Has Crypto Bottomed?
On-chain metrics suggest bottom is near, but what about macro?
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Contagion from FTX’s collapse continues to spread. This time Genesis, the largest crypto lender, has halted withdrawals and it’s rumored to be raising an emergency $1B round. Due to this, Gemini’s Earn product was also forced to freeze $700M in client funds as it relied in Genesis as the main counter-party for that yield.
Despite this, crypto prices have held up relatively well, remaining above last week’s lows. Although fear and uncertainty continues to prevail, a few figures in the space such as Chris Burniske have become vocal about the market being at or near its bottom.
This week in the newsletter we examine this possibility by analyzing historical on-chain data from previous cycles.
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.
- Ethereum fees dropped significantly, likely due to last week’s volatility increasing the amount users were willing to pay to avoid liquidations or to panic sell
- Bitcoin fees instead continued to rise this week
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 or distrust of centralized exchanges
- Over the past couple of weeks we have seen an exodus of capital from centralized exchanges
- $3B+ of Bitcoin and Ether have left CEXs this week alone, nearly $2B more than last week
Has Crypto Bottomed?
Many crypto-assets reached a new yearly last week. All of the top five assets by market cap (excluding stablecoins) have dropped at least 74% from their 2021 highs.
Decreasing Drawdowns — Historically, most of the major crypto-assets drop less in the next bear market than they do on the previous one
- Just like the 2021 bull market saw smaller percentage gains than those from 2017, it is possible drawdowns could be less severe
- A potential reason to believe we could experience a relatively milder bear market is that crypto investors have expanded beyond the 2018 holder-base, with major tech funds and financial institutions now having exposure to the space directly or indirectly
- This pattern provides some ‘hopium’, though it most certainly does not guarantee that this bear market we will not see a bigger crash
By diving into on-chain data we observe another potentially promising pattern.
Majority of BTC Holders in the Red — For the first time since March 2020, over 50% of Bitcoin holders are losing money on their position
- In 2015, the amount of holders losing money on their Bitcoin reached 62%
- In 2018, it was 55% and we are currently at 52%
- Having the majority of holders of an asset that has appreciated 25,000% since inception could be a sign of bearish momentum getting excessive
- In 2015 it took 6 months for the majority of holders to be back into profits, compared to 3 months in 2018
Bear cycles appear to be getting shorter and with a smaller share of holders losing over time. This trend also favors the chances of a potential bottom being near.
Bear Market Accumulation — Long-term investors historically double down on Bitcoin during bear markets
- 2022 has been no exception, with the amount of Bitcoin held by addresses holding for over one year (classified as ‘hodlers’ by ITB) reaching new highs
- Hodlers’ balance have increased by 2.7 million Bitcoin year-to-date
- Demand from long-term investors slowly creates a floor for Bitcoin in bear markets and they typically begin to sell to new investors shortly after new all-time highs
While these on-chain indicators suggest we could be late into the bear market, crypto is much less isolated from today’s economy than it was in 2018 or 2015. For better or worse, institutions outside of crypto began buying in 2020–21 and this led to higher correlations with traditional markets.
Crypto-Stock Correlations at Yearly Lows — Bitcoin’s correlation with the S&P 500 reached -0.58, its lowest value since June 2021
- Headwinds arising from FTX’s collapse has led to crypto to de-correlate from stocks as internal selling pressure grew, while stocks celebrated lower than expected inflation prints
- It’s still unclear whether correlations will go to being as high as they were a few months ago, but if the industry aspires to continue to grow back into the trillions of dollars it will likely require external capital to enter
- Many macro experts remain bearish going into 2023, with the fed indicating that interest rates may have to go higher than initially anticipated and for longer time
Could crypto’s recent capitulation indicate that we are at or near the bottom like on-chain metrics suggested in previous cycles? Or has crypto become dependent on external capital flows, preventing it to reach a bottom until stocks do so?
Hopefully we’ll find out soon.
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