The Good

Finally, a breakthrough, after nearly nine weeks of range-bound trading, the world’s largest crypto skyrocketed Sunday night/Monday morning in the wake of an epic short squeeze. As of Monday morning, BTC was hovering around $39,000 having risen nearly 25% over the past week. Today (7/28), it shot to nearly $41K.

Bitcoin’s early May decline was largely attributed to a mass liquidation of BTC-collateralized long futures positions; in other words, a massive de-leveraging event. 

Last night’s rally saw the opposite, albeit with the same dynamics at play. Here’s the gist, according to Bitcoin Magazine’s Dylan LeClair. For the last month or so, we’ve tracked BTC futures open interest which has been steadily rising since May’s massive de-leveraging. Whereas futures contracts in May were collateralized largely with BTC, June/July’s increase has been largely driven by stablecoin collateralized positions, with many of them, naked shorts – meaning they would need to be covered (i.e. liquidated) were the [expletive deleted] to hit the fan. 

Last night’s sudden (Amazon or maybe RSI induced?) price increase triggered what’s known as a “short squeeze” or an event in which short-sellers, especially those who are levered up, are forced to liquidate their positions (i.e., buy BTC) en masse. This creates massive buying pressure, a cascading effect, which in turn causes the price of the underlying asset, in this case, BTC, to skyrocket.  

The fact that many of these short positions were stablecoin-collateralized played into the rally’s hands as well, likely causing further price increases. Had these short positions been collateralized with BTC, the value of that collateral would have increased during the short squeeze, potentially offsetting losses in the process. However, when you short Bitcoin using stablecoins or fiat … this dynamic is not at play. Bears got caught holding the bag and essentially became buyers overnight. 

As of Monday afternoon, over $1 billion in short positions have been liquidated, with nearly $800 million coming on Binance alone. The rally marked a celebratory day for many HODLers, an additional 11.2% of whom are now in profit.  

Shifting focus, Bitcoin’s supply shock seems to remain in play, a scenario that bodes well for the first crypto’s long-term future. Per Glassnode, there is roughly 15,170 less BTC held on exchange wallets than this time last month, reinforcing an accumulation-themed tone. Smaller entities holding between 0.1 and 100 BTC have been largely responsible for sucking BTC’s supply dry since May’s capitulation; they’ve added roughly 98,000 BTC to their positions in the past 2 months, nearly 20,000 BTC more than “the whales” over the same period. In the words of on-chain analyst Will Clemente, who predicted Monday’s supply shock, “the smaller players are a real force in this market.” 

Likewise, the number of receiving entities on the Bitcoin network has increased 20% over the past two weeks. As of Sunday night, roughly 240,000 unique entities were on the receiving end of a BTC transaction. On the flip side, the number of unique entities sending BTC has stagnated, currently sitting at around 100,000. Simply put, a large portion of the market is accumulating while a much smaller portion is selling. That’s a bullish trend should it continue.   

The Bad

Elon Musk. We think he’s smart. One of the greatest minds of our generation. But right now he seems to have way too much influence over Bitcoin’s price, arguably more so than any technical or on-chain indicator. The market responded positively last Wednesday to Musk’s announcement that Tesla would “most likely” start accepting BTC payments sometime in the near future, with the coin rising roughly 6% in a matter of hours. To be fair, the Tesla chief admitted that he “might” be responsible for pumping up Bitcoin’s price, but was steadfast in his assertion that he had never “dumped.” Either way, these hard and fast Musk effects can be much too much to bear.    

In other bearish signals scored, Bitcoin’s NVT ratio is hinting that this rally may be short-lived. The metric, often described as Bitcoin’s P/E, has risen sharply (over 200%) in wake of BTC’s rapid price increase, averaging 60.46 for the week ending 7/25, its highest mark YTD. Similar to P/E, an increasing NVT during times price appreciation would suggest that the fundamentals, in this case, BTC’s daily transaction volume, are not justifying Bitcoin’s current spot price, certainly cause for concern. The last time NVT was this high was in early May of 2021. We all know what happened next. 

The Ugly

Another day, another regulatory crackdown, this time involving Tether, the world’s largest issuer of stablecoins. On Monday word came out that the DOJ is reportedly investigating bank fraud stemming from the firm’s “early days” of operation. If reports are to be believed, Tether possibly misled a number of large financial institutions by hiding the fact that their transactions were linked to cryptocurrency (CNBC). 

Why exactly does this matter? Well, at times the BTC/USDT pair have accounted for nearly 80% of Bitcoin’s daily trading volume. Should Tether fail, a massive liquidity shock could ensue, potentially spurring downside momentum for the world’s largest crypto.  

Large legacy financial institutions seem to enjoy throwing shade towards the crypto industry. This week the IMF stepped in to the ring, using a blog post to advise emerging market economies to avoid adopting crypto assets as national legal tender. This comes on the heels of El Salvador’s recent adoption of BTC as an acceptable medium of public/private debt repayment. Citing the poor track record of crypto assets as a store of value, they forecast significant headwinds to future macroeconomic stability for nations pursuing formal crypto inclusion into their monetary system. In addition, they cited the potential negative impact that crypto adoption would impose on monetary policy stability. Since the dynamics and value of a private cryptocurrency cannot be controlled by a central bank, it would create difficulties for monetary authorities when attempting to manage fluctuations in the business cycle. The IMF listed a number of other concerns–exchange rate risk, environmental sustainability, legal troubles–but the overarching theme fits into a broader narrative under which legacy financial behemoths look to contain the risks associated with new financial innovations. Regulatory headwinds, indeed.

