Bull Market or Bull Trap?
Bullish on-chain metrics clash with macro outlook
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we cover the strong price action that has taken place thus far in 2023 and where it leaves the market. We evaluate potential signs for a bottom based on blockchain metrics during previous bear markets, while also considering that this time may *actually be different* given the macro outlook and the broader effects of global liquidity on risk assets.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees spiked as its price rose above $20,000 for the first time since early November
- Ethereum fees reached a three month high, with OpenSea and Uniswap continuing to increase their gas consumption
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
- $300M worth of Bitcoin left centralized exchanges after a week with smaller outflows
- Ether on the other hand recorded $400M in inflows, most of them heading into Kraken and Binance
Bull Market or Bull Trap?
2023 kicked off with sharp rally throughout the crypto markets. Bitcoin is up 27% thus far in January, which would make it the largest monthly gain since October 2021. Given the price momentum, people are asking themselves: is this the beginning of a new bull market? Or is this just a bull trap before we head lower?
While it’s impossible to know with certainty, in this week’s newsletter we analyze data supporting each side of the argument and evaluate their likelihood.
Let’s start by looking at the profitability of Bitcoin holders.
50% of holders losing money — The percentage of addresses earning or losing money have historically pointed to peaks and bottoms
- Previous bear markets have bottomed after getting to the point where 50% or more of the holders are losing money on their positions, classified as “out of the money” by IntoTheBlock
- These thresholds have set higher bottoms as more addresses purchase Bitcoin and anticipate these trends
- In November, Bitcoin broke past this level though it only lasted a few weeks there before bouncing back
- This could suggest Bitcoin believers were eager to accumulate as the FTX-driven capitulation led most holders into losses
This high conviction is consistent with accumulation patterns in previous bear markets.
Hodlers Supporting a Bottom — long-term Bitcoin holders historically take advantage of bear markets to buy Bitcoin
- In 2022 we saw the amount of Bitcoin owned by addresses holding for over 1 year (“hodlers”) increase by 50% from 10M BTC to 15M BTC
- This pattern has been observed in previous bear markets, with hodlers’ balance decreasing only after new highs are set
- By adding buying pressure during bear markets, long-term holders create a floor supporting prices
- While it may still be too early to call the bottom, hodlers’ balance increased by 1.6M BTC in November (worth ~$30B at those prices) indicating the high demand realized
Even though these and other on-chain metrics suggest that the bottom may be behind us, the macro landscape still creates uncertainty for the path ahead.
Macro Correlations are Back — After diverging in paths throughout the FTX collapse, crypto and stocks have been moving in tandem again
- The correlation coefficient between the Nasdaq and Bitcoin is back up to 0.86 currently, suggesting a very strong statistical relationship between the two
- As inflation has come down, markets broadly have climbed in anticipation of a potential Fed pivot
- Although there still is no confirmation from the Fed looking to ease financial conditions, investors may be front-running the decision given that they have learned the playbook on how “printing money” leads financial assets to appreciate
The reason for this relationship has to do with the Fed’s actions effect on liquidity.
Liquidity and Markets — The Fed’s balance sheet, Repo markets and Treasury balances have a direct impact on the capital allocated to risk assets and their performance
- As the Federal reserve engaged in quantitative easing (QE) in 2020 and 2021, it aggressively increased the size of its balance sheet and propped up markets including crypto
- In 2022, through quantitative tightening (QT), the Fed unwound $458 billion worth of assets from its balance sheet, reducing the liquidity available throughout markets and dragging down prices
- For 2023, Jerome Powell has stated his goal to continue QT and interest rates at elevated levels until there is sustained evidence of inflation being behind us
- Previously Bitcoin has anticipated changes in liquidity, dropping a few weeks in advance based on the Fed’s forward guidance on May and November 2021, which turned out to be local tops
Is the current rally so far in 2023, due to the market calling for the end of QT and rate increases? And if not, could crypto still rally even if broader financial liquidity drops? On-chain metrics from previous bear markets follow previous bottoming patterns, but the increasing relevance of these macro factors still cast uncertainty on whether the recent price action marks the beginning of a bull market or just a bull trap.
