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The Good, The Bad, and The Ugly

The Good: Whether sickening dead cat bounce or a signal of staying power after plunging Tuesday by as much as 15%, BTC  scurried away from a slippery slope toward low-$40K levels. We thought we spotted a calm before a storm, as in a potential storm of bullish movement, with BTC, steadily gaining, convincingly slaying a familiar foe (the $50K resistance level) and then gaining some more. Technical patterns blared “bull cycle top coming, soon, possibly within 3 weeks” (based on past charts of runs in 2011, 2013, and 2017). The storm came Tuesday but it wouldn’t be described as bullish. We now seek comfort in longer-term “halving” patterns, as spelled out by NewsBTC’s Hououin Kyouma, analyzing the current BTC halving cycle, which began in May 2020. “If the cycles do indeed follow a pattern,” Kyouma said, “then the latest all-time high was the first peak of the cycle, and thus BTC might reach a new ATH towards the end of the cycle.” The outer rim of this current halving cycle, 450-days-old as of Tuesday, looks to be at least 555 days.

The Bad: What’s worrisome is the lack of clarity on how this crash even happened, not that we expected to find a smoking gun. El Salvador, yeah, whatever. 

The only thing that could possibly have flashed a warning signal, as we scoured data Sunday night, was relatively heightened futures open interest on Sunday. 

Overall, it looks like leveraged speculators and margin borrowers got a little too ahead of themselves, and were thus caught flat-footed. The downturn looks to be a short-term hiccup at the moment, considering that basically all of the on-chain indicators offered largely positive signals.

The Ugly: Nearly $3 billion in long positions were liquidated in mere hours on Tuesday. 

At its worst, the spot BTC price went from near $53K to near $43K in one brief window of torment. That’s some volatility.

On-Chain:

>Stablecoin Supply Ratio (SSR), 7-day SMA: 8.03

SSR measures the supply of BTC relative to the supply of all stablecoins, denominated in BTC. Assessing the relationship between the size of the stablecoin market and BTC allows the investor to determine whether buying power remains ample, or conversely, has been exhausted.

The current level of SSR continues to reflect positive prospects for BTC. At its current mark, SSR’s 7-day SMA continues to loiter well below January’s YTD highs, suggesting ample buying power (in terms of USD-pegged stablecoins) remains on the sidelines. After breaching the level of 8.0 during the second to last week of August, SSR has largely trended sideways. Increasing enterprise adoption of BTC coupled with the persistence of volatile price dynamics has strengthened the use case for stablecoin positioning since the start of the year. If deployed, this dry powder could serve as the backbone behind future rallies. 

>>Adjusted Spent Output Ratio (aSOPR), 7-day SMA: 1.029

The aSOPR metric 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 or the price at which a coin is sold divided by its respective cost basis. A ratio above 1 indicates that coins–in the aggregate–are being sold for profit, vice versa for ratios below 1

Bullish: Building off early August’s “bullish reversal”, aSOPR continues to present a strong case in terms of the market’s ability to absorb sell-side pressure. The metric averaged 1.029 for the week ending 9/5 and remains sturdy on the intraday charts, suggesting some profitable entities are selling into market strength. Per on-chain wizard Will Clemente, given the length of aSOPR’s month-long consolidation, a retest of the key 1.0 threshold could be in the works in the near to medium term. We’ll be sure to track this in the coming weeks.

>>>Number of Transactions, 7-day SMA: 258,377

Weekly moving average tracking the daily number of transactions successfully processed by the Bitcoin ledger, serving as a proxy for block-space demand and the underlying strength of the network.

 Despite reiterating a bearish rating, transaction volume has witnessed some upward momentum from YTD lows seen in late June. On the other hand, the Bitcoin network’s daily transaction count still remains about 20% below January’s YTD highs, suggesting demand for block space has largely stagnated. While this lasting divergence between price and on-chain activity sings a bearish tune in the short term, it is not without precedent, with many drawing similarities to the pre-bull accumulation phase of 2020.

>>>>Coin Days Destroyed (CDD), 7-day SMA: 5.13 million 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.

Spending behavior of long-term holders is reflected in the size of CDD; consequently, traders can use this metric to track potential inflection points in market cycles.

Neutral: BTC’s August rally coincided with a considerable spike in CDD (nearly 300%) on the weekly charts, suggesting that some LTH’s have begun to take profits (as was expected). However, the metric has recently fallen back down to more familiar levels–compared to the trend seen in the first few months of the year. In addition, CDD’s movement in the past week has been noticeably less volatile compared to prior months. Overall, the prevailing level reflects the die-hard HODL mentality among long-term owners.

Technical:

>200-day SMA: $46,060

 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.

Bullish: As of 9/5 BTC was hovering above its 200-day SMA. After initially breaking through this assumed resistance level in the first week of August, we have witnessed no major deviation between BTC’s price and this moving average in either the positive or negative direction.

