Bitcoin Market Analysis(February 7th — February 13th)
1. At present, the market is in the worst case for the Fed’s monetary policy tightening: that is, raising interest rates by 50 basis points in March and May, and at the same time starting to shrink the balance sheet in the second quarter, and does not rule out the situation of actively selling assets, as well as being on the Ukraine geopolitical crisis to carry out and other external risk events to reprice.
2. Once the actual situation is better than or basically equal to the worst expectation, the price may be affected by a large upward push, thus getting out of the pullback trend. It is worth mentioning that even though the hawkish expectations are very strong, BTC has only dropped from $45K to $41k (as of the date of this report), a drop of only 8%, and the market seems to have developed a certain immunity to fear.
3. In terms of technical trend, the 3-day RSI indicator has broken through the downward trend, MACD has also appeared a golden cross, and the technical indicators are continuing to repair.
4. In terms of fundamentals, the balance of Bitcoins on exchanges began to see a large net outflow again last week, and the remaining 2.505 million Bitcoins on exchanges continued to hit a new low since October 2018.
5. Under normal circumstances, there is a certain time deviation between illiquid supply and price, but then the price tends to return. The divergence time is long and the magnitude is obvious, which is closely related to the multiple major bad news that appeared in the market in a short period of time. First, the liquidation of major blockchain institutions in China at the end of 2021 led to the suppression of market prices. This was followed by higher U.S. Treasury yields, and rising inflation expectations accelerated market expectations for Fed tightening. Coupled with the sudden turn of the Fed’s policy, the timing of interest rate hikes and balance sheet reductions has been advanced, leading to successive panics in the market. The third is that contract leverage has remained high, which increased the pressure of long liquidation during the pullback, which temporarily suppressed the upward price movement. This correction comes at the end of the year, which is the stage when many institutions are returning their funds. After entering 2022, the return of funds has not appeared so quickly. Coupled with the influence of negative factors, the market has a very strong wait-and-see mood. Therefore, there are longer and larger divergences.
6. Short-term market price fluctuations are affected by multiple factors, but long-term prices are subject to the constraints of supply and demand. When supply and demand reach a critical state, and after the uncertainty of the market has gradually settled, the price will return. So be patient.
Ⅰ. External macro environment
Last week, the U.S. released January unadjusted CPI data, 7.5% year-on-year, expected 7.3%, 7.0% previous; core CPI 6.0% year-on-year, expected 5.9%, 5.5% previous, the highest level since 1980, the overall inflationary pressure is still severe.
After the release of inflation data, the Fed Bullard issued a strong “hawkish” remarks, said in July 2022 to raise interest rates by 100 basis points, that is, in March and May each raised rates by 50bp, suggested that the second quarter on the measures to reduce the balance sheet, and may take the initiative to sell assets to shrink the table.
Bullard’s remarks took the Fed’s hawkish tone to a new level after markets expected a worst-case 7.3 percent inflation reading for January, and expectations for the frequency and intensity of rate hikes were not as strong. After the CPI data was released, the price of Bitcoin was hit, causing Bitcoin to slide from $45k.
The following day, the geopolitical situation in Ukraine and Russia further escalated, causing global risk assets to face a sharp correction.
Going into February, BTC’s risk of early Fed rate hikes and balance sheet shrinkage has been factored into market prices, but higher inflation data and stronger hawkish remarks are not. A deterministic upgrade, we can consider the current Bitcoin pullback as a repricing of external events that have occurred in recent days.
Chart 1: Fed Bullard’s “hawkish” remarks following the February 10 CPI inflation data release.
The market is currently repricing external risk events such as the worst-case scenario of Fed monetary policy tightening: i.e., a 50 basis point rate hike in March and May, along with the launch of tapering in the second quarter, and active asset sales cannot be ruled out, as well as the ongoing geopolitical crisis in Ukraine. Once the actual situation is better than or largely equal to the worst expectations, prices may be affected by a greater upward thrust, thus coming out of the retracement trend. It is worth noting that even though hawkish expectations are very strong, BTC has only fallen from $45K to $41K (as of the date of this report), a decline of only 8%, and the market seems to have developed some immunity to fear.
Ⅱ. Market Trend Analysis
Judging from the technical trend level, the 3 Daily Frame K-line closed above $42K and the RSI indicator closed above the downtrend line formed since October 2021, indicating that the price breakout of the RSI downtrend was confirmed, very similar to the breakout of the RSI downtrend line formed since the beginning of 2021 at the end of July 2021.
At the same time, the 3-day level MACD has shown a Golden cross 2021 there have been 2 3-day level MACD golden crosses, and the market has risen to varying degrees in the aftermath.
Chart 2: The 3-Day Frame RSI broke the downtrend line and the MACD golden crossed again.
III. BTC on-chain data analysis
While the market is experiencing panic from external macro events such as the Fed’s monetary policy tightening and the geopolitical crisis, bitcoin selling pressure in exchanges has not increased significantly as a result, and exchange bitcoin balances continue to trend outward as smart investors continue to suck up and raise bitcoins on exchanges amid market fears.
