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good evening,
markets have been rocked since thursday last week with nothing spared but the US dollar, which rose to its highest level since 2002. i've got some evening commentary for you below along with some thoughts on where we are headed in the near term.
best,
alex
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Market Selloff Accelerates
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When there was nothing to trade over the weekend, the world again turned to its favorite 24/7 punching bag: crypto markets. The bullish leap that immediately followed the FOMC last Wednesday was resoundingly rejected on Thursday and Friday, with S&P 500 down 4.27% and NASDAQ Composite down 6.47% from the Wednesday May 4 top to Friday May 6 close. The carnage continued throughout the weekend, with the brunt of the bearishness falling on cryptoassets while traditional markets slept one off.
Between NY market close at 4pm Friday and the time of writing (2:30pm ET Monday May 9), BTC was down 14% around $30,888, though it traded as low as $30,650 on Monday. Ether has been hit worse, down more than 16% since Friday close, having traded as low as $2,250 on Monday. YTD, BTC is down 32.5% and Ether is down 37.3%. From all-time high, BTC is down 54.5% and ETH is down 52.8%. From a pure price perspective, there are few bright spots in the cryptoasset market—of the top 50 cryptoassets by implied network value (market cap), only TRX (+13.4%), ALGO (+4%), DFI (+10.7%), and WAVES (+8.6%) are positive over the last 7 days. That being said, these names are all down from their all-time highs (TRX -73.75%, ALGO -80.75%, WAVES -78.24%, and a more modest DFI -5.55%).
Traditional markets continued lower today, with the NASDAQ down 3.95% and the S&P 500 down 3.2% at the close. (Note: SPX closed below 4000 at 3987.50). Macro is in the driver’s seat and crypto is along for the ride, after being much more widely adopted by global institutional investors over the last 24 months. The Treasury curve steepened with shorter dated bonds leading the gains. Amid the turmoil, the US dollar has risen to the highest level against a basket of foreign currencies since 2002. Calls of stagflation are in the air. BTC has become increasingly correlated with equities since the beginning of 2021 and the correlation is now at an all-time high.
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The move over the last week has been almost solely in spot markets—just a grind down. Futures open interest is mostly unchanged, funding rates remain positive on average, and liquidations are not particularly high. The put/call ratio on Deribit shows growing bearish sentiment in the market.
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Volatility in BTC & ETH has been relatively low, though it rose today (BTC realized vol rose from 65% to 75%, and ETH realized vol rose from 68% to near 80%). Last year, when BTC and equity indices were practically at the same level as today, BTC vol was about 5x the VIX, but today it’s only about 2x VIX. A difference between then and now is that basis is basically flat, which indicates that a lot of leverage has come out of the system. Galaxy Digital’s head of derivatives, Rob Bogucki, said we’re seeing a “disrespected risk premium” in crypto markets today. “The volatility pricing is not respecting the extent to which people could become forced sellers, but it’s also not respecting the amount of price volatility to the upside we could see if we find a bottom. With that type of 2-way risk, vol should be higher.”
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Compounding a strong risk-off attitude spreading throughout all markets this weekend was worry over Terra USD (UST), the dollar-tracking stablecoin in the Terra (LUNA) ecosystem. Outflows from Anchor, the high yield lending platform that has fueled the growth of UST over the last year sparked fear in the market that a run could occur on UST. Indeed, Anchor deposits are down 21% since one week ago (May 2).
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UST lost it’s $1 peg over the weekend and has struggled to regain it, despite interventions by the Luna Foundation Guard including providing liquidity to market makers in the form of $750m loans of both UST and BTC. The consensus among analysts examining UST activity over the weekend is that a large sell-off of UST on DeFi platform Curve led to fear on social media, resulting in a significant decline in the LUNA price and causing UST to de-peg from $1. At the time of writing around 6pm ET, despite the best efforts from the LFG, UST is trading as low as $0.88.
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While the peg has been under pressure and Anchor deposits have decreased, the circulating supply of UST has not yet declined. A big reason for the long-term increase in circulating UST supply has been the deposit yields available on Anchor (as much as nearly 20% over the last year), which has driven significant demand for the Terra USD stablecoin. By adding BTC to Luna Foundation Guard’s (LFG) reserve, the UST team created a mechanism whereby UST redeemers could choose to receive BTC rather than LUNA. That mechanism, it was thought, would provide additional confidence in the peg, but today the LFG was forced to move 37k of its 42k BTC reserve directly to market makers to actively support the UST peg. LFG was seen moving the funds on-chain and they appeared to arrive at OKEx after a few hops, likely the primary distribution venue to market makers, although other data providers suggested the destination could have been Gemini. Despite arriving at whatever venue LFG is supplying mid-afternoon Monday, the peg continues to break down.
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The percentage of BTC supply currently “in profit” is at its lowest level since March 2020. When analyzed by the price at which coins last moved on-chain, 56% of BTC’s total supply (of 19.03m coins) is currently “in profit,” i.e., last moved on-chain at a price lower than Monday morning (0 UTC), while 44% are currently underwater. The percentage of supply in profit has never dropped below 38%, but was lower than today during the bear markets of 2011, 2015-2016, 2018-2019, and Spring 2020.
