Bitcoin Market Report in January

Preface

The January FOMC meeting revealed a “hawkish” tone, suggesting a possible (but uncertain) rate hike in March, as well as discussions of an early balance sheet shrinkage. The macro environment tends to be depressed, which has caused the US stocks and Bitcoin prices to be affected to varying degrees. However, after the FOMC meeting, although the correlation coefficient is still high, the correlation coefficient between BTC and the Nasdaq index and the S&P 500 index showed signs of peaking and turning down. BTC may be decoupling from the US stock market, although the strength is relatively weak, but if it can continue, it is a good sign.

In January, there were many withdrawals on ZB exchange again, with a net withdrawal of 34,000 Bitcoins in a single month. At present, LTH supply is still rising slightly, and has rebounded to around November 2021. The number of positions held is about 13.4 million, indicating that LTH has not yet started a large distribution.

The NUPL indicator, which measures the degree of market mania and downturn, continued to fall at 0.36, corresponding to a market sentiment of “anxiety and doubt.” However, the dormant indicator Entity-Ajusdted Dormancy Flow indicator indicates that the current area has entered the bottom area, indicating that BTC is seriously undervalued and the valuation is very attractive.

From the perspective of market funds, although the funds at the beginning of the year were not abundant, global crypto funds continued to increase their holdings at the end of January, which is another sign of buying back after a slight reduction of 4–5K BTC since the end of last year. At the same time, a huge amount of BTC has flowed into the whale wallet around $36k-$38K, and the frequency has gradually accelerated, reflecting that large funds in the market are still accumulating.

From the perspective of institutional positions, the institutions (including funds, enterprises, countries and governments, etc.) that have publicly held BTC in the world currently hold a total of 1.52 million bitcoins, and their positions remain stable. In the primary market, miners are still actively deploying, and the computing power in January remained at 160EH/s-200EH/s. Miner groups are also accumulating BTC, with BTC miner wallet balances rising to the highest level since January 2021.

This report believes that the 2-month-long pullback in this round is closely related to external macro events, and the exchange contract leverage has played a suppressing role 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 settled, the pricing of the market will tend to end, that is, the market price contains uncertainty (price in). Considering that 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.

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 is settled, the market downturn will gradually weaken, and the market is expected to gradually become clearer.

Ⅰ. Macro environment

In January, the Fed’s FOMC meeting discussed matters related to the normalization of monetary policy (interest rate hike) and the reduction of the balance sheet this year. Powell hinted at the press conference that interest rates may be raised in March this year, and announced the guidelines for shrinking the balance sheet. The degree of hawkishness exceeded expected. After the press conference, the U.S. stock market and the cryptocurrency market experienced corrections to varying degrees, but the cryptocurrency led by Bitcoin did not have a major linkage with the U.S. stock market in the following days. Judging from the linkage between BTC and U.S. stocks, the linkage effect between BTC and U.S. stocks reached a staged peak in January, and the 20-day rolling correlation coefficient between BTC and the S&P 500 and Nasdaq reached a highly positive correlation level close to 1. However, recently, the rolling correlation coefficient between Bitcoin and U.S. stocks has shown signs of peaking and falling. This sign began after the FOMC meeting in January, but the current correlation is still high, so the follow-up still needs to be closely watched.

Chart 1: The correlation between Bitcoin and U.S. stocks peaked in January, but the correlation coefficient has recently shown signs of falling back.

At present, the correlation between BTC and U.S. stocks has begun to weaken to a certain extent, which is an alleviation of the expected panic of interest rate hikes and liquidity reduction caused by the recent high inflation, indicating that the current BTC price has already priced the liquidity reduction to a considerable extent. If the timing and intensity of interest rate hikes are weaker than expected or flattened with expectations, the price of BTC will gradually get out of the current predicament.

Ⅱ. On-chain data

1. Exchange deposit and withdrawal

(1) BTC exchange traffic

In January 2022, the Bitcoin reserve balance of centralized exchanges continued to maintain a downward trend. During this period, the BTC reserve balance of centralized exchanges dropped from 2.559 million to 2.525 million, and the net withdrawal of Bitcoin in a single month exceeded 34,000.

Chart 2: The BTC reserve balance of centralized exchanges showed a downward trend in January, with 2.525 million BTC remaining in the exchange.

Overall, the exchange’s BTC reserve balance is still at a low level, which is related to the intensive accumulation of funds at a low level. The main force behind this trend has come from long-term investors, who continued to hold high positions, adding slightly in January. Currently, long-term holders hold about 13.39 million Bitcoins, down 100,000 Bitcoins from a high level. Since long-term holders usually collect chips in a bear market or a volatile market, and distribute chips to take profit in a rising market, the distribution stage has not yet been reached.

Chart 3: Short-term holders’ holdings and long-term holders’ holdings continue to diverge.

Chart 4: Long-term holders usually start the chip distribution process during the bull market process and have not yet reached the distribution stage.

BTC on-chain metrics

Bitcoin NUPL (Net Unrealized Profit/Loss) reflects the situation between unrealized profit and unrealized floating loss. When the indicator is at 0.5, it means that the total unrealized profit in the total circulating supply of Bitcoin is equal to 50% of the total market value of Bitcoin. Historically, NUPL = 0.5 has been a strong support level in bull markets, as was the case in the 2013 bull market and in the 2017 bull market.

When the indicator is above 0.75, market sentiment is characterized by “greed”, which is a periodical or cyclical top zone. At present, the indicator has fallen back to 0.36, and the market sentiment corresponding to this position is characterized as “doubtful”. In terms of the scale of unrealized profits and the corresponding market sentiment characteristics, the market sentiment is relatively anxious.