>>RSI, 14-day: 47.58

Momentum indicator measuring both the speed and rate of change of recent price movements. Helpful in determining overbought/oversold market conditions.

Neutral: As of 9/5 BTC’s 14-day RSI was sitting in neutral territory, having declined roughly 18.7% from this time last week. At its current level, RSI would seem to hint that the market is neither overbought nor oversold, hence the neutral rating.

Fundamental:

>Open Interest, Futures, 7-day SMA: $18.5 billion as of 9/5, $14.6 as of Tuesday 9/7

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. 

Bearish: Last week we noted that open futures interest was quickly approaching level untouched since early May 2021. As the gradual increase had largely coincided with BTC’s late summer rally, we viewed open interest as an extension of the market’s bullish sentiment. However, we didn’t account for one thing: the leverage traders were using to take these positions. On Tuesday morning we found out just how much borrowed money was at play, with nearly $1.1 billion of open interest (leveraged longs) liquidated in just under an hour. By the end of the day, OI had declined by roughly $4 billion, creating downside momentum that delivered Bitcoin with a swift roundhouse kick to the face (ie, a 10% decline). We don’t expect this to be a long-term trend, given supply-side fundamentals are still strongly in BTC’s favor, but for this week the outlook is bearish.       

>>Net Exchange Flows, 7-day SMA: -3,942.2 BTC

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.

Bullish: Exchange flows continue to suggest that supply-side dynamics remain in Bitcoin’s favor. For the week ending 9/5, exchanges recognized an average daily outflow of -3,942.2 billion, reinforcing this current theme of mass coin accumulation. Exchange net position change continues to present a bullish outlook as well, with roughly 54,000 less BTC present on exchange wallets than this time 30 days ago.  

>>NVT signal (NVTS) 7-day SMA: 42.3

NVT measures BTC’s market cap relative to the 90-day SMA of daily transaction volume on the Bitcoin network. It provides insight into overbought/oversold market conditions, serving as a leading indicator of market peaks/troughs.

Bearish: The growing divergence between BTC’s spot price and on-chain activity has negatively impacted NVTS, with the metric’s 7-day SMA having increased roughly 77% since late July’s local bottom. This week, rising transaction volumes seem to have placed NVTS in a better spot than this time 7-days ago, but the outlook is still bearish considering its rapid increase over the preceding month. Unless transaction volume can keep up with demand in the spot markets, the outlook will remain bearish.    

>>>Market Value/Realized Value, MVRV Ratio, 7-day SMA: 2.36

Takes the current market cap of BTC and divides it by the realized capitalization.

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.

Bullish: What this ratio is saying is that, hypothetically, if all holders were to sell their BTC positions right now, they would receive–on average–2.36x their initial investment. Given the ratio is still well-off March’s YTD highs, MVRV would seem to hint that BTC has not yet heavily outstripped its “fair value”. Overall, a market value sitting comfortably above its realized value suggests that long-term holders will continue to be undeterred by volatile swings in BTC’s price.

>>>>Mean Hash Rate, 7-day SMA: 129.1 EH/sec

Hash rate: 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.

Bullish sentiment can be derived from the fact that the hash rate has rebounded nearly 53% from July’s YTD lows, hinting that miners involved in the “great migration” are starting to come back online. Capital migration–in the form of mining equipment–to regions of the world that exhibit greater political stability should bode well for the BTC network’s processing capacity going forward. However, the exodus of mining equipment from China has proven more difficult than initially expected considering that global shipping costs have risen to record highs in recent months. Overall, the prevailing trend seems to suggest that Bitcoin mining will become relatively less consolidated compared to prior years, stimulating competition and network decentralization. 

>>>>>Futures Perpetual Funding Rate, 7-day SMA: 0.0022%

This metric is designed to track the average funding rate–weighted by the size of open interest on each tracked exchange–required to hold a perpetual futures contract tied to BTC. The prevailing rate–whether positive or negative–incentivizes traders to buy/sell perpetual contracts to converge the perpetual futures price with the spot price. To maintain a hypothetical $1,000 perpetual BTC futures position, longs were paying shorts about $8.00 every few hours over the past week, on average.

Bearish: In the same vein as open futures interest, we read last week’s positive perp funding rate as an extension of bullish sentiment in the derivatives markets. While it is true that a positive funding rate does demonstrate bullish bias, we should have been paying closer attention to Twitter. On-chain analyst TXMC Trades summed things up nicely with this tweet on 8/26, “The funding rate of futures is a barometer for bias in the derivatives market. Too much time is spent in one direction and it becomes like a rubber band waiting to mean revert. It’s nowhere near April 2021 yet, but worth monitoring in the short term”. Unfortunately, the futures markets had been leaning long (and leveraged) for a matter of weeks, meaning Tuesday’s massive de-leveraging event was largely inevitable. This bearish reading is merely short-term, with those aforementioned supply-side metrics still pointing to large-scale accumulation.