The Dynamics Driving Crypto Prices
Plus: Bitcoin’s distribution and supply shocks
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This week we dive into the dynamics driving crypto prices near-term. Here we cover how macro conditions have led to a market where bots dominate crypto trading based on shockingly high correlations with Big Tech’s earnings.
Then we cover key price levels to watch based on buying patterns emerging on-chain. Finally, we transition into Bitcoin’s longer-term distribution patterns to understand the bigger picture.
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees grew by 17% as the average number of daily transactions increased by 20k this week relative to the last
- Ethereum saw a decrease of 8% in weekly fees, despite NFT volumes remaining high
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Bitcoin recorded the highest weekly outflows so far in 2022 and the largest single-day outflow since last April, suggesting less supply able to be sold at centralized exchanges
- Ethereum saw mild net outflows after recording inflows the prior week
Tech Earnings in a Bot-Driven Crypto Market
Since early December we’ve discussed how macro conditions have been dominating the short-term outlook for crypto markets. Rising global uncertainty — starting with the Omicron variant, then the fed’s outlook as inflation grew and now also a potential conflict between Russia and Ukraine — has led to increasing correlation across markets.
Particularly, we’ve seen Bitcoin and crypto broadly move closer to risk-on assets such as tech stocks.
Highest since Covid — Bitcoin’s correlation vs the Nasdaq 100 reached its highest level since April 2020. Here are few similarities and differences with that time in the market:
- In 2020 Covid fears led to the evaporation of buyers as the World headed into a recession and the outlook for all markets turned grim; then war-like money printing brought renewed buying interest through the rest of the year and 2021
- Now that artificially high monetary conditions are coming to an end, uncertainty is growing and buying interest is fading in anticipation of rate hikes and quantitative tightening
- Last time the fed raised rates was in Q4 2018, where both equities and crypto crashed. This time the market appears to be frontrunning fed policy in anticipation that it will “break something”
- This fear is thus decreasing buyers in the market (especially those from the traditional finance world) and pushing correlations higher, similar to what took place in 2020
Due to these reasons, the market has shifted to a regime dominated less by narratives and more by bots, particularly those trading based on correlations.
Tech earnings steering crypto — Traditional markets are going through a volatile earning season, and it is causing ripple effects across crypto
- Bitcoin crashed 2.6% within the hour following Meta’s disappointing earnings report, which send the company’s shares down over 20%
- Yesterday the odds where in Bitcoin’s favor as Amazon beat earning expectations, pushing the stock 14% higher as Bitcoin climbed 2%
- This concerning and somewhat comical sequence of events is evidence of the bot-driven market currently shaping short-term price moves
But wasn’t crypto supposed to be an uncorrelated bet? Well, over a time-frame of years it has been so, especially during up-trends. However, as soon as uncertainty starts affecting liquidity across markets crypto tends to tumble along as was the case in Q4 2018 and March-April 2020.
What comes next — While it is anybody’s guess what ends up happening with fed policy and the Ukraine conflict, on-chain data can help us identify key price levels of buying and selling activity in the short-term.
Key levels to keep an eye on — Using IntoTheBlock’s In/Out of the Money, we can identify clusters of addresses concentrated around areas of high buying activity
- Based on this we see high resistance around $38k, where 1.27 million addresses previously bought 835k BTC. If Bitcoin clears that level a move to $42k is likely
- On the other hand, some support can be expected at $35k, where 291k BTC was acquired by 714k addresses. If this level fails to hold, Bitcoin should revisit its recent lows
- Momentum is still on the bearish side, though, with twice as many Bitcoin holdings near current price being held by addresses losing money on their positions
Bitcoin’s Distribution & Supply Shock
Zooming out, there are two main forces affecting Bitcoin’s internal metrics: the decreased supply available in exchanges and the “maturation” of holders based on the time that they have been holding.
Using Bitcoin’s unspent transaction outputs (UTXO) we can monitor the duration an address has held onto their BTC. By segmenting this by different time-frames we obtain a wholistic picture of all participants in the network and its ebb and flow.
Bitcoin distribution cycle — Bitcoin holders tend to follow a pattern based on price activity and new vs old entrants dominating. It goes something like this:
1. Price rises attracts new entrants, which leads to further price increases
2. Speculation gets out off hand as short-term holders (pictured in red and orange above) rush in while long-term holders sell and create the top
3. Price crashes, with many of the new entrants exiting with losses
4. Long-term players buy in again and accumulate a larger share of holdings
Right now, we seem to be between step 3 and 4, with Bitcoin hitting an all-time high in November and short-term traders dropping as much as 32%. Simultaneously, long-term holders are starting to increase their share of supply as shown by the black arrows in the UTXO age indicator.
- Unlike the crash in May 2021, the percentage of BTC circulating supply that hasn’t been moved for at least 12 months is growing and approaching 60%
- The percentage held for over 5 years also reached a new record high
- This shows coins are “maturing” as they shift over from speculators to holders with long-term conviction
A similar pattern appears when comparing Bitcoin netflows during the past two 50%+ crashes.
Comparing the drawdowns experienced during May-July of last year and the current, the exchanges netflows paint a different picture:
- Between May and June of 2021, there were significant inflows of Bitcoin into exchanges (net amount of 130k BTC), coinciding with the sell-off that happened during that period
- This time net outflows of 80k BTC trend suggests that less Bitcoin is available to buy at exchanges, as users tend to move these assets to cold storage or yield generating strategies
Ultimately, this suggests strong buying activity from holders, resulting in a potential supply shock as Bitcoin shifts from being held by short-term speculators to long-term investors.
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