date, and then sums all the individual products together. Historically, CDD values less than 5 million days signal that long-term holders expect an upcoming rally; conversely, values greater than 20 million days indicate an approaching ceiling as long-term investors look to take profits on their existing holdings because of what they see as frothy conditions. Over the past 7 days, CDD shot up to levels last recorded at the very start of this year. The metric’s weekly average came out to 33.87 million coin days, a noticeably bearish reading. These levels suggest that generally, most of the coins being spent on-chain during the past week were possibly indicative of major changes in sentiment among the “strong hands”. It is very feasible that some of these long-term holders saw last week’s rally as an optimal time to cash out on some of their existing balances. However, investors may want to take this reading with a grain of salt. The last time CDD flashed noticeably bearish sentiment was around the first week of January. In the 3 months following this reading, BTC’s price rallied over 50% to all-time-highs.

Technicals

>200 Day Simple Moving Average: Equally weighted average tracking daily pricing data from the last 200 trading days. Often represents a key area of support/resistance and provides a solid assessment of the underlying price trend by largely ignoring volatile day-to-day price swings. With BTC having passed above its 50-day MA last week, the 200-day is seen by many chartists as the next major area of resistance to be surpassed. The 7-day period ending 8/1 saw the gap between BTC’s spot price and the 200-day shrink even further in a move that bodes well for BTC’s short-term health. As of Sunday evening, the 200-day was standing at $44,702, meaning a further 8% rally is needed for a bullish breakout to occur. 

>>Relative Strength Index (RSI): Momentum indicator measuring both the speed and rate of change of recent price movements. Helpful in determining overbought/oversold market conditions. Values above 70 indicate an overbought market and bearish momentum, while values below 30 signal an oversold environment with bullish momentum to the upside. Despite a weekly price gain of almost 14%, BTC’s RSI remains firmly in neutral territory standing at 58.83 as of 8/1. 

Fundamental 

>Open Futures Interest, 7-day average: Calculates the total amount of funds ($USD) currently locked in BTC futures contracts (across all major exchanges) that have neither been exercised nor expired. Provides insight into the actions of institutional traders, while also evaluating the general level of strength/weakness that underlies price fluctuations of BTC. For the past week, daily average open interest in futures contracts came in at $13.5 B. Corroborated by heightened levels of inflows also seen during the week prior, activity in the futures markets seem to suggest that part of BTC’s rally can be attributed to the utilization of leveraged instruments. With massively levered short positions being forced to cover at rapidly rising prices, momentum looks to be firmly positioned to the upside at the moment. 

>Exchange Net Flows, 7-Day SMA: Weekly moving average tracking the difference between # of BTC flowing into and out of exchanges. The numbers projected by the metric are counterintuitive; positive net inflows are normally taken as bearish signatures, and vice versa for outflows. For the week (7/26 – 8/1), daily average net flows came in at -15,174 BTC. The significance of this reading is not to be understated; This past Wednesday (7/28) saw the second-highest net outflow of BTC ever recorded (-59,633 BTC). This measure trails slightly behind the all-time highest measure of net outflows recorded in the spring of 2016. In that case, such a substantial level of net outflows kickstarted a bull market that lasted around 18 months. Whether or not the current level of net outflows will have the same catalytic effect remains to be seen, but it is certainly something to keep an eye on. 

 >Network Value to Transactions Ratio Signal, 7-day SMA (NVTS): Slight variation of Willy Woo’s NVT ratio. Measures BTC’s market cap relative to the 90 day SMA of daily transaction volume on the Bitcoin network. Provides insight on overbought/oversold market conditions, serving as a leading indicator of market peaks/troughs. NVTS’s months-long consolidation looks to be in the rearview mirror, thus arguing that the bottom of this current market cycle has passed. NVTS averaged a mark of 29.39 for the week ending 8/1, rising over 30% from the week prior. Despite this rally, NVTS still hovers below levels seen right before May’s sudden price correction. Considering this, it is fair to say that the current upward price swing has not yet outstripped the value being generated on the network.

>Market value/Realized value Ratio (MVRV): Takes the current market cap of BTC and divides it by the realized capitalization. The latter attempts to gauge the true economic weight locked up in BTC by multiplying the number of total UTXO addresses by the price at which the coins in those UTXO’s were last moved–not at the current market price. Since realized cap presents a cumulative cost basis for the market and removes the influence of dormant coins, it provides a noteworthy assessment of Bitcoin’s long-term fair valuation. Periods in which the ratio falls below 1 signal the possibility of an impending accumulation phase; in this case, such a reading can point to the formation of a newfound fair value threshold. On the other hand, historical evidence suggests that a ratio above 3.7 flashes overvalued conditions, showing that speculators are primarily dominating buying activity. The ratio ended the week at 2.01 and continues to inch its way back up from a recent trough. Overall, MVRV still suggests a somewhat balanced relationship between BTC’s current price and its fair value as implied by the realized capitalization. 

Hash Rate (estimated), 7 -day SMA: Bitcoin’s decentralized nature incentivizes a global matrix of computer operators to verify network transactions through an ultra-fast competition of brute computational power, known as “mining”. Miners work to verify transactions by producing a series of unique 64-digit alphanumeric codes, collectively referred to as “hashes”. Hash rate is an estimation of the total numbers of hashes produced each second by miners on the Bitcoin network, serving as a key proxy of the total computational resources underpinning the world’s largest crypto. Bitcoin’s hash rate fell off a cliff in mid-June, declining more than 50% from May’s sustained peak; it’s yet to fully recover. The nose-dive can be almost entirely attributed to an intense Chinese mining crackdown which has effectively shuttered half of Bitcoin’s processing power. Miners are flocking out of China at record paces in an event deemed the “Great Migration” by many in the on-chain community. A quick hash rate recovery will signal bullish momentum, indicating miners (on aggregate) have successfully relocated (or liquidated) their operations. On the other hand, a slow and prolonged recovery will flash bearish, signaling displaced miners are having trouble finding a new home. Hash rate experienced sideways momentum for much of the past week averaging 110.06 EH/sec for the 7-day period ending 8/1. Although it’s still far below levels seen in earlier this year, a positive outlook can be extracted from this metric considering that it has rebounded nearly 31% from early July’s YTD lows. Per Coinbase, there is mounting evidence that a number of mining operations have successfully relocated to the theUnited States, a move which will bode well for the health of the network.