Trading View (next 2-4 weeks): We like to be neutral to bullish bitcoin.
Investment View (next 1-3 years): We like to be long bitcoin.
- Central banks continue to hike rates.
- We think 75bps is likely at the next Fed meeting.
- The probability of recession within the next year remains at 70%.
- Regulatory pressures on proof-of-work cryptocurrencies increase.
- August CPI came in hotter-than-expected at +8.3%.
- The macro backdrop remains bearish.
- Our metrics are mostly bullish this week (four bullish signals and two bearish signals).
- With the macro backdrop still bearish, and our on-chain/flow signals bullish overall, our overall view is neutral to bullish (Chart 1).
Bitcoin had been rallying prior to the hotter-than-expected August CPI print (+8.3%) sent crypto markets off a cliff. Bitcoin fell from around $22,000 to around $20,800 in a few hours (down 68% from its November 2021 all-time high). Alongside this, HODLer numbers have been setting new highs. Currently, around 66% of the coin supply have held their investment for at least a year.
Splitting HODLers into those that have held for at least a year and those who have held for less than a year is useful to gauge overall accumulation. However, more granular vintages reveal how the age of the coin supply is changing.
Since bitcoin peaked in November and began its drawdown, the 6m-12m vintage has decreased sharply from around 22% to currently around 11% (Chart 2). Over the same period, the 1y-2y vintage has increased by a similar proportion (Chart 3). This suggests most of the reduction in the 6m-12m vintage has come from those coins transitioning into the 1y-2y vintage (i.e., becoming older), not those coins being sold (i.e., becoming younger). In other words, the HODLers have kept on HODLing.
That so many HODLers have kept their coins throughout the macro headwinds, regulatory pressures, and extreme volatility since November is remarkable. It implies an extraordinarily strong investor base that believe in the long-term value of bitcoin and have a strong conviction to hold despite various sell pressures.
Rate Hikes = Decreasing US Bitcoin Supply?
A related metric for supply is to look at how the supply of bitcoin is changing throughout major regions (the US, EU, and Asia). Using data from Glassnode, we can see how the share of the bitcoin supply to be held/traded varies across the three regions. Glassnode says it performs the geolocation of the supply probabilistically using transaction timestamps.
Asia and the EU have seen increases in their YoY supply, while that of the US has been decreasing sharply since the November 2021 highs (Chart 4). The decrease in the US supply corresponds with rocketing US 2Y yields since the Fed started hiking interest rates.
We can also examine how regional prices change over time to better understand buy/sell or accumulation/distribution pressures. The MoM price change metric shows the 30-day change in the regional price across US, EU, and Asia (Chart 5). It reveals that:
- The US produced the highest sell-side pressure during the May-July 2021 selloff.
- There was initially huge sell pressure from Asia after the November all-time highs.
- More recently, Asia leads the buy side while Western markets seem to be selling.
Changes in the buy/sell pressure across the three regions potentially reflects different expectations on the influence key events (e.g., rate hikes) will have on crypto markets.
Macro Backdrop: Regulatory Headwinds for PoW Cryptocurrencies
The macro backdrop has changed little for bitcoin. It is still bearish on rate hikes and inflation. However, regulatory pressures have reared their head again via a report from The White House Office of Science and Technology. It called for the legislation to ‘limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining.’ Ethereum seems safe given the imminent merge (change from proof-of-work to proof- of-stake). But the report puts bitcoin (and other proof-of-work cryptocurrencies) in the firing line. For now, bitcoin appears to be shaking off the regulatory headwinds, but this is bad news for the cryptocurrency.
Lastly, todays hotter than expected August CPI print (+8.3%) has seen crypto markets correct sharply on the news. This demonstrates it is still very much driven by broader risk sentiment as opposed to just crypto specific fundamentals.
On-Chain/Flow: 1y+ HODLer Vintage at New Highs
Two metrics give a bearish signal this week:
- ETF outflows.
- There is a bias for exchange inflows.
The remaining four metrics give a bullish signal:
- Futures open interest is rising, and perpetual funding rates are positive.
- The 1y+ HODLer vintage sets a new high of 66% (long-term holders are not selling).
- The profitability of the coin supply is rising.
- The hash rate and miner revenues are up.
On balance, on-chain/flow metrics are giving a bullish signal. Here are the details of each metric (with explanations in the Appendix).
Institutional Demand: Bearish Bitcoin
Our preferred metric to track institutional demand is flows into bitcoin ETFs. We are seeing a sustained period of outflows, though small in magnitude (Chart 6). This is bearish bitcoin.
Demand for Liquidity and Exchange Activity: Bearish Bitcoin
On exchange flows:
- Short term, a bias exists for inflows to exchanges. Net 35,977 coins entered exchanges over the past 14 days (Chart 7). This is bearish bitcoin.
- Longer term, the 30-day change in the exchange balance reveals fluctuations in the supply held on exchanges month on month. This metric has been increasing but remains in negative territory (Chart 8).
Together, we view this as bearish for bitcoin.
Futures Activity: Bullish Bitcoin
Futures open interest is up 10% over the past 14 days – it is currently around $11.1bn (Chart 9). Around $8.8bn (79%) of this comes from perpetual futures contracts.
Perpetual funding rates reveal the directional bias of investors. Funding rates have been rising on average and are now positive again (Chart 10). This is bullish bitcoin.
HODLers: Bullish Bitcoin
The 30-day moving average of the coin days destroyed (CDD) metric falls (Chart 11). The 1y+ revived supply metric follows suit (Chart 12). The 1y+ vintage of the coin supply sets new highs, dominating around 66% of the coin supply (Chart 13).
A considerable proportion of the coin supply has held its coins throughout the macro headwinds and price volatility since bitcoin set all-time highs back in November. We view such a strong conviction not to sell among these investors/HODLers as bullish for bitcoin.
