Bitcoin Market Analysis (February 28th — March 6th)

Weekly Summary:

1. Credit market volatility is intensifying its rise, with implied volatility, a measure of bond options, rising to March 2020 levels, and investors racing to sell bonds for cash, which is not a sign to the upside. A liquidity crisis in the market could have a more serious impact on cryptocurrencies, and while the Fed will eventually have to compromise to stabilize financial markets, until then, the onset of a liquidity crisis could bring down risky assets. Therefore, you need to keep a close eye on the changes in macro liquidity.

2. Bitcoin weekly level RSI (Relative Phase Weakness Index) is currently located around 40, in the history of the weekly level RSI in the 30–40 range, the market basically experienced a fairly large retracement, the Bitcoin price is very depressed, this position is usually at the bottom area.

3. The market is experiencing panic from external macro events such as the Fed’s monetary policy tightening and the geopolitical crisis. Despite this Bitcoin selling pressure in exchanges has not increased significantly as a result, and exchange Bitcoin balances continue to remain at the low levels seen since 2018.

4. Over 220K Bitcoins have flowed into the Giant Whale wallet in the $36-$38K price range. Global crypto funds have also continued their positive trend of increasing their holdings, with positions reaching a record high of 851,815 Bitcoins, and money from global funds is still quietly flowing in.

5. Currently, as the funding rate enters negative, it indicates that shorting funds are greater than longing funds, which indirectly indicates that the market is very bearish. We can conclude that the current dominant opening of the BTC futures contract is more guided by the short initiative to open positions. When most of the funds in the market are dominated by shorting (the longer the funds rate lasts and the deeper the negative funds rate is, the stronger the shorting position is), the prerequisites for a trend reversal are in place.

6. This report believes that external macro events are dominating the short-term prices, but from the fundamental situation, smart fund is still actively laying out. Therefore we can think that the current pullback shock and washout probability is a bit greater, the possibility of bottoming at this position is increasing and should not be pessimistic. However, one should also pay close attention to the macro liquidity changes brought about by the Fed’s monetary policy shift. If the signs of liquidity contraction are too violent, it may bring down risky assets in the short term, which includes cryptocurrencies.

Ⅰ. External macro environment

The current external environment is being affected by both the geopolitical crisis and macro liquidity. In addition to the geopolitical crisis, market fears of a macro liquidity crunch have been heating up in recent days. Credit market volatility is intensifying its rise, with implied volatility, a measure of bond options, rising to levels close to March 2020, and investors are racing to sell bonds for cash, which is not a sign to the upside.

Chart 1: U.S. bond market volatility is rising and a liquidity crisis like the one in March 2020 may be brewing.

The rapid rise in inflation has intensified market expectations of higher interest rates, resulting in short-term bond yields rising faster than long-term bond yields, leading to a flattening of the yield curve (note: flattening of the yield curve means a flattening of long-term bond yields and short-term bond yields), with the difference between 2-year Treasury yields and 10-year Treasury yields remaining at just 29 BP, already on the verge of inversion.

When the yield curve is inverted, it means that buying long-term bonds will give a lower yield than buying short-term bonds, which means that capital is more willing to hedge, and capital is not willing to take the risk of a longer cycle, which means that the market is not optimistic about the future development potential of the country’s economy, and the possibility of the economy falling into recession increases. As the bond market is more sensitive to changes in interest rates, the rise in volatility indicates that the market’s sensitivity to funding is increasing, reflecting a possible credit unwinding and liquidity crisis that may be brewing.

Chart 2: Severe inflationary upside causes the short-term bond yield curve to move up faster than the long-term bond yield curve.

Chart 3: The spread between the 2-year U.S. Treasury yield and the 10-year Treasury yield fell to 29 BP, on the verge of inversion.

If the Fed can implement yield curve control (YCC,Yield Cruve Control) while raising interest rates, then the curve may avoid inversion and shift from flattening to steepening, thus attracting more long-term capital to enter and the possibility of recession will be reduced. Otherwise there could be a liquidity crisis. If a liquidity crisis occurs in the market, it may have a more serious impact on cryptocurrencies, and although the Fed will eventually have to compromise to stabilize the financial markets, until then, the occurrence of a liquidity crisis may bring down risky assets and eventually come out of a downward and then upward trend.

