Making sense of December’s volatility & a market outlook
We at Deus Ex DAO (@deusexdao) are always trying to make sense of the market. Luckily in crypto, derivative and on-chain data is transparent and often accessible cheaply or free. A sharp contrast to the Bloomberg terminal sub.
We want to walk you through the volatile events of the past weeks, the December 4th liquidation cascade that flushed out $5B of leverage and our outlook.
First, some terminology
Open Interest is the amount of outstanding leverage via futures and option derivative contracts. Through Coinalyze we can view the futures data. Note that OI doesn’t indicate direction; they represent both longs and shorts. Importantly OI must be watched in relation to Market Cap, as it can be influenced by asset prices (e.g. if BTC appreciates in isolation, relative leverage decreases, but as coin-margined contract collateral increases in value, it permits more borrowing. Absolute OI thus grows as a function of price).
Cumulative Volume Delta shows the difference between buy and sell volume, anchored to a point in time. Typically we chart this from the beginning of the price feed. You can track this for spot and futures.
From new ATH to cascading liquidations
From the 21st of September bottom, BTC had rallied 74% to a new all time high (ATH). The first peak on the 20th of October showed an ATH already, but a second peak on the 10th of November formed a new ATH. The second peak was formed on lower volume and was quickly sold into.
The run up to the new ATH can mostly be described as a run pushed up by the futures market. By looking at the aggregated CVD we see that market participants were more aggressively buying BTC futures, while the spot CVD remained relatively flat.
The result of traders opening positions on futures can be seen in the aggregated open interest (OI). On the run up OI in stablecoin-margined contracts increased approximately 32%, while coin-margined contracts OI increased approx. 96%.
October 20th through November 10th marks a sharp change, as the CVDs from both futures and spot start sloping down, indicating that market participants were willing to pay the price to cross the spread. A sign of eagerness to grab the liquidity available in the market.
The result of this spot sell pressure was a slowly moving downward trend on BTC. The imbalance between the price action and the OI starts to show. While price went down, the OI remained relatively flat. OI / market cap shows a divergence with price.
OI continued increasing after the ATH on stablecoin-margined contracts, peaking Dec 3rd while price had been declining. Funding was generally positive, meaning most leverage was on the wrong side of the market when price went down. On Dec 4th BTC wicked down (-21%) on a liquidation cascade, measured from the top of the candle to the lows. A big portion of open interest was closed.
Macro uncertainty and the big rotation
As the market matures through increasing adoption, volatility (price divergences) is slowly becoming muted. We think therefore there’s a good case for both lengthening cycles and less parabola to the up and downside. Historically, bull runs have begun with BTC appreciation, whereafter profits were rotated into alts, with ETH leading. We must remember that this technically happened twice in the past year, with almost every coin seeing major appreciation.
Where does that leave us? The current environment’s uncertain and it’s reflected in the spot, open interest and on-chain activity. This is a combination of macro fears of the effects of inflation, the Fed’s tapering and potential rate hike and COVID continuing to wreak havoc. And December is typically a slow month for markets. Many are sidelined.
This reflects in the data. Money’s rotated into strength, with majors leading. ETH has been particularly strong against BTC. OI/MCAP is strong on both BTC & ETH across all exchanges with a positive bias expressed in funding. However global OI is flat and funding bipolar, indicating that OI has decreased elsewhere and indecision about market direction.
This environment is likely to continue until there’s clarity from the Fed about the pace of tapering and interest rate hikes. The market is currently pricing 3 hikes to 0.75–1% on the Federal Funds Rate (h/t @biancoresearch). Any divergence will likely result in volatility in both traditional and crypto markets.
For a better read on the probability of a hike, @sell9000 smartly suggests reading quarterly reports from big retail stores. He explains Fed’s likely more influenced by Core CPI than CPI as a gauge of inflation, since Core excludes energy and food, which are very volatile. Costco’s earnings predicted correctly (4.5–5% YoY inflation) vs. 4.9% reported.
Read the following for more context:
1. https://twitter.com/sell9000/status/1450290300203806723
The uncertainty results in less inflows, creating zero sum markets. This increases the difficulty of making money, as the rising tide no longer lifts all boats. People are rotating into relative strength in majors and ecosystems with popular narratives, like the metaverse and play-to-earn gaming. Almost everything else is showing weakness.
Being allocated differently will be painful, as illustrated by DeFi and altcoins selling off even faster than majors.
And even within strong sectors, the market’s divided. Consider the relative strength of GALA vs. the gaming sector as a whole. Funding’s negative there vs. slightly positive on GALA. Picking the right coins is critical.
And the bid doesn’t sustain forever. One of the higher mcap P2E coins is Sandbox (SAND). After the 20th November peak on BTC, SAND has rallied >1000%. Eventually the market was heavily overbought (RSI> 88) on lower volume, resulting in a sell-off.
Onchain tells a more positive story.
Exchange net position (which as a 30D average is a lagging metric) shows some increase of coins held on exchanges, but not entering positive territory like during the May crash.
Exchange netflows, which are indicative of coins moving to exchanges to sell, were positive but not remotely as parabolic as during previous sell-offs. This is also a bullish signal.
Spent Output Profit Ratio (daily coins sold in profit/loss) has been decreasing since late October, however after a quick wick of sells at a loss, recent sellers have been positive again. Selling at a loss is indicative of capitulation, where people cannot handle the pain anymore.
And Realized Cap HODL Waves, which measures the % of coins moved by age brackets, weighted by the price last transacted, also paints a positive picture. From the July bottom to Nov peak, about 6% additional coins were moved in the 1w-1m old bracket. This indicates they bought in the run-up and took profits. Thereafter, short term HODL waves decreased again, indicating HODLing.
Zooming out on BTC can be important to remind ourselves of the secular trend at play. Recent volatility was rough and while we see reason for carefulness, we don’t for capitulation. The logarithmic growth curve continues to play out, a result of the decreasing volatility from adoption (h/t @davthewave).
From that vantage point, we’ve just made a higher high and will likely make a higher low. That would imply roughly $30K BTC holds.
It seems prudent to keep cash on hand to purchase further capitulation and be sensitive about the relative strength of the coins you’re holding. Protecting capital by cutting weakness. With clarity on macro its likely that the bid will gradually return and we can once more play musical chairs with the difficulty turned down.
If you liked this piece, please consider supporting us by retweeting. You can also subscribe to the Deus Ex DAO newsletter for more such content. This article has been written by @ape_rture and @cryptobrucey.
Thank you to data providers @coinalyze & @glassnode for the great democratising tools.
(Any views expressed in the below are the personal views of the authors and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions. Do your own research.)
