1. At the beginning of 2022, the market’s expectations of the Fed’s liquidity tightening has dragged down the BTC price to a certain extent. However, considering that risky assets have sufficient time for the Fed’s tightening in 2021 to be included in prices — especially when US stocks have recently reached new highs — it shows that the reason for the correction may come more from the cryptocurrency market itself.
2. In previous weekly reports, we have repeatedly emphasized that the fundamentals of BTC have not deteriorated, focusing our attention on the derivatives market. Due to the high contract position holdings and the long-short ratio, the funding rate has not significantly turned into a minus. In this decline, due to the heavier sentiment of the contract position longs, it has become an important reason to suppress the BTC price.
3. The fundamentals of the spot market are still showing a healthy trend. ZB exchange has continued the trend of net withdrawals as a whole. The illiquid supply has reached a record high of 14.4 million. The difference between the long-term holder supply and the short-term holder’s holdings has reached the highest in history — 9.6 million. The imbalance between supply and demand in the spot market is still continuing.
4. The recent political turmoil in Kazakhstan, the world’s second-largest mining country, caused the network to be disconnected for a period of time, consequently causing the entire network computing power of BTC to be affected to some extent. However, judging from the data, the computing power of the network has now stabilized near a record high of 180EH/s, and the disconnection of the network does not seem to have had a great impact on the computing power of the entire network itself. The miner group has also seen a huge increase in holdings recently, and there is no obvious selling pressure.
5. The market panic has reached the level of March 12, 2020, and the FGI has dropped to 10. Historically, every time it entered below 20, the market was usually oversold. Although the short-term market may continue to decline under pessimism, it is increasingly likely that the pullback is close to the bottom.
6. Considering that there are still huge holding orders in the BTC contract market, and the leverage ratio of exchange contracts remains high, there will still be large fluctuation risks in the short term, which needs to be paid close attention. Looking back at the fundamentals, the current dynamic flow structure of the imbalance between supply and demand of chips in the entire market has not changed due to the recent market decline, especially the core indicators such as Illiquid supply and Long term holder supply. The fundamentals still show a positive trend, indicating that the current market is showing signs of being oversold and should not be overly pessimistic about the coming quarters.
I. BTC Fundamental Analysis:
Bitcoin prices have continued to fall since BTC hit a new all-time high on November 9. The main reason comes from the market’s panic over the tightening of the Fed’s monetary policy, and the withdrawal of blockchain-related institutions in mainland China at the end of 2021. Prices have continued to decline recently, mainly due to expectations of a liquidity crunch from the Federal Reserve. Market participants believe that the Fed’s rate hike and potential balance sheet shrinkage could negatively impact risk assets. Risk assets such as cryptocurrencies and U.S. stocks will be affected to varying degrees starting in 2022.
Recently, U.S. stocks have not experienced a sustained and sharp decline due to the minutes of the Federal Reserve meeting. Conversely, the S&P 500 and Dow Jones reached new all-time highs on January 4, 2022. This shows that the traditional capital market is psychologically prepared for the Fed’s future monetary policy actions, and there is no extreme panic similar to the cryptocurrency market.
The correlation between U.S. stocks and Bitcoin prices has strengthened to a certain extent in the past six months. There is no huge panic in the U.S. stock market right now, but the panic in the cryptocurrency market is approaching the level of panic when it collapsed in mid-2021. The explanation for the pullback may have more to do with the cryptocurrency market itself.
In previous issues of the weekly report, we have repeatedly highlighted the trend of healthy BTC fundamentals. The current spot market has not shown a trend of fundamental deterioration due to price corrections. Therefore, we turned our attention to the BTC futures market.
The high open interest in the BTC futures contract market causes the contract leverage to fluctuate and rise (exchange contract leverage = exchange contract position market value / exchange BTC reserve market value). This shows that more and more investors are betting on high leverage in derivatives trading. Usually, when the leverage ratio of exchange contracts increases, the risk of large market fluctuations also increases. The leverage ratio usually decreases as the price falls, and the price rises again.
In this drop, although the price fell by a large margin, the leverage ratio of the exchange contract did not drop but rose. Combined with the fact that the long-to-short ratio (the ratio of long-to-short holders) on the exchange has risen, and the funding rate has not shown a significant minus (maintaining a small positive number), we can think that in the second round of decline, there were more people who bought long orders. The liquidation of longs during price declines is also a big reason for the pressure on prices.
As futures open interest is still high and the leverage ratio of exchanges remains high, there is still a large risk of price fluctuations in the short term.
Chart 1: The leverage ratio of open contracts on exchanges remains high, and there is still a large risk of short-term volatility in the market.
Chart 2: The funding rate has not entered the minus range, indicating that there are currently more long-sellers, and the sentiment of holding orders is much.