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 “dry powder” 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 SMA edged slightly downwards from levels seen last week, coming in at 5.58. Despite the ratio experiencing relatively muted moves in the wake of the mid-May selloff, the ratio’s longer term downtrend is undeniably reflecting the increasingly integral role that stablecoins are playing in crypto trading and the Defi space. As evidence, the collective market capitalization of the top 10 stablecoins–measured by market cap–has increased nearly four-fold YTD. These substantial inflows are sparking serious deliberations among regulators about the risk profile and appropriate policy response to these fiat derivatives. Whatever actions are drafted in the coming months to broaden their transparency and security, it is undeniable that stablecoins have become a critical piece to the operational dynamics of cryptocurrency marketplaces. 

>>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. SOPR 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. A ratio above 1 indicates that coins–in the aggregate–are being sold for profit, vice versa for ratios below 1. ASOPR once again exhibited choppy movement for much of the past week, averaging 0.99 for the 7-day period ending 7/25. In dollar terms, this equated to an average daily loss of $140 million dollars. BTC’s Monday rally could bode well for aSOPR, as an additional 11% of Bitcoin’s circulating supply is now in profit.    

>>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 is undervalued. For the week, movement was largely toward the downside, with the metric settling around 0.31 by Sunday. Interestingly enough, the correlation between the S2FD and BTC’s daily closing spot price (when measured over the past six months) comes out to 0.72. From this relationship, we can say that BTC’s price and the S2FD generally move in the same direction, on average. Look for this statistical relationship to continue to be the driving force behind the S2FD’s movement in the coming months. 

>> 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 large-scale enterprise adoption. BTC’s ledger verified 217,999 transactions per day on average for the week ending 7/26. Compared to mid-May (when Chinese authorities initially began a massive crackdown on the operation of physical mining infrastructure), average transaction volumes for the past week were down about 25%. Overall, the whirlwind of a price rally seen over this past weekend doesn’t reflect any notable change in the fundamental value that Bitcoin provides as a P2P exchange network, at least according to this widely tracked on-chain metric. 

>>Coin Days Destroyed (CDD): CDD is used to gauge the dynamics 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, it’s 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. This process then proceeds to automatically destroy the accumulated coin days within the UTXO by resetting its coin days level to zero. To calculate the aggregate level of days destroyed, CDD takes the respective lifespan–measured in days–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 by what they see as frothy conditions. After experiencing quite short-lived parabolic movement almost two weeks ago, CDD moderated during the past week; the metric’s 7-day moving average ended the week at 4.4 million coin days. These levels suggest that generally, most of the coins being transferred on-chain during the past week were more indicative of normal network activity rather than major changes in sentiment among the “strong hands”.


>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 underlying momentum by largely ignoring volatile day to day price swings. With BTC having passed above its 50-day MA on Sunday night, the 200-day is seen by many chartists as the next major area of resistance to be surpassed. The 7-day period ending 7/25 saw the gap between BTC’s spot price and the 200-day decrease by nearly 50% in a move that bodes well for BTC’s short-term health. As of Sunday evening the 200-day was standing at $44,659, meaning a further 17% 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. RSI was given a great deal of attention this week, with its breakout of a long-resistant trend line seen by many (including Willy Woo) as a catalyst for Monday’s short squeeze. However, BTC’s rapid price appreciation has pushed RSI near overbought territory for the first time since april. As of Sunday evening, RSI was standing at 67.38, representing a weekly increase of 83%.  


>Open Futures Interest, 7-day average (All Exchanges): 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 $12.5 B, breaking out of a pretty tight monthly range between $11-12 B. These relatively heightened levels of futures positions look to have propelled momentum to BTC’s weekend rally. Overall, activity in the futures market seems to corroborate the stance among bulls that BTC’s price has reversed its prevailing trend, especially with massively levered short positions being forced to cover at rapidly rising prices. 

>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 quite counter intuitive; positive net inflows are normally taken as bearish signatures, and vice versa for outflows.For the week (7/19 – 7/25), daily average net flows came in at -971 BTC, a positive reversal compared to the week prior. Although the past week saw net flows swing between positive and negative, the overarching trend argues that strong buying pressure ultimately came out on top.  

>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. This week marked the end of NVTS’s month-long consolidation, hinting the market is no longer oversold at near-historic levels. NVTS averaged a mark of 22.25 for the week ending 7/25, representing an appreciation of 10.2%. Additionally, NVT, the P/E-Esque metric from which NVTS is derived, has shot up nearly 200% over the past week to a YTD high of 60.46. NVT’s sudden parabolic move does not bode well for network health as it could suggest transaction volume isn’t keeping up with recent price momentum. We’ll give this a neutral rating for now, but be on the lookout in the weeks ahead. 

>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 1.78 and is starting to climb upwards from a recent trough. Overall, MVRV currently 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 100.17 EH/sec for the 7-day period ending 7/25. 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 20% from early July’s YTD lows. Per Coinbase, there is mounting evidence that a number of mining operations have successfully relocated to the US and Kazakhstan, a move that will bode well for the health of the network.