Preface
United States Federal Reserve Chairman Jerome Powell recently stated that current U.S. inflation is not temporary, and may shorten the Taper's time cycle in coming months. Even so, by the time the Federal Reserve raises interest rates it still needs to assess the full employment data - only then will it set out a path of timing and numbers.
The last round of interest rate hikes and balance sheet reduction cycles were carried out at the same time, however it did not hinder the Bitcoin bull market. This indicates that the core element that determines the Bitcoin bull market cycle does not come from the monetary policy of the Federal Reserve, but the fundamentals of Bitcoin itself - namely supply and demand. The Fed's monetary policy is only an external cause, and Bitcoin itself is an internal cause; only when the Bitcoin itself is reversed will the external cause of Federal Reserve monetary policy play a role.
In terms of fundamentals, the Bitcoin exchange balance continues to maintain an outflow trend. This indicates that the market's demand for BTC is still strong. From the perspective of BTC holders, the number of long-term holders maintained a significant increase in November, and judging from indicators such as long-term holder supply shock ratio and CDD this group has just started to distribute. The supply-demand imbalance is gradually being broken and prices are expected to be revalued soon, with a violent upward movement expected to happen in the next few months.
The flow of ETH on exchanges is also facing a clear outflow trend. The scale of ETH locked in DeFi and ETH2.0 continues to grow steadily, which provides a clear boost to the decline of ETH circulation - coupled with the relatively high popularity of GameFi, Metaverse and other sectors in recent months, which have played a significant role in boosting of ETH. It is expected to follow BTC to enter the second wave of rising prices in the bull market.
Global institutional investors increased their holdings of BTC significantly in October. Fund institutions increased their holdings by about 10,000 Bitcoin, and public companies also increased their holdings slightly. At present, these well-known institutional investors do not have a specific stand; however they are constantly pouring in new funds. It shows that institutional investors are very optimistic about the market outlook.
The group of miners continues to actively deploy the mining business. The computing power of the entire BTC network is hovering near a new high (135eh/s-180eh/s), and the balance in the miner's wallet has also reached a new high since the second half of the year, demonstrating that miners are clearly willing to hold Bitcoin.
From a technical perspective, indicators such as UB max bias ratio and 30-day cumulative return rate reflect that the big cycle has not yet peaked. Given that the fundamentals remain healthy, this report continues to maintain an optimistic judgment on the market outlook in the next few months.
The Macro Environment
Jerome Powell's reference to accelerating Taper at the November 30 Congressional hearing effectively took rhetoric about ‘temporary inflation’ out of the equation. That is, the Fed no longer considers inflation to be temporary, and that inflation will be sustainable for a longer period of time. This report believes that Powell's wording at the meeting may have other subtle intentions. Taking a compromising stance on inflation does not mean that the Fed will take a big step towards policy tightening, but is more likely to express a substantial shift in the Fed's perspective on inflation risk through the move to compress the time cycle of Taper.
Since the market had previously been questioning the divergence between the data on inflation and the Fed's statement, people were hesitant about the issue of pricing inflation - until the market later stopped believing the Fed's 'temporary inflation' rhetoric and the market re-priced in inflation. Now that Powell has admitted that inflation is not a temporary situation, the most extreme period of market expectations of tightening may have passed.
This does not mean turning to dovishness or returning to easing, but rather a more rational market view of tightening.
Under the premise that "monetary policy is incapable of dealing with supply problem”, Powell's move is likely to have won room for policy breathing, and will draw the market's attention back to the job market. Powell has already promised at the October FOMC meeting to assess the specific meaning of "full employment" in Q1 2022, which may include specific values such as how much the unemployment rate should reach and how much labor participation should be. Therefore, only after full employment is defined, the path of interest rate hikes will gradually surface, not now. Even if the Fed taper (reduce currency), tighten its balance sheet (recycle currency), and raise interest rates, it will not necessarily have a fatal impact on Bitcoin's cyclical trend.
Chart 1: 2017, the U.S. was in a cycle of interest rate hikes, which did not have an impact on the Bitcoin bull market
Chart 2: The Fed’s balance sheet tapering from 2016, which continued until June 2019, did not prevent the big Bitcoin bull market in 2017
The first of the two charts above shows the U.S. Federal benchmark rate during the Fed’s last rate hike cycle. The interest rate hike began in early 2016 and continued through 2019 — during this period, risk assets (S&P 500) did not enter a bear market due to these hikes, with the S&P 500 basically up throughout the hike cycle. It is worth noting that Bitcoin also accompanied a huge bull market during the last interest rate hike cycle.