Ⅱ. Short-term Market Trend Analysis

Bitcoin’s weekly RSI (Relative Relative Weakness Index) is currently sitting around 40. Historically, when the weekly RSI is in the 30–40 range, the market has basically experienced a fairly large pullback and the Bitcoin price is very depressed, and this position is usually the bottom area. And when the RSI breaks through 80 and is in the 80–90 range, it reaches the peak of the market’s frenzy level, which is often the top at this point.

Currently, although the Bitcoin price is experiencing a pullback, it still hasn’t fallen below the previous falling lows of $34,000 and $32,000, and the possibility of a bottom is strengthening.

Chart 4: BTC weekly level RSI is in the underestimated region, the possibility of bottoming has increased greatly.

III. BTC on-chain data analysis

Short-term exchange Bitcoin deposit pressure increased last week due to the geopolitical crisis and non-farm payroll data, resulting in a continued slowdown in exchange net withdrawals trends.

The market is experiencing panic from external macro events such as the Fed’s monetary policy tightening and the geopolitical crisis, but nonetheless Bitcoin selling pressure on exchanges has not increased significantly as a result, and exchange Bitcoin balances continue to remain at their low levels since 2018.

As of the date of this report, the centralized exchange Bitcoin balance was approximately 2.565 million, and the exchange BTC balance as a percentage of circulating supply was 13.46%.

Chart 5: The amount of Bitcoin flowing into exchanges from external wallets continues to remain low, indicating that there is actually not much selling pressure on exchanges at the moment.

Chart 6: Centralized exchange Bitcoin balance of 2.565 million Bitcoins, balance continues to hover steadily.

At the same time, there has been a significant amount of Bitcoin coming into the Giant Whale wallet, as shown below, with over 220,000 Bitcoins flowing into the Giant Whale wallet around $36k-$38k, and this inflow trend has re-emerged in recent days on the decline with higher inflows (green bubble in the chart). Global crypto funds have also continued their positive trend of increasing holdings, with positions reaching a record high of 851,815 Bitcoins, and money is still quietly flowing in from global funds.

Chart 7: Giant Whale is still holding BTC at $36k-$38KYOU 220,000 Bitcoins flowed into the Giant Whale wallet.

Chart 8: Global cryptocurrency fund BTC positions reached a new all-time high of 851,815 Bitcoins.

The BTC perpetual contract position offset in the futures contract market is starting to rise. This indicator is the ratio of the growth rate of the market value of the BTC perpetual contract position to the growth rate of the market value of BTC, and if the ratio goes higher, it indicates that the active speculative atmosphere in the futures market is increasing.

Currently, as the funding rate goes into negative numbers, it indicates that shorting funds are greater than longing funds, which indirectly indicates that the market is very bearish. Therefore, we can conclude that the current dominant opening of BTC futures contracts is more guided by short active opening.

When most of the funds in the market are dominated by shorting (the longer the duration of the funds rate and the deeper the negative funds rate, the stronger the shorting atmosphere), the prerequisites for trend reversal are in place.

Chart 9: BTC perpetual contract position offsets rose, indicating an increased speculative atmosphere in the market.

Chart 10: Funding rates are negative and current funding is dominated by shorting in the perpetual futures contract.

Chart 11: Breakdown of BTC perpetual contract funding rates on major exchanges.

Ⅳ. Afternoon Outlook

In recent times, the market has been pricing in a Fed rate hike and tapering caused by inflation in the U.S., as well as the worst-case scenario of the Ukraine situation. The current market price has been repeated, but the decline has been much weaker than in January, and with various negative pressures, the price is still higher than the January low of $32K and the February low of $34K. The market has been repeated, but does not look particularly pessimistic in terms of price.

Technical trend, weekly level RSI has been in the bottom area, the possibility of bottoming has increased greatly.

The fundamentals on the chain show that the exchange Bitcoin balance ratio remains low, a large number of giant whales are still holding Bitcoin, funds from global crypto funds are quietly entering, and BTC positions are at record highs. Meanwhile on the sentiment side, most people are becoming bearish, and through the fluctuations in the contract’s funding rates and position offsets, we believe that the shorts are dominating the dominant openings in recent days, indirectly indicating that the prerequisites for a trend reversal are currently in place (most people have joined the shorting camp). Our judgment is that after a short-term shock bottoming, it is expected to continue to maintain an uptrend.

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