Efficient Frontier
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Efficient Frontier

A dive into the sideways market

In recent weeks, we’ve seen markets range sideways in a range between $30–40k. In this blog post, we deep dive into some of the charts to explain this sideways market.

Institutional exit and re-balancing

Last year, we saw a lot of buzz around the institutions and professional hedge funds that were entering our space. They provided much of the impetus for the rush into crypto markets and the massive bull run that we recently experienced. Many of these funds who joined the Bitcoin bandwagon in December 2020 with short term bets have concluded taking profits, such as Ruffers who said they sold almost 50% of their position when Bitcoin was at $55,000 after investing $774 million last November when 1 Bitcoin was sold for $15,000.

As you can see below, Ruffers was not the only institutional investor taking profit:

Above: The number of accounts holding 1,000 Bitcoins skyrocketed in December and January 2020, peaked as Bitcoin reached above $38,000 for the first time and since has declined steadily back to where it was in October 2020, losing over 300 accounts.

Bitcoins for sale

Since April 18th, the ratio of Bitcoin on exchanges rose from 13.02% to 13.77%, adding almost 140,000 Bitcoins to exchange wallets by May 19th.These bitcoins are often available for sale. This rise came after 11 months of Bitcoin leaving exchanges

Despite this, according to Glassnode, the recent crash to $29,800 did draw strong outflows from OTC desks (above). Aya Kantorovich from FalconX also reported strong interest from family offices after the leverage driven crash.

Traders spooked

The growth of high leverage Bitcoin trading in the last 2 years has made the volatility to both directions stronger. After the biggest one day liquidation in Bitcoin’s trading history on April 19th, and following liquidations, price drop and record loss taking, high leveraged traders have been shaken out and other traders remain cautious.

In this state, perpetual contract funding has been negative to neutral, futures basis almost 0, liquidations have stopped and volume is much lower than before.

Bitcoin perpetual contract’s global funding rate according to CryptoQuant

After the storm

According to Arcane Research, open interest denominated in Bitcoin has declined 36% in the last two months; it has not been this low since March 2020, indicative of a serious concerns of wipe out and/or fear.

Bitcoin network fees have dropped 93% from the peak, with 38 bitcoins paid to miners today for transactions, after a three year record on April 20th of 300 Bitcoins, while the price was at $56,300. (2017 saw a record 1,500 day, which was influenced by inefficient wallet software and higher retail participation).

A sea of stablecoins

In the meantime, a record number of open-blockchain powered stablecoins are on the sidelines, floating in cyberspace:

Source:CoinMetrics

The increasing use of stablecoin in banking and commerce is described in this great interview with QCP.

Left: Bitcoin futures monthly volume. Right: Total cryptocurrency monthly spot volume. Source: TheBlockCrypto Data

As we’re writing this post, the Bitcoin market seems to have been waking up a bit, with open interest and estimated leverage slightly rising, along with a more optimistic mood.

But we believe the markets can continue to cool off, considering the previous month brought record volumes, record profit (and loss) taking.

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Efficient Frontier

Efficient Frontier

Leading research & algorithmic trading firm for the cryptocurrency markets efrontier.io