Investor Profit and Loss: Bullish Bitcoin
On profitability of the coin supply:
- The percentage of circulating supply in profit (PSIP) is 60% (Chart 14). This is up 10pp over the 14 days.
- Net unrealised profit/loss (NUPL) is now +0.03 (3% of market cap) (Chart 15). This means the supply sits just in a net profit position (NUPL > 0), with realised cap currently exceeding market cap.
- The spent output profit ratio (SOPR) still mostly remains below one (Chart 16).
The profitability of the coin supply is increasing, and it exits a net loss position (NUPL < 0) despite realised losses on chain (SOPR < 1). On balance, we view this as bullish for bitcoin.
Mining Activity: Bullish Bitcoin
The hash rate is up 25% over the past 14 days and has hit new all-time highs (Chart 17). Miner revenues have also started to rise – they are up 23% over the past 14 days (Chart 18). Together, these are bullish for bitcoin.
We have introduced a framework for understanding the flow and microstructure dynamics of bitcoin markets. The six key metrics are:
- Institutional demand: ETF outflows. Bearish bitcoin.
- Liquidity demand: bias for inflows to exchanges. Bearish bitcoin.
- Futures activity: futures open interest trending up, and funding rates positive. Bullish bitcoin.
- HODLer behaviour: the 1y+ vintage sets new all-time highs (66%). Bullish bitcoin.
- P&L of investors: profitability of the coin supply rising. Bullish bitcoin.
- Mining activity: hash rate and miner revenues are up. Bullish bitcoin.
Perhaps the largest institutional vehicle for bitcoin is the Grayscale Trust, with over $27bn in assets. It invests solely in BTC, and so many investors, notably institutional, who cannot hold BTC directly can get exposure through investing in Grayscale. Consequently, if the trust trades at a premium to BTC prices, it may imply ‘excess’ demand from institutions, but ‘excess’ supply if it trades at a discount. Alternatively, the discount may suggest investors have found other ways to get exposure to BTC, whether through ETFs or directly holding BTC. We therefore focus on how the discount has changed in recent months to gauge investor interest. Alternatively, investors may be using other vehicles to get exposure such as ETFs or holding BTC directly. We put more weight on BTC flows than the Grayscale premium.
Another measure of cryptocurrency bullishness is whether investors are willing to hold it in illiquid form (e.g., a private wallet) or prefer a liquid form (e.g., on an exchange). The former would suggest investors are bullish, as they are comfortable with being unable to sell easily. Conversely, holding it in liquid form would suggest investors are bearish, as they prefer being able to sell easily.
Therefore, large flows onto crypto exchanges would suggest investors want to convert their holdings to a more liquid form, implying more bearishness.
We track the growing market of bitcoin futures. Open interest – the sum of long and short contracts – is a good measure of investor interest.
Perpetual funding rates reveal the directional bias of investors. Exchanges set funding rates to prevent a lasting divergence in the price of the futures contract and the underlying since perpetual contracts have no expiry date so never settle in the traditional sense. Consequently, we can interpret funding rates as the cost of holding bitcoin via perpetual futures. Positive funding rates imply longs pay shorts and vice versa. We use it as a proxy for trader sentiment since a positive funding rate implies traders are paying a premium to keep open long positions.
In our introductory bitcoin flow framework, we explained ‘HODLers’ and ‘HODLing.’ HODLing refers to buy-and-hold strategies in the context of bitcoin and other cryptocurrencies. Those who HODL for extended periods are die-hard adherents.
We can categorise HODLers by the length of time they have held BTC. We define long-term or staunch HODLers as those who bought BTC five or more years ago and have held it ever since, medium-term HODLers as those who bought 6-12 months ago, and short-term HODLers as those who bought 3-6 months ago.
The coin days destroyed (CDD) metric is defined as the number of coins in a transaction multiplied by the number of days since the coins were last spent. So, increasing CDD suggests older coins are being spent (more coin days are destroyed) and vice-versa.
Profit and Loss
The percent supply in profit (PSIP). This tracks the share of circulating BTC supply in profit. That is the percentage of circulating BTC whose current price is higher than when it was last transacted (movement).
Net unrealized profit and loss (NUPL). This is the ratio of unrealised profits over total market capitalisation. While PSIP just focuses on whether BTC coins are in profit or not, the NUPL focuses on the size of profits. So, we could have a situation where the PSIP is low – that is, a low share of supply is in profit – but the NUPL could be high if the size of those profits is large.
Spent output profit ratio (SOPR). While PSIP and NUPL focus on unrealised profits or mark-to-market, this measure focuses on realised profits. SOPR is the realised value of a transaction divided by the value at initiation (or creation) – more simply, price sold divided by price paid. If SOPR is above one, investors in aggregate have realised profits, while below one means they have realised losses. In broad uptrends, SOPR spends a significant amount of time above one, whereas the opposite is true for broad downtrends.
When SOPR is rising, sellers are increasingly realising profits. The opposite is true when it is falling. A price rally with a flatter SOPR trend indicates investors are not yet realising their profits with the rally. The reluctance of investors to sell and realise a profit may be because they believe the price will increase further, which would be bullish. At the same time, more profit taking could precede a correction. Typically, buying as SOPR moves around one during bullish periods has proven to be a profitable strategy.
Computing power is central to the crypto market. Miners use advanced computing hardware to solve complex problems that confirm BTC (and other coins) transactions on the public ledger or blockchain. The miners are rewarded with new coins for their efforts. A measure of the complexity of the problems and so the computing performance required to solve them is the hash rate. The higher this rate, the more computing performance is needed to maintain the blockchain. The rate can fluctuate depending on demand for crypto.
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.