Weekly Summary：
1. The US 10-year Treasury bond interest rate(US 10Year TIPS) is still rising, and the fear of higher inflation and the macro policy uncertainty it brings has intensified the correction of risk assets, and Bitcoin price will still be suppressed by this in the short term.
2. The Bitcoin market has strong liquidity, freer fund flow, and relatively few policy restrictions. Compared with U.S. stocks, its risk pricing is more adequate, and the time for market reversal is earlier. We believe that the recent weakness in the market, especially the sharp correction of Bitcoin, is pricing in the uncertainty of the Fed’s interest rate hike and balance sheet reduction in advance. Drawing on historical laws, BTC may bottom out earlier than the U.S. stock market.
3. There are serious signs of oversold BTC at present. There are large buying orders between $30,000 and $32,000, which can be regarded as a support level in the short term. The current contract market risk has eased relative to last week. The size of BTC’s open positions has dropped to the level on December 4, and the funding rate has also turned negative.
4. In terms of fundamentals, the Bitcoin balance of exchanges began to see a large net outflow again last week, with 20,000 Bitcoins outflows in a single week. The current Bitcoin price has fallen to the shutdown price of some miners, but the miners have not sold off significantly and are still actively increasing their holdings.
5. Generally speaking, 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. 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 change in the Fed’s policy, the timing of interest rate hikes and balance sheet reductions has been advanced, leading to successive panics in the market. Third, the contract leverage has remained high, increasing the pressure of long liquidation during the pullback, making it more difficult for prices to rise. This correction comes at the end of the year, and it is a stage for many institutions to withdraw funds. After entering 2022, the return of funds has not appeared so quickly. Coupled with the influence of negative factors, the market’s wait-and-see mood is very strong, so there has been a longer and larger deviation.
6. Short-term market price fluctuations are affected by multiple factors, but long-term prices will be subject to the constraints of supply and demand. When supply and demand reach a critical state, and the uncertainties of the market are gradually settled, prices will return. From the perspective of technical trends, this report believes that on the premise that the fundamentals have not deteriorated, the price range of $30,000 — $60,000 will constitute a volatile box, which will become the midway pullback and wash area of the current bull market cycle. There is still uncertainty in the market in the first quarter (the specific interest rate hike path will be announced after taper in March), so the uncertainty will need to wait until the second quarter of 2022. This report believes that after the uncertainty has landed, the market downturn will gradually weaken and return to the main theme of value-led prices.
1. External macro environment
The market’s expectation of high inflation still shows no sign of reversing. The real interest rate of the 10-year US Treasury bond (10Y real yields) continues to climb and is close to the accelerated downward pressure level of -0.5% in 2020. The current value is at -0.624%.
The real interest rate is equal to the nominal interest rate minus the inflation rate. The rise in real interest rates also reflects the fact that the current high inflation rate cannot offset the increase in nominal interest rates. Therefore, it is necessary to pay close attention to the monthly inflation data such as CPI. If inflation data continues to exceed market expectations, the intensity and speed of Fed rate hikes and balance sheet reduction will be stronger, which will be very unfavorable to the performance of high-growth risk assets.
Chart 1: The real interest rate of 10-year Treasury bonds continues to rise, reflecting the market’s continued high inflation expectations.
Affected by the rise in real interest rates, the market is worried that the Fed may raise interest rates and shrink its balance sheet ahead of schedule, and the timing of interest rate hikes will be advanced from June 2022 to March 2022, and the expected value of interest rate hikes will be raised from 25bp to 50bp; From the second half of 2022 to May 2022. Since there was a 2-year interval between the rate hike and the reduction of the balance sheet in 2017, the minutes of the meeting released this time seem to break this mode of operation, shortening the time interval between the rate hike and the balance sheet reduction. In addition, since the last round of balance sheet reduction triggered a liquidity crisis in 2018, the discussion on the balance sheet reduction after the release of the minutes of this meeting seems to be fierce. Various unfavorable factors accelerated the panic in the market, causing US stocks to fall sharply from their highs. The technology sector Nasdaq has fallen 13% from its highs, and there is still no sign of stopping the decline in the short term.
Chart 2: The rise in inflation expectations has caused huge uncertainty in the market about the Fed’s early tightening and its tightening intensity, triggering a major adjustment in risk assets such as the Nasdaq.
As a risk hedging in the traditional legal currency system, Bitcoin has the property of hedging. Bitcoin is also an emerging product, and its growth is also more prominent, so it also has the attributes of a risk asset. Affected by the pullback of US stocks, the characteristics of Bitcoin’s linkage with US stocks have significantly strengthened in the near future. The 20-day rolling correlation coefficient between Bitcoin and the Nasdaq index has recently risen sharply to 0.8.
