3x Capital
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3x Capital

Bitcoin On-сhain: November 2022 (№71)

With the highly destructive collapse of the FTX exchange in November, the digital asset industry has experienced the most shocking bankruptcy of a custodian in history. Such an event is a tremendous problem for the industry, leaving millions of customers with cut-off funds, destroying many years of industry reputation, and creating new credit risks, many of which likely still remain unknown. The event brings back memories of the failure of Mt Gox in 2013, whereby a significant custodian is found to be fractionally reserved. Nevertheless, It is important to remember that the digital asset space is a free market, and this event represents a failure of a centralized entity, not of the cryptographic technology. I believe that with a renewed focus on exchange Proof-of-Reserves, upcoming regulations, and switch to a self-custody, the market will recover and become stronger in the years ahead.

In November the Bitcoin market experienced huge volatility and scarcity. According to the Binance exchange, the price of BTC/USDT has fallen (-27%) from a high of $21,444 to a low of $15,575. Based on data provided by Coinmarketcap.com, the market capitalization has decreased (-16%) from a high of $1,062T to a low of $0,806T.

Executive summary:

In April to May this year, the FTX reserves had reached a peak of over 102k BTC and declined by 51.3% in June. Reserves have been decreasing until reaching effectively zero. Alameda-FTX entity may have in fact experienced severe balance sheet impairment in May-June following the collapse of LUNA, 3AC, and other lenders.

The supply of ETH held on FTX has also experienced two periods of significant decline. In June, where reserves dropped by -576k ETH (-55.2%) and in November, falling from 611k ETH to just 2.8k (-99.5%). Similar to the Bitcoin balance, this leaves close to no ETH in FTX owned wallets, with the bank run effectively clearing what was left from the balance sheet.

Exchanges have seen one of the largest net declines in aggregate BTC balance in history, falling by 72.9k BTC in 7-days. BTC is currently flowing out of exchanges at a rate of -172.7k BTC per month, eclipsing the previous peak set following the June 2022 sell-off.

A similar observation can be made for Ether, with 1.101M ETH being withdrawn from exchanges. This makes for the largest 30-day balance decline since September 2020, where demand for ETH was high for use as collateral in smart contracts.

Moreover, stablecoins held across all exchange reserves reached a new all-time-high of $41.186B. We can also see a notable increase in BUSD dominance, with over $21.44B held in exchange reserves. This is likely a result of Binance’s recent stablecoin consolidation towards BUSD, as well as its growing dominance as the largest exchange in the world. USDT exchange reserves have declined slightly, and USDC reserves more dramatically over recent months, indicating a potential shift in market preference is underway.

Finally, the market has entered an interesting state, whereby centrally issued stablecoins are flowing into exchanges, whilst the two major crypto assets, BTC and ETH are being withdrawn at historic rates. The net buying power of stablecoins on exchanges has increased by $4.0B/mth. This demonstrates that despite market turmoil, investors appear to favor holding trustless BTC and ETH assets, rather than than centrally issued stablecoins at this time.

Relative Unrealized Loss measures the aggregated loss still held by the wider market, compared to the total market capitalization. Tracking the weekly average of this indicator shows that at extreme points of prior bear markets, investors were shouldering a loss in excess of 50% of total market cap at the time. This metric has recently peaked at 56%, which is the highest for this cycle, and comparable to prior bear market floors.

Over the last weeks, the market realized a net loss equal to -521k BTC, which is again close to the all-time largest recorded in history. Comparing the current Cumulative Net Realized Loss to the COVID and LUNA Crash, with 44% and 39% price decline respectively, the market has shown a larger degree of strength during the recent capitulation with only 26% correction.

Whales (the entities with > 1k BTC) have actually been net accumulators over recent weeks, with a 30-day balance change of +53.7k BTC.

The Whale cohort since 5-Jul-2017 (launch of Binance) has an average withdrawal price at $17,825. With spot prices currently at $16.8k, this is the the first time since March 2020 that this Whale cohort has been at an unrealized loss. In response, Whales have actually been depositing coins to exchanges, with an excess of between 5k and 7k BTC per day in net inflows over the past week.

Among all cohorts, Shrimps (the entities holding < 1 BTC) have recorded two distinctive ATH waves of balance increase over the last 5-months. Shrimps have added +96.2k BTC to their holdings since the collapse of FTX, and now hold over 1.21M BTC, equivalent to 6.3% of the circulating supply.

A peak daily value of -$1.45B in realized loss was reached in November, ranking as the largest in history. A comparably small $83M in realized profits occurred, suggesting that the vast majority of spent volume at present is sourced from investors from the current cycle.

The supply of Long-Term Holders has declined by 84,560 BTC post-FTX, which remains one of the most significant declines in the last year. As shown in the chart below, LTH supply declines have exceeded 100k BTC in three back-to-back months through May, June and July this year. This makes the current decline notable, but not the largest, although it is still underway.

Sources: https://studio.glassnode.com/metrics?, https://www.tradingview.com/, https://coinmarketcap.com

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