The second chart shows the first half of the Fed’s last balance sheet drawdown cycle, which began in 2015 and lasted until June 2019. During the balance sheet drawdown cycle, Bitcoin saw a second super-bull market, with the size of the Fed’s balance sheet declining throughout the process. Bitcoin was in a bull market during that time until the pace of the drawdown accelerated after 2018 to end the bull market itself.
Taper, balance sheet drawdown, and interest rate hikes are not the core factors that determine the general trend of the Bitcoin cycle. Even if interest rate hikes and taper, they are only external factors. What determines the rise of Bitcoin lies in its own intrinsic fundamentals (supply and demand), and external factors will only play a bigger role after the fundamental trend has been reversed.
On-chain data
1. Deposit & Withdrawal
(1) BTC exchange traffic
Bitcoin reserve balances on centralized exchanges continued to maintain a downward trend in November, falling from 2,473,600 to 2,440,000 with the net withdrawal of Bitcoin in a single month exceeding 30,000.
Chart 3: Centralized exchange BTC reserve balance maintained a downward trend in November, with 2.44 million reserves remaining
Overall, the BTC reserve balances on exchange remain at a low level, which is associated with intensive accumulation of funds at a low level. The main force driving this trend is coming from long-term investors, whose total Bitcoin holdings recently reached a record high of 13.5 million Bitcoins. Subsequently, long-term Bitcoin holders began to decline — a sign that they were distribute chips. Currently, long-term Bitcoin holders hold about 13.35 million Bitcoins, down 150,000 Bitcoins from their high point. Since long-term holders usually collect chips in bear markets or shock markets and distribute them for profit taking in rising markets, we can assume through this relationship that the chip distribution action of long-term holders may indicate the upcoming start of a new up cycle.
Chart 4: Long-term holders started to distribute, and the chip holdings dropped by about 150,000 from the top
Chart 5: Long-term holders usually start chip distribution in a bull market, and the start of distribution means that the main rise is not far away
1.ETH exchange traffic
The ETH reserve balance of centralized exchanges showed an accelerated decline in November, from 14.65 million to 14.15 million, with a net outflow of 500,000 in a single month — slightly lower than the 840,000 outflow in October.
Chart 6：Centralized Exchange ETH Reserve Balance Net Outflow of 500,000 Bitcoins in November, Withdrawal Trend Continues
In addition to centralized exchanges, the scale of ETH staked in the DeFi protocol has also shown a steady growth trend. The total value of ETH staked in the DeFi protocol is about 270.8 billion U.S. dollars.
The staking scale of the ETH2.0 beacon chain continues to hit a record high. As of the completion date of this report, ETH2.0 beacon chain staking address has deposited over 8.45 million ETH in total — an increase of 400,000 from the previous month, which is a record high. Meanwhile, concepts such as GameFi and Metaverse continued to ferment in November, intensifying ETH on-chain activity. The destruction volume of UiswapV2, ETH transfer and Opensea continued to rank high, which had a favorable effect on weakening ETH circulation.
Chart 7: The amount of ETH staked by the ETH2.0 beacon chain and the scale of DeFi staked hit a record high, which has a beneficial effect on weakening the ETH fluid market
Chart 8: The activity of GameFi, Metaverse and other sectors rose rapidly in November, accelerating the destruction of ETH, which has a beneficial effect on weakening the ETH fluid market
On-chain data
（1）BTC on-chain valuation indicators
Bitcoin Unrealized Profit/Loss NUPL (Net Unrealized Profit/Loss) reflects the situation between unrealized profit and unrealized floating loss. When this indicator is at 0.5, the proportion of the total unrealized profit in the total Bitcoin supply, within the total market value of Bitcoin, is equal to 50%. Historically, NUPL = 0.5 was a strong support level in bull market, as was the case in the 2013 and 2017 bull markets.
When the indicator is higher than 0.75, the market sentiment is characterized by “greedy”, a periodical or cyclical top area at this time. At present, this indicator has fallen back to 0.56 from 0.63 last month. The market sentiment characteristic corresponding to this position is “half-trusted”. Looking at the unrealized profit scale and the corresponding market sentiment characteristics, the bull market is still not over.