Chart 3: Bitcoin has the attributes of a risky asset, and its correlation with Nasdaq has been significantly strengthened recently, and the 20-day rolling correlation coefficient exceeded 0.8.
Short-term Bitcoin and US stocks are still affected by the Fed’s tightening expectations, and the market risk appetite is still weak. To be precise, the market is confused by the uncertainty of the policy. Since the Fed has not yet announced the exact path of raising interest rates and shrinking its balance sheet, the reason for the market correction is more caused by the panic caused by the uncertainty of speculating on the policy. Therefore, we believe that the market panic may gradually disappear after the policy uncertainty is settled. Specifically, the Federal Reserve’s interest rate meeting (FOMC) in January and March is particularly important, which will guide the market’s expectations and need to pay close attention to the FOMC meetings at the end of January and March.
From the perspective of the pricing of uncertainty in the two markets of Bitcoin and the US stock market, due to the high liquidity of Bitcoin, its pricing of uncertainty is more adequate. When there is extreme sentiment in the market, Bitcoin tends to end pricing ahead of U.S. stocks. Taking the March 12 event in 2020 as an example, Bitcoin bottomed out 2 weeks earlier than the S&P 500. By the time the S&P 500 bottomed, Bitcoin had risen 40% from its lows. We believe that the recent market correction, especially the sharp correction of Bitcoin, is pricing in the uncertainty of the Fed’s interest rate hike and balance sheet reduction in advance, and may bottom out earlier than the U.S. stock market.
Chart 4: The Bitcoin market is pricing in uncertainty ahead of U.S. stocks, and Bitcoin bottomed out 2 weeks ahead of the S&P 500 in March 2020.
Ⅱ. Market Trend Analysis
Judging from the technical trend level, when the daily level RSI enters below 30, the market is oversold. At present, BTC daily level RSI fell to near 20, and the daily level RSI fell to near 20 only three times in the last three years, respectively in early 2019, October 2019 and March 2020, corresponding to the bottom of $3,100, the bottom of $6,000 and the bottom of $3,800. Short-term oversold signs are more evident, and the time window for oversold repair is gradually approaching.
Chart 5: The Bitcoin market is pricing in uncertainty ahead of U.S. stocks, with Bitcoin bottoming 2 weeks ahead of the S&P 500 in March 2020.
There is currently a buying order wall support at $32,000 and $30,000, with the order wall near $30,000 lasting longer and the order wall thicker, with support near $30,000-$32,000 in the short term.
Chart 6: There is strong recent buying order support around $30,000-$32,000.
III. BTC on-chain Data Analysis
When the market fell sharply last week, the exchanges did not have a significant net inflow, but instead the withdrawals dominated. Last week the exchange BTC balance started to show signs of reduction, with a net withdrawal of about 20,000 Bitcoins in a single week. This indicates that there are still big funds willing to buy vigorously when the price is falling. The current exchange balance is about 2.53 million Bitcoins, accounting for about 13.4% of Bitcoin circulation.
Chart 7: Last week, the market fell and the exchange withdrawal increased, and the exchange balance showed a downward trend again.
While the market fell last week, the open position trading volume of the BTC network also experienced a rapid decline. The size of open position has returned to the level of December 4, 2021, and continues to decline. For a market with high leverage risk, this momentum is a positive sign, indicating a gradual decline in leverage risk in the market.
Chart 8: The open contract position of BTC began to decline rapidly, and the size of the contract position returned to the level of December 4, 2021, and the contract market risk is gradually weakening.
At the same time, we have also observed positive signs in the funding rate of BTC perpetual futures contracts as the size of BTC open position has declined. The current BTC perpetual futures contract funding rate is negative, and the enhanced funding rate is -0.003%. This momentum is an obvious change since BTC fell below the important psychological threshold of $40,000 last week, indicating that there are many investors in the contract market with long positions and these investors believe that $40,000 is an important support. When $40,000 was broken, they chose to close their positions, resulting in a decrease in long funds, an increase in short funds, and a negative funding rate.
Usually, when the funding rate is negative, it often means that most investors in the market are bearish and short, and the number of short sellers and the scale of funds in the market have reached extremes. When most people in the market are short, if the price rises, the short-selling funds tend to buy and stop the loss. At this time, the rise becomes. On the contrary, if most people are buying long, when the market rebounds a little, they will close their positions and exit at a profit, and the longs will become the biggest obstacle to the rise. By observing changes in funding rates, this market sign can be captured, and it also shows that the time window for the market to recover and recover is approaching.
Chart 9: BTC perpetual contract funding rates started to turn negative from the time they fell below $40,000 and the bearish and shorting groups started to increase.
With the price moving downward rapidly, the current Bitcoin price has gradually come to be near the miners’ shutdown price. The chart below shows the BTC mining cost band for miners produced by BTC on-chain analyst Charles Edwards. The current mining cost range for miners is around the $20,000-$35,000 range. The current BTC price has slightly touched the upper edge of the cost band position.