As of the date of this report, the centralized exchange bitcoin balance is approximately 2.505 million, continuing to set new lows since October 2018.
Chart 3: Smart investors’ enthusiasm to buy bitcoin has not diminished despite continued market panic messages, and BTC balances on exchanges continue to fall.
The indicator Entity-Adjusted Dormancy Flow, which measures the degree of dormancy of the market’s chips, has moved out of the green zone at the bottom. The indicator has fallen into the green zone (below 200K) 5 times in its history (including this one) and each time it has fallen into the green zone and re-ascended, the price almost never returns to the lows, i.e. the indicator is quite accurate in assessing the bottom areas of the market and even the lows.
This indicator is the ratio of BTC market value to the annualized fiat value of dormant value. When the indicator is low, it means that there are a lot of dormant chips (held chips) in the market, and there are less tradable chips in the market at this time, which can be interpreted as most tradable chips are sold and left the market, and the possibility of the market bottoming out is greater at this time.
Chart 4: Entity-Adjusted Dormancy Flow is more accurate in measuring the bottom, which is currently out of the green zone.
The percentage of Bitcoin that have been inactive for more than six months (HODL waves>6m) is near an all-time high, with this value currently standing at about 76.4% (all-time high 76.9% in January 2022), indicating that more than 13.63 million bitcoins have been in an illiquid state for more than six months.
Historically, when this ratio exceeds 75%, it spawns several times or even tens of times the market for several quarters thereafter. During the rally, the percentage of HODL waves >6m gradually decreases until it increases again after the market tops.
This phenomenon shows that HODLers have an extremely strong willingness to hold at the current price level, indirectly indicating that the current price is still not expensive.
Chart 5: HODL waves>6m over 76% and over 75% 3 times historically, with big bulls for several quarters thereafter.
Illiquid supply reflects the number of addresses with a cumulative outflow to cumulative inflow ratio of less than 25% of bitcoins. When an address is called Illiquid supply, it is in a way an “accumulation address”, reflecting the intention of the holder of that address to hold Bitcoin in a predominantly “HODL” state. When most of the chips in the market are in illiquid supply, it means that most of the chips in the market are in an illiquid state, and there will be fewer tradable chips in the market. When the illiquid supply increases, it reflects the change of supply and demand in the trading market gradually shifted to the demand force is greater than the supply force. Conversely, when illiquid supply indicator decreases, it reflects that the supply force in the trading market is greater than the demand force.
Normally, illiquid supply and prices diverge for a certain period of time, but then prices tend to revert in value. The longer and more pronounced divergence this time is, in my opinion, closely related to the multiple major bearish information that appeared in the market within a short period of time. First, the clearing of major Chinese blockchain institutions in late 2021 led to a suppression of market prices, followed closely by higher U.S. bond yields. Rising inflation expectations accelerated market expectations of Fed tightening, which, combined with the sudden turn in Fed policy to advance both rate hikes and tapering, led to one market panic after another. The third is that contract leverage has been high, adding to long liquidation pressure during pullbacks and keeping prices temporarily subdued on the upside.
Short-term market price fluctuations are influenced by multiple factors, but long-term prices are subject to supply and demand, and will return when supply and demand reach a critical state and the uncertainty element of the market is gradually determined. Therefore, investors need to remain patient and focused.
Chart 6: illiquid supply continues to grow (14.42 million coins), with a phase divergence in the current tescoin price.
Chart 7: The illiquid supply shock ratio is at a new high since April 2021 and the market is facing a serious chip supply crisis.
At the market funding level, the current exchange-traded stablecoin balance is at a record high of $27.2 billion, and there is an abundance of stablecoin (funding) in the market.
The 200-day moving average of the ratio of exchange-traded stablecoin market capitalization to bitcoin market capitalization (SSR) is standard deviated to obtain the Bollinger Band track of SSR. When the SSR goes below the Bollinger band track, the ratio of stable market cap to bitcoin market cap goes below one standard deviation, indicating that the market is oversold and has a higher probability of going up in the aftermarket.
Historically the SSR has fallen below 1 standard deviation several times before rising to varying degrees. The indicator fell below 1 standard deviation in January 2022.
Chart 8: Exchange stablecoin balances hit a record high and the market is actually not short of funds.
Chart 9: Current SSR is below 1 standard deviation and there may be a demand for higher prices.
Ⅳ. Afternoon Outlook
The market is pricing the external macro environment such as the Fed’s strong hawkish expectations. Although the current market price has corrected, the decline has been much weaker than in January, indicating that the market is taking into account various risk events such as the Fed’s interest rate hike. The technical trend will not be particularly pessimistic. The 3-day RSI breaks through the downtrend line, and the MACD also has a golden cross. On-chain fundamentals show that Bitcoin is still flowing out of exchanges, Hodler’s strong demand continues, and there is enough money in the market. This report believes that the current should not be overly pessimistic, after short-term shocks and corrections, it is expected to continue to maintain the upward trend.