Chart 9: BTC NUPL is currently at 0.56, the most frenzied phase is yet to come
Chart 10: When the BTC NUPL exceeds 0.75, it is the top of the phase or the top of the major cycle
The Supply Shock effect refers to the fact that a large amount of cryptos flow into the strong (long-term investors). These investors hold the cryptos for a long time, resulting in fewer and fewer cryptos in circulation in the market, which subsequently intensifies the flow. The liquidity crisis has caused a gradual imbalance between supply and demand, leading to price increases.
This trend can be roughly quantified by measuring the Long Term Holder Supply Shock Ratio (LTH supply/STH supply), which is the ratio of the total amount of long-term investors’ holdings divided by the total holdings of short-term holders. When the ratio gradually rises, it reflects that long-term investors are constantly “harvesting” chips from short-term investors, and it shows that long-term investors are dominating the market. As a large number of chips are locked in the hands of long-term holders, the willingness of this part of Bitcoin to enter circulation is very low, and the liquidity supply is gradually shrinking. This has laid the foundation for the subsequent break of the balance between supply and demand, and subsequent price increases.
Typically, long-term holders take advantage of bull rallies to make distributions, and when they do so the Bitcoin is randomly credited to short-term holders — resulting in lower LTH supply/STH supply indicator values. Currently, the indicator is above the top (green zone) and is showing signs of turning down, indicating that long-term holders have started the chip distribution and that a main bullish uptrend wave is coming.
Chart 11: LTH supply shock ratio has a high downward trend, the second wave of the main rise of the bull market is about to start
CDD can reflect the holder’s willingness to sell Bitcoin. This indicator is the product of the number of Bitcoin held and the Bitcoin holding data when the holder’s UTXO is destroyed. The greater the number of Bitcoin held, the longer the holding time — and the higher the CDD value at the time of destruction. When the indicator value is at a high level, long-term Bitcoin holders — or “whales” — with a large number of Bitcoin are in a sell-off state. Therefore, we can judge the cyclical tops and bottoms of the market by observing the high and low positions of the CDD indicator value.
The 90-day moving average of CDD provides us with a good perspective. As shown in the figure below, when the indicator is in the red zone, it indicates that long-term holders or giant whales are in a substantial sell-off stage, and the market is about to peak. Conversely, when the indicator is in the dark area, it means that the role of sell-off at this time is mainly short-term Bitcoin holders or small retail investors. At present, the indicator is slightly lower than 200K, which is a lower position. The market sell-off has not yet arrived, and the tone of the bull market is healthy.
Chart 12: CDD is at a low level, indicating that the current large funds have not yet entered the stage of large-scale distribution
By observing this indicator, we can find that the market will usually peak when the warm-toned part quickly rises to a high level. Otherwise, it is in the bottom area. The current warm color part (the part shorter than 6 months) has begun to turn upwards, indicating that it is now at the beginning of the second wave of rising market in this round of bull market. When this proportion reaches about 90%, the market will peak.
Chart 13: The percentage of realized cap Hodl Waves within 6 months starts to turn upwards, the second wave of the bull market is about to open, and more than 90% are signs of peaking.
The short-term holder spent out profit ratio reflects the level of profitability after short-term speculators sell their chips. In an upward trend, if the SOPR indicator falls back to 1, it means that investors are in a no-gain-no-loss situation when they sell their chips.
At this time, investors still expect the price to rise in the future, so they are reluctant to sell chips — resulting in a reduction in the amount of chips thrown into the market. The selling pressure dropped, and the price stopped falling and rebounded. Therefore, SOPR indicator falling back to 1 or below in a bull market is a good opportunity to buy.
If the SOPR of short-term holders is in a negative number (loss status), it means that the bull market is very successful in the middle of the washout, and the short-term speculators have been “washed off”. The current indicator is already in the negative region, combined with the above and recent fundamental analysis, this report believes that the decline belongs to the washout behavior, and washout is very successful, and the downward space may be accompanied by short-term holders SOPR into negative values.
Chart 14: Short term holder spent out profit ratio falls into negative value, short term speculators have been washed out of the market with losses
On the basis of the theory of SOPR, we further extended the on-chain Bitcoin holding cost of short-term holders — that is, short-term holder realized price.