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Another view shows the total supply of bitcoin segmented by the price at which coins last moved on-chain, giving a good idea of the amount of supply at various cost bases. Note, I’ve removed coins that moved between $0 and $686.42, the largest bucket of supply (which accounts for 21%+ of all coins), to make the chart more readable. In this view, we can see that 57% of coins were last moved on-chain above current prices when those very inert coins are removed. However, if we take as a percentage of all coins (i.e., we add back the coins that last moved between $0 and $686), that percentage in loss drops to 44%, in line with the data above from Coin Metrics. The point is that, if we consider coins that haven’t moved since BTCUSD traded below $686 are are so illiquid as to be likely irrelevant (and they could even be lost, as this includes Satoshi’s coins), the percentage of supply that is currently underwater is 57%. It’s also evident that there are very few coins that last moved when prices were between $19,900 and $30,000, which suggests very thin support below $30k.
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At least one US public miner that pledged not to sell BTC to fund its operations has begun doing so (Riot), and the another (Marathon) has said it may begin to do so. The bitcoin mining industry has grown substantially over the last year as machines relocated out of China following its ban, and many US-based miners have been successful in funding their operations by tapping US capital markets to raise funds through debt and equity. Appetite for miner debt and equity has waned along with a decline in risk sentiment, and while several had pledged never to sell BTC, Riot appears to be the first that had made such a pledge to capitulate, and Marathon is now indicating they may also do so. Riot is the second largest US public miner by current hashrate, while Marathon is the 4th largest, based on company disclosures. Looking more broadly on chain suggests miners have begun selling their coins on a net basis at the largest levels since June & July 2021.
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While exchange supply is still declining, a larger portion of inflows are seen to be coming from “private wallets.” According to data shared on Twitter by Chainalysis, 40% of BTC inflows to exchanges are currently coming from wallets for which Chainalysis has no institutional attribution, i.e., not custodians, institutional investors, or other exchanges. This could signify that retail users are beginning to capitulate.
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Yet, while the nature of exchange depositors may have shifted recently more heavily to private wallets, the total supply held on exchanges continues to decline, suggesting that coins are still being siphoned off into cold storage by longer term investors on a net basis.
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BTCUSD closed the week below its 100-week moving average. The last two times this happened, a significant capitulation occurred down to the 200-week moving average. 100-week MA currently stands at $36,460; 200-week MA currently stands at $21,853. Bitcoin has never really traded below its 200 week moving average except for a couple wicks. 200-week MA would likely find very strong support.
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Bitcoin’s “realized price” is currently $24,379. Following all-time highs and major drawdowns, BTCUSD has almost always reverted to its realized price. This metric is realized cap / current supply. Rather than looking at standard market capitalization, which values the network by multiplying the current circulating supply by the last known BTCUSD price, realized cap values each coin at the price it last moved on-chain, then sums those values for an interval (i.e., daily), giving us an idea of the network’s overall cost basis. Like the 200-week MA, the realized price should be viewed as strong support.
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A Few Signs of Positivity
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Coins are being held longer. The percentage of bitcoin supply that hasn’t moved on-chain in a year or more is at its highest level ever at 65.2%. Current price action is likely being determined by the activity of a very small number of coins, with only 16% of coins having moved on-chain in the last 3 months, only 7.8% moving in the last 1 month, and only 3.8% having moved in the last week. Price is currently being set by a very small portion of supply. That a sizeable majority of coins has not moved in the last year suggests they are in the hands of long-term holders with low price sensitivity.
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While coins are moving at a loss on a net-basis, SOPR remains relatively strong. When we look at coins that move on-chain and compare the price at which they move to the price at which they last moved, and do so across all coins, we can construct a ratio that gives us a sense of the relative profitability of spent coins. Over the last few days, coins are seen on-chain moving at a loss, but the ratio is much closer to neutral than prior downturns. While this is partially a consequence of lower net cost basis for coins given prior recent downturns that perhaps saw buyers enter at lower prices, it’s also a sign that capitulation is not occurring en masse. Whether that’s because coins are already in strong hands or that further capitulation is yet to come remains to be seen.
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Markets are soft and everyone is scared, but little has fundamentally changed. There’s a lot of fear in the market these days, not just inside crypto. And with inflation remaining high, supply chains disrupted, geopolitical risk elevated, and further central bank tightening on the way, there’s plenty of reason to believe there will be more pain ahead. But as I wrote on January 6, 2022, “with crypto markets reacting to exogenous circumstances rather than some fundamental change in their viability, the longer term outlook for public blockchains and digital assets remains incredibly bullish.” That remains just as true today as it was when I wrote it 5 months ago. The question is how much pain the market needs to experience before we find a bottom. I’ve presented some ideas above, but as my Zen master always says, “we’ll see.”
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Alex Thorn
Head of Firmwide Research, Galaxy Digital
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