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The Good: Despite continued regulatory windfalls stemming from China’s intense statewide mining crackdown, the world’s largest digital asset continues to keep on chugging, trading within its established range $32K-36K for the week ending 7/4. In what can only be seen as a win for decentralized technologies, the network continues to function despite nearly half of its computational power being taken offline essentially overnight. 

Bitcoin downgraded its difficulty level by 28% Saturday night in a move meant to mitigate the Chinese mining community’s “Great Migration.” In addition to reducing block times and making it “easier” to mine Bitcoin, the update could potentially bring about a 35% increase in net earnings to the other half of miners still online. 

The difficulty adjustment may create a short-term incentive for displaced miners (as well as new profit-seekers) to quickly relocate (or build) their operations, restoring the network’s dwindling hash rate in the process. 

Willy Woo’s NVT Signal continues to flash bullish, indicating oversold market conditions. The ratio has consolidated over the past week, sitting at 19.47 as of July 4th, a hint that the market continues to dish out black-Friday esque deals. 

Bitcoin’s well-tracked stablecoin supply ratio (SSR) continues to sing a bullish tune regarding the world’s 1st crypto. The metric, which serves as a key proxy for capital rotations into/out of BTC, continues to consolidate around YTD lows, sitting at 6.1 as of 7/4, up 4% WoW. SSR would seem to suggest that a great deal of on-chain capital continues to hang around the sidelines. Near-term price appreciation may entice some of this “dry powder” to make its way back onto “the court”, potentially fueling further rallies.    

The Bad: Sellers continued to swap BTC in the red this week as evidenced by adjusted spent output ratio (aSOPR). The metric, which serves as a key proxy of network profitability, continues to signal bearish momentum having risen slightly (3%) from last week’s YTD lows, indicating that the market on aggregate is selling at a loss. Those who sold BTC amidst the “Great Migration” did so at an average cumulative loss of $194 million/day for the week ending 7/4. Bitcoin continues to severely lag behind its 200-day moving average, currently sitting around $44,000 as of 7/4. Since crossing below the 200-day SMA on May 19th, BTC has failed to sustain any serious upwards price momentum, echoing shades of late 2018, the last time BTC crossed below the average. In that case it took nearly a year for Bitcoin’s price to fully recover.  

The Ugly: While many seem to view China’s mining crackdown as a positive development by moving computational resources away from an authoritarian regime that seeks to curtail market-based power in favor of centralized state control, UBS seems to think otherwise. The Swiss bank, still reeling from a $700 million loss at the hands of Bill Hwang’s Archegos Capital, is extremely bearish on BTC considering the regulatory uncertainty surrounding China’s crackdown, stating in a recent client letter that it could be the pin that finally causes the crypto bubble to “pop.” The manner in which these regulatory updates are announced and implemented has been catching investors flat-footed for the past month and a half, potentially limiting institutional adoption going forward.

On Chain 

>Stable Coin Supply Ratio, 7-day SMA (SSR): Measures the value of BTC’s market cap relative to the market cap of all stablecoins. Low ratio (less than 10 usually) suggests a lot of “dry powder” waiting on the sidelines ready to spur a rally, vice versa for high ratio (greater than 20 in most cases).The ratio’s 7 day SMA moved up slightly from levels seen last week, hovering around 6.1. The metric has continued to undergo a consolidation phase since the end of May, hinting that volatile swings in BTC have made traders gravitate towards stablecoins for the time being. Nonetheless, levels such as these provide evidence that in the event of a surprise news event with positive undertones, plenty of buyers could be willing and able to propel upward momentum. Zooming out of the crypto space, excess liquidity is sloshing around the entire financial system as short term interest rates remain pinned around zero. As of now, the swell of funds moving into stablecoins is just a symptom of this larger scale trend. 

>>Adjusted Spent Output Price Ratio, 7-day SMA (aSOPR): Examines levels of profitability/loss experienced by coins moved on-chain over a given time interval. Ignores UTXOs with a lifespan less than 1 hr. Ratio above 1 indicates that coins–on aggregate–are being sold for profit, vice versa for ratios below 1. The metric exhibited choppy movement for much of the past week, averaging 0.988 for the week ending 7/4, up 3% WoW. aSOPR has continued to flash poor prospects for the past two weeks, suggesting that those who sold amid recent market swings did so at a loss.     

>>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 (stock) in relation to the amount of BTC mined annually (flow) to project a price for the asset. The deflection ratio simply compares the current market price of BTC in relation to 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. The deflection measure largely spent the week moving sideways and settled around 0.32 by Sunday. It has been almost 5 months since this indicator projected a bearish outlook. Reflecting the whiplash of volatility seen during the first half of this year, S2FD has experienced movements as high as 1.09–reached during January–and as low as 0.29 which was hit about 2 weeks ago.