Returning to the spot market, the amount of Bitcoin withdrawn by exchanges throughout 2021 is significantly reduced compared to 2020. This is one of the reasons why the market has been relatively weak throughout 2021. Due to various reasons such as Chinese regulations, the withdrawal trend of exchanges has suffered to a certain extent. However, it is worth noting that the chip structure of the current market still exhibits the characteristics of shifting from a liquid market to an illiquid market. Bitcoin balances on exchanges continued to flow out, and the trend of withdrawals generally continued.
Chart 3: The BTC reserve balance of centralized exchanges has generally maintained a volatile downward trend.
The flow direction of market chips can also be captured by the growing trend of the number of illiquid Bitcoin. When the cumulative outflow/cumulative inflow of an address is < 25%, this address can be considered as an address with a lower liquid state (illiquid). Since the overall supply is relatively limited, how many chips are available for trading in the entire market does not depend on how many people in the market are willing to buy, but how many chips in the market are willing to release them into the trading system. The illiquid supply is precisely that part of the market stock that is not released into the trading system.
The more Bitcoin in the illiquid state, the fewer tradable chips in the market, and the scarcity of chips gradually increases. In the case of constant or even increased demand, the imbalance between supply and demand will force the Bitcoin price to rise again. This transmission mechanism does not act on the Bitcoin price in a short period of time, but over time, the state of supply and demand imbalance will be transmitted to the price.
Chart 4: The number of Bitcoin in illiquid supply topped 14.4 million, a new all-time high.
Another angle of supply and demand imbalance is the Bitcoin holding deviation of long-term and short-term holders. The difference between the Bitcoin holdings of long-term holders and short-term holders forms a “smart money gap”, which currently reaches 9.6 million. Due to the time of long-term holders (UTXO has a long duration), the current holdings are close to 13.5 million, an increase of more than 1 million compared to 2021. It can be considered that this group has been collecting chips dispatch. Since long-term holders typically distribute in bull markets, we can assume that the main upswing phase is yet to come.
Chart 5: The difference between Hodler’s holdings and short-term holders’ holdings has reached the highest level in history (9.6 million), and Holder’s chip collection continues.
The NVT Signal indicator also points to the conclusion that BTC is underestimated.
NVT Signal (NVTS) = Network Value / 90d MA of Daily Transaction Value,
Network Value refers to the market value of Bitcoin. Transaction Value refers to the value transmitted on the payment network, which can be roughly understood as the market value corresponding to the amount of transmission that is willing to use the Bitcoin blockchain for network transmission, or understood as the fair value. Divide the two to get the ratio of market value to transmission value. If the market value is lower than this ratio, it is considered that the current pricing is lower than the pricing of network transmission generally recognized by the market, and the price is underestimated. The 90-day average is used to smooth out abnormal values.
Currently, the NVTS indicator has fallen below the normal value of -2 standard deviations. There have not been many such major downward corrections in history, and each time it has occurred, it has risen to varying degrees.
Chart 6: NVTS fell below -2 standard deviations, and the value of Bitcoin was seriously underestimated.
Despite the recent political turmoil in Kazakhstan, the second largest mining country in the world, and the rumors that miners in the crypto market in Kazakhstan were selling off their bitcoin held, we have observed from the data that the entire miner community has not sold off significantly, but instead has recently increased their holdings significantly. The reasons for the massive holding by the miner community are complex, but at least it shows that there is not a huge sell-off in this community at the moment.
Chart 7: Miner groups have increased their Bitcoin holdings significantly recently.
Although Kazakhstan has recently experienced a network shutdown, which once affected the computing power of the entire Bitcoin network, the impact does not seem to be serious at present. The average computing power (7Dma) of the entire network is still near a record high of 183EH/s. Stan’s disconnection did not lead to a massive collapse in computing power similar to China’s clearing of mining.
Chart 8: The average computing power of the entire BTC network remains around 180EH/s, which is not affected by the political turmoil in Kazakhstan.
Ⅱ. Afternoon Outlook
Market sentiment reflected that the Fear and Greed Index (FGI) fell to 10 this weekend, and the overall market sentiment was extreme panic. From historical experience, when market sentiment falls below 20, it is usually in the stage of preparing to reverse the market.
Considering that there are still huge holding orders in the BTC contract market, and the leverage ratio of exchange contracts remains high, there will still be large fluctuation risks in the short term, which needs to be paid close attention.
Looking back at the fundamentals, the current dynamic flow structure of the imbalance between supply and demand of chips in the entire market has not changed due to the recent market decline, especially the core indicators such as Illiquid supply and Long term holder supply. The fundamentals still show a positive trend, indicating that the current market is showing signs of being oversold and should not be overly pessimistic about the coming quarters.
Chart 9: The panic and greed index(PGI) fell to 10, the market is extremely panic, or is preparing for a rally.