In a bull market, when the price drops to the short-term holder realized price, it indicates that the short-term holder’s profit has been wiped out and the washing is completed. At this time, the short-term holder realized price will become a support position.
In a bear market, when short-term holders’ floating losses are reduced to the short-term holder realized price, this price will become a concentrated area for their selling, that is, they will run away from the margin. At present, the price has just fallen back to the short-term holder realized price, or it will be a medium and long-term support level.
Chart 15: When the Bitcoin price drops back to near the cost line of short term speculators, which in a bull market usually means a washout is achieved, this price will constitute support
（2）ETH on-chain valuation indicator
The NUPL of ETH has the same principle as the NUPL of BTC mentioned above. The indicator is currently at 0.65, which has not yet reached the most enthusiastic zone.
Chart 16: ETH’s NUPL is at 0.65, and the most enthusiastic stage has not yet arrived.
The MVRV Z-score reflects the degree of deviation between market value and fair value.
Fair value usually adopts the price when the code is transferred on the chain, that is, the realized price. This indicator is the ratio of market value to fair value (realized market value). When the indicator enters the red zone (value greater than 7), it indicates that the market has entered the top; when it enters the green zone (value less than 0), it indicates that the market is in the bottom zone. The indicator is currently at 2.83, and continues to rise, in the middle of the bull market.
Chart 17: Deviation of ETH market cap from fair value is on an upward trend, but still not entry the top area
1. Institutional positions
In November, the Bitcoin holdings of various institutions around the world increased slightly, with a total holdings of 1.501 million Bitcoins, an increase of 10,000 from October. Among them, ETF funds hold 816,300, a total of 263,100 are held by the national government and publicly held by civil servants, 174,000 are held by private companies, and 238,000 are held by public companies.
Chart 18: List of positions held by institutions in the world that publicly hold Bitcoin (classified by institution type)
Fund institutions saw a slight increase in the overall movement of their positions in November, with positions at around 844,000 at the end of November — up 10,000 from the previous month. These fund institutions include: 3iQ CoinShares Bitcoin ETF (BTCQ), 3iQ (QBTC), Grayscale Bitcoin (GBTC), ninepoint (BITC), Osprey (OBTC), Purpose Bitcoin ETF-CAD (BTCC), Purpose Bitcoin ETF-USD (BTCC) .U), Purpose Bitcoin ETF-USD hedged (BTCC.B), WisdomTree Bitcoin ETP (WBTC), 21Shares (ABTC), Bitcoin Tracker Euro (XBTE), Bitcoin Tracker One (XBT), Galaxy Bitcoin ETF (BTCX.B) , Galaxy Bitcoin ETF (BTCX.U), Iconic Funds Physical Bitcoin ETP (XBTI), VanEck Vectors Bitcoin ETN (VBTC), Coinshares Physical Bitcoin (BITC SW). Among them, the total holdings of exchange funds are 182,400+, accounting for approximately 21.6% of all fund institutions’ holdings.
Chart 19: Bitcoin Inflows by Global Fund Institutions in November
Chart 20: Bitcoin Holdings of Global Exchange Traded Funds and Closed-End Funds
Most of the position data released by public companies have the average position price. From the data distribution point of view, 36 companies have announced their holdings of Bitcoin, of which 26 have announced input costs. Among these 26 companies, 9 companies have an average holding price of less than US$20,000, 7 companies have an average holding price of US$20,000–40,000, and 5 companies have an average holding price of more than US$40,000. Among companies with an average holding price of less than US$20,000, most of the holdings numbers are between 100–1000. Companies with an average position price of US$2–4 million have the largest holdings. Among them, Microstrategy holds more than 120,000 holdings, and Square, Tesla, and Marathon Digital Group hold thousands to tens of thousands of holdings.
Chart 21: The number of positions held by public companies that have announced that they hold Bitcoin and the purchase cost price
1. Computer Power Market
In November, the total computing power of Bitcoin remained at 135EH/s-180EH/s. As of the publication date of this report, the total computing power of Bitcoin dropped from a high of around 180EH/s to around 138EH/s.