Chart 10: The price touches the shutdown Bitcoin price for some miners, and the current mining cost for the miner community is between about $20,000 and $35,000.
It is worth noting that this round of price corrections did not lead to a sharp sell-off among miners, but instead increased their holdings against the trend. The current size of the miners’ holdings is around 1.825 million Bitcoins.
Since the Bitcoin block reward is not affected by the increase or decrease of the total computing power, the increase in the total computing power leads to an increase in the cost of computing power per unit of Bitcoin. The pressure on the early Bitcoin mining machines has increased, and the power of update iterations has increased, which will lead to an overall increase in mining costs. When the mining cost is higher than the market price, some Bitcoin-based miners will choose to shut down and buy Bitcoins in the market, further raising the market price until the mining cost is lower than the market price. Another part of fiat-based miners do not buy Bitcoins in the market after shutdown, but their shutdown has no effect on the output speed of Bitcoin, while fiat-based miners are usually the main force of “mining, withdrawing, and selling”. The output is used for selling, which means that the selling pressure will be further reduced, which can stabilize the price of Bitcoin to a certain extent.
Chart 11: Miners actively buy Bitcoin against the trend in the downtrend.
Illiquid supply (illiquid supply) reflects the number of Bitcoins in the address where the ratio of cumulative outflow to cumulative inflow is less than 25%. When an address is called Illiquid supply, it is an “accumulation address” to some extent, reflecting that the Bitcoin held by the address holder is intended to be in the “HODL” state. When most of the chips in the market are 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 that the change in the supply and demand relationship in the trading market gradually turns to the demand force being greater than the supply force. Conversely, when the illiquid supply indicator decreases, it reflects that the supply force in the trading market is greater than the demand force.
The 2017 bull market and the 2020 bull market, fluctuations in illiquid supply and prices reflect this trend. In the fourth quarter of 2017, when illiquid supply continued to rise, the price also rose to a high of $20,000. During the middle callback process, the two have the same frequency callback. Until December 2017, when the illiquid supply stopped increasing, it turned down all the way, and the BTC price also fell all the way. Both were generally down in the 2018 bear market. The same is true for the bull market in 2020, with illiquid supply rising all the way, and the BTC price rising from $10,000 to $64,000. After that, in April 2021, the illiquid supply stopped increasing and began to turn downward, and then BTC also turned downward.
Chart 12: illiquid supply showed a rhythm with Bitcoin price during the 2017 bull market and the 2018 bear market.
Chart 13: From the fourth quarter of 2020 to the first half of 2021, illiquid supply showed the same frequency rhythm as Bitcoin price.
The above situation diverged after November 2021. After the BTC price reached $69,000, it turned around and fell to the current $35,000, with a 50% retracement. In the same period, illiquid supply grew against the trend, adding 100,000 Bitcoins in 2 months, and did not sell off in the recent sharp drop in market prices, but continued to hit new highs. The current illiquid supply is 14.41 million.
Chart 14: Significant divergence between illiquid supply and Bitcoin price after November 2021.
Under normal circumstances, there is a deviation between illiquid supply and price for a certain period of time, but then the price often returns to value. The divergence time is longer and the magnitude is more obvious. I think it has a lot to do with the multiple major bad news 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 change in 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, increasing the pressure of long liquidation during the pullback, making it more difficult for prices to rise. 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.
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. Investors are therefore required to remain patient and focused.
In addition to the continued growth of illiquid supply, Long Term Holder Supply has also remained stable, with no visible signs of selling from this group.
Chart 15: Long Term Holder holdings have grown steadily, returning to near an all-time high of 13.4 million.
Ⅳ. Afternoon Outlook
This report believes that the two-month-long pullback in this round is closely related to external macro events, and the exchange contract leverage has played a role in suppressing the flames in this process. The panic in the market stems from concerns about the uncertainty of macroeconomic policies in the United States. The uncertainty is priced through a violent decline. This effect is event-driven and has the characteristics of short-term and periodic. When this uncertainty is determined, the market pricing will tend to end, that is, the market price includes uncertainty (price in). Taking into account the current balance of supply and demand in the market is still evolving in the direction that the supply force is less than the demand force (illiquid supply continues to increase). This report believes that the value of BTC is seriously undervalued, the price is oversold, and there is a need to repair the rebound.
From the perspective of technical trends, this report believes that on the premise that the fundamentals have not deteriorated, the price range of $30,000 — $60,000 will constitute a volatile box, which will become the midway pullback and wash area of the current bull market cycle. There is still uncertainty in the market in the first quarter (the specific interest rate hike path will be announced after taper in March), so the uncertainty will need to wait until the second quarter of 2022. This report believes that after the uncertainty has landed, the market downturn will gradually weaken and return to the main theme of value-led prices.