Chart 5: BTC NUPL (Net Unrealized Profit and Loss) is currently at 0.36, emotionally in a stage of doubt and anxiety.

Chart 6: BTC NUPL (net unrealized profit and loss) reveals a staged top or a large cycle top when it exceeds 0.75.

In a previous report, the Entity-Adjusted Dormancy Flow was shown. Because the CDD is not high, that is, the current sellers sell less Bitcoins, the sellers hold Bitcoins for a short time, and the trading volume (Volume) is not high, resulting in a low Dormancy Flow.

This situation usually occurs at the bottom, because the giant whale do not sell, and the long-term holders do not sell, and the market transactions are sluggish. At this time, almost small retail investors are selling, and the sales volume is not much, usually a big bottom. By observing the performance of Dormancy Flow, we have only entered the green zone 6 times in history, and the first 5 times were all big bottoms.

Chart 7: Entity-Adjusted Dormancy Flow reflects BTC entering undervalued and oversold territory.

According to the data of whalemap, between 36,000 USDT and 38,000 USDT, a large amount of BTC has flowed into Large wallet. Judging from the characteristics, this is a positive signal that giant whales are holding, and the holding actions of giant whales seem to be becoming more frequent. However, the current price is still lower than the STH-realized price of short-term holders. Usually in a bull market, this short-term holder’s cost of holding Bitcoin is an important support level for the wash, and the current price is at a support level. Below, the short-term is still unfavorable. When the price returns to the STH-realized price, the new upward trend will gradually become clear.

Chart 8: Whale wallets began to see a large amount of BTC accumulation.

Chart 9: The Short-Term Holder Cost Line Still Constrains Prices.

2. Institutional positions

In January, the holdings of various institutions around the world remained stable, with a total of 1.52 million bitcoins, of which 809,000 bitcoins were held by ETF funds, 271,000 bitcoins were held by the national government and public servants, and 174,000 bitcoins were held by private companies. , the public company holds 255,000.

Chart 10: A breakdown of institutional holdings of Bitcoin publicly held globally (by type of institution).

Global crypto funds have slightly reduced their holdings in this round of decline, and the number is around 4,000–5,000. However, as prices stabilized, funds from global crypto funds showed signs of entering the market again, buying back about 2,000 bitcoins in early February.

Chart 11: Bitcoin holdings of global fund institutions in January.

3. Computing power market

In January, the computing power of the entire Bitcoin network remained in the range of 160EH/s-200EH/s. As of the publication date of this report, the computing power of the entire Bitcoin network dropped from a high of around 220EH/s to around 200EH/s.

Chart 12: The computing power of the entire BTC network hovered around 160eh/s-200eh/s in January.

In January, the miner group increased their holdings of BTC significantly. The current miner wallet balance is about 1.862 million, and the miner wallet balance is approaching a new high since January 2021.

Chart 13: Miner groups increased their BTC holdings significantly in January.

Ⅲ. Afternoon Outlook

This report believes that the 2-month-long pullback in this round is closely related to external macro events, and the exchange contract leverage has played a suppressing role 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 settled, the pricing of the market will tend to end, that is, the market price contains uncertainty (price in). Considering that 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.

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 is settled, the market downturn will gradually weaken, and the market is expected to gradually become clearer.

IV. Report Conclusion

The January FOMC meeting revealed a “hawkish” tone, suggesting a possible (but uncertain) rate hike in March, as well as discussions of an early balance sheet shrinkage. The macro environment tends to be depressed, which has caused the US stocks and Bitcoin prices to be affected to varying degrees. However, after the FOMC meeting, although the correlation coefficient is still high, the correlation coefficient between BTC and the Nasdaq index and the S&P 500 index showed signs of peaking and turning down. BTC may be decoupling from the US stock market, although the strength is relatively weak, but if it can continue, it is a good sign.

In January, there were many withdrawals on ZB exchange again, with a net withdrawal of 34,000 Bitcoins in a single month. At present, LTH supply is still rising slightly, and has rebounded to around November 2021. The number of positions held is about 13.4 million, indicating that LTH has not yet started a large distribution.

The NUPL indicator, which measures the degree of market mania and downturn, continued to fall at 0.36, corresponding to a market sentiment of “anxiety and doubt.” However, the dormant indicator Entity-Ajusdted Dormancy Flow indicator indicates that the current area has entered the bottom area, indicating that BTC is seriously undervalued and the valuation is very attractive.

From the perspective of market funds, although the funds at the beginning of the year were not abundant, global crypto funds continued to increase their holdings at the end of January, which is another sign of buying back after a slight reduction of 4–5K BTC since the end of last year. At the same time, a huge amount of BTC has flowed into the whale wallet around $36k-$38K, and the frequency has gradually accelerated, reflecting that large funds in the market are still accumulating.

From the perspective of institutional positions, the institutions (including funds, enterprises, countries and governments, etc.) that have publicly held BTC in the world currently hold a total of 1.52 million bitcoins, and their positions remain stable. In the primary market, miners are still actively deploying, and the computing power in January remained at 160EH/s-200EH/s. Miner groups are also accumulating BTC, with BTC miner wallet balances rising to the highest level since January 2021.

This report believes that the 2-month-long pullback in this round is closely related to external macro events, and the exchange contract leverage has played a suppressing role 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 settled, the pricing of the market will tend to end, that is, the market price contains uncertainty (price in). Considering that 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.

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 is settled, the market downturn will gradually weaken, and the market is expected to gradually become clearer.

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