Chart 22: The computing power of Bitcoin in the entire network is hovering between 135eh/s-180eh/s
In November, the BTC wallet balance of the miners showed signs of throwing before selling, and the current miner wallet balance is about 1,852,000, with the miner wallet balance approaching a new high since the second half of the year.
Ⅲ. Afternoon Outlook
From a fundamental point of view, long-term holders still hold more than 70% of the chips in the market. The large-scale distribution of chips has not yet arrived, and the market is still pouring in funds. The continued outflow of BTC balances on the exchange confirms this sign. This report believes that the market is still pouring in incremental funds, the BTC supply and demand pattern is still gradually tilting towards the imbalance of supply and demand, and the situation of short supply is still continuing to ferment. Under this trend, a short-term correction in Bitcoin price will not change the mid-to-long-term upward trend. It will continue to maintain the bullish judgment in the medium and long term (several months) unchanged.
From a technical point of view, the Bollinger Band indicator, which is used to measure the degree of market volatility deviation, can assist us in determining the position of the cycle. When the price runs up to the upper Bollinger Band, it indicates that the market is maintaining an upward trend. When this trend appears to be overheating (prices are substantially above the upper Bollinger band), then a large cycle top is imminent.
By quantifying the deviation of the weekly level BTC high from the weekly upper Bollinger band (UB MAX bias ratio), we can see that the major cycle tops when this indicator exceeds 0.35. Currently this indicator is still at -0.13 and the top is premature.
Chart 23: Large cycle tops after UB MAX bias ratio exceeds 0.35
Rapid short-term price moves to the upside are usually accompanied by profit-taking sell-offs, leading to price pullbacks. By quantifying the cumulative return of the last 30 days of prices, we find that the risk of pullback increases substantially after the 30-day cumulative return exceeds 60%. Currently this value remains negative and is not a cause for concern.
Therefore, from a technical analysis perspective we also believe that the broad cycle has still not peaked.
Chart 24: After the 30-day cumulative return exceeds 60%, we need to be alert to the risk of a pullback, the value of which is still negative.
Ⅳ. Report Conclusion
Powell recently stated that U.S. inflation is not temporary and may shorten Taper’s time cycle in the coming months. Even so, by the time the Fed raises rates, it will still need to assess full employment data and only thereafter derive a path for the timing and value of rate hikes. In the last rate hike and taper cycle, the fact that the hike and taper took place at the same time did not hinder the bitcoin bull market, suggesting that the core elements that determine the bitcoin bull cycle do not come from the Fed’s monetary policy, but rather the fundamentals of bitcoin itself (supply and demand). The Fed’s monetary policy is only the external factor, bitcoin’s fundamentals are the internal factor, and only when the internal factor is reversed will the external factor play a role in pushing the market forward.
In terms of fundamentals, the exchange’s Bitcoin balance continues to maintain an outflow trend, indicating that the market’s demand for BTC is still strong. From the perspective of the holder structure, long-term holders have maintained a clear trend of increasing their holdings in November. According to indicators such as holder supply shock ratio and CDD, this group has just started to distribute. The pattern of imbalance between supply and demand is gradually being broken, and prices are expected to usher in a revaluation in the near future, and a violent rise in the market is expected to occur in the next few months.
The exchange’s ETH traffic is also facing a clear outflow trend. The scale of ETH locked in Defi and ETH2.0 continues to grow steadily. This has a significant boost to the decline of ETH circulation. Coupled with the relatively high popularity of GameFi, Metaverse and other sectors in recent months that have played a significant role in boosting the burning of ETH. After ETH breaks through a record high, the market outlook is expected to follow BTC into the second wave of rising prices in the bull market.
Global institutional investors increased their holdings of BTC significantly in October, among which fund institutions increased their holdings by about 10,000, and public companies increased their holdings slightly. At present, these well-known institutional investors do not have a stand, but are constantly pouring in new funds. It shows that institutional investors are very optimistic about the market outlook.
The miners continued to actively deploy the mining business. BTC’s entire network computing power is sent back near the new high (135eh/s-180eh/s). The balance in the miner’s wallet also hit a new high since the second half of the year, and the miners are clearly willing to hold Bitcoin. From a technical perspective, indicators such as UB max bias ratio and 30-day cumulative return rate have yet to peak. Given that the fundamentals remain healthy, this report continues to maintain an optimistic judgment on the market outlook (in the next few months).