>> Number of Transactions, 7-day SMA: Weekly moving average for the daily number of transactions on the Bitcoin ledger. Decrease in transaction volume often coincides with bearish momentum, while increasing transaction volume generally reads bullish. BTC’s ledger verified 210,399 transactions per day on average for the week ending 7/6. Given the fact that just over 50% of Bitcoin’s hash rate dropped off between mid-May and the end of June, mean block processing times reached upwards of 23 minutes per block, and transaction fees began to climb. However, a powerful self-regulatory update took effect on the BTC algorithm this past Saturday (28th of June). Witnessing a downward slide in the hash rate, the algorithm automatically improved miner incentives in the form of lowering the difficulty of mining blocks. This mechanism will ultimately allow the depleted number of miners to process and validate blocks in the same amount of time as compared to levels seen before the crackdown by Chinese regulators. Transactional activity could also see a spurt upwards in the coming weeks as payment fees have dropped by nearly half in the wake of the stabilization adjustment.

>>Coin Days Destroyed (CDD): CDD is used to gauge long-term cycles by placing heavier weighting on the trading actions of “smart money”–investors that hold BTC for the long term. For each day that one BTC remains unspent, it accumulates one coin day. When that coin is spent, the accumulated level of coin days is reset to zero. Therefore, the trading of coins held for extended periods of time has an outsize effect on the CDD measurement when compared to day-to-day trading activity. To measure an aggregate level, CDD takes the respective lifespan of each UTXO spent on a particular day, multiplies it by the volume of coins spent on that UTXO on the same date, and then sums all of these individual values together. Historically, CDD values less than 5 million days signal an approaching lower bound floor for the price of BTC, while values of greater than 10 million days indicate upward momentum as long-term investors take profits on their existing holdings. During the past week, CDD hovered around a daily average of 4.4 million coin days. During the past month, the metric continued to hit year-to-date lows, hinting that going forward, BTC might not have further room to fall as older coins remain dormant and conviction among HODLers remains steadfast. Overall, the metric presents a slightly bullish outlook. 

Technicals

>200 Day Simple Moving Average: Equally weighted average of daily pricing data from 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 swings. The current level of $44,047 continues to reflect poor prospects, as the gap between the 200-day SMA and the price of BTC shrunk a little from last week. Looking back historically, this same kind of rift between the spot price and a higher 200 day SMA also emerged in the spring 2018 crash. In that case, the gap ultimately took a little over a year to close. With this in mind, the divergence we’re seeing today may show little signs of going away, especially with prevailing market sentiment hinting that institutional investors see a long consolidation phase on the horizon. 

>>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 number of on-chain metrics signaling bullish, oversold market conditions, RSI has continued to hold its neutral rating, settling in at 45.21 as of 7/4, down -3% WoW.        

Fundamentals

>Open Futures Interest, 7-day average (All Exchanges): Calculates the total amount of funds ($USD) currently allocated towards BTC futures contracts (across all exchanges) that have neither been exercised nor expired. Provides insight into the actions of institutional traders, while also gauging the general level of strength/weakness that underlies the price movement of BTC. For the past week, daily average open interest in futures contracts was $11.46 B, up about 3% compared to the week before. Considering that the past 7 days saw relatively heightened levels of futures inflows coinciding with choppy movement in the price of BTC, futures positions projected a largely neutral outlook. At the moment, there is no pronounced trend to be gauged by these levels.

>Exchange Net Flows, 7-Day SMA: Weekly moving average tracking the difference between # of BTC flowing into exchanges vs out of exchanges. The numbers projected by the metric are quite counterintuitive; positive net inflows are normally taken as bearish signatures, and vice versa for outflows. For the week (6/28 – 7/4), daily average net flows came in at -2347 BTC, presenting a positive outlook when considering that the average daily net flows were about 84% higher compared to levels seen during the prior week. Overall, this metric reflects a growing conviction among long-term HOLDers that BTC’s negative reversal is largely in the rearview mirror. 

>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 continues to present a bullish case having largely consolidated over the past. The metric is currently sitting at 19.47 as of 7/4, suggesting an already oversold market is continuing to dish out deals. 

>Market value/Realized value Ratio (MVRV): Takes the current market cap of BTC and divides it by the realized cap. The latter attempts to gauge the true economic weight locked up in BTC by multiplying the number of UTXO’s 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 signals anticipation of a decline; in this case, such a situation indicates an aggregate loss for the market and possibly a downward breakthrough of a key support level. Conversely, historical evidence suggests that a ratio above 3.7 flashes overvalued conditions, signaling that speculators are primarily dominating buying activity. The ratio ended the week at 1.82, hovering around low points not seen since last October. Overall, MVRV currently suggests a pretty 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 has recently fallen off a cliff, declining more than 50% from May’s sustained peak. 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 averaged 89 EH/s for the week ending 7/4, a neutral rating considering the “Great Migration’s” long-term effects are yet to be fully observed. Be on the lookout for further hash rate developments in the coming weeks.