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.
- Fed speakers remained hawkish last week.
- Recession probabilities remain near 80%.
- The macro backdrop remains bearish.
- Our metrics are bullish on average this week (three bullish signals, one bearish, and two neutral).
- With the macro backdrop still bearish, and our on-chain/flow signals bullish overall, our overall view is neutral (Chart 1).
Macro: BTC/GBP Trading Spikes
Fiat currencies globally have been getting crushed against the US dollar, and GBP has not been spared. The UK chancellor’s mini budget sparked a selloff in GBP and UK bonds during the last week of September. Indeed, GBP/USD fell to its lowest levels since 1985 (Chart 2). But how does fiat turmoil translate to the crypto markets?
Binance is the world’s largest cryptocurrency exchange by trading volume. So if there were any spillover effects from the cable (GBP/USD) volatility into crypto markets, Binance would be a good place to look. Around the same time GBP/USD hit lows of around 1.04 (26 September), trading volume in the BTC/GBP pair on Binance spiked (Chart 3). A similar spike occurred in the BTC/EUR pair too.
There are several potential reasons trading volume might spike as sterling dropped:
- People could be switching their GBP to BTC to hedge against GBP weakness. This narrative is not unique to GBP. BTC/RUB and USDT/RUB trading volumes increased on Binance during the start of the Russia-Ukraine war.
- That said, increased trading volume does not automatically translate to more bitcoin buyers (every buyer needs a seller). Maybe the increased volume was people selling BTC for GBP instead.
- Volatility offers the opportunity for large profits (and losses). So, the ‘flash crash’ in sterling on 26 September would have presented some arbitrage opportunities for BTC/GBP that speculators could have been making the most of.
When fiat currencies crumble against the dollar, investor participation (as proxied by trading volume) in crypto tends to rise. We noted the spike in BTC/GBP trading volume after the GBP/USD crash and the same for BTC/RUB when the Russia-Ukraine war stared. But there are more examples. The USD/TRY rate has been increasing since the start of the year. Simultaneously, BTC/TRY volume on Binance has been increasing throughout. Moreover, a similar story played out in the BTC/JPY pair after the Bank of Japan intervened to try and stabilise the yen.
Are Correlations Changing?
Bitcoin has spent much of this year being highly correlated to risk assets like tech stocks. However, over the past few months, its correlation to gold (traditionally considered a safe-haven asset) rose more sharply. It peaked near 70% at the start of September and has fallen to around 46% currently. Notably, bitcoin is currently more correlated to gold than the S&P 500 (33%) and the NASDAQ (37%) over a rolling 30-day period. No doubt a strong US dollar has weighed on both assets, pushing correlations higher.
Macro Backdrop: ISM PMI Sparks Rally
Stocks and crypto both gained on Monday after the ISM manufacturing purchasing managers index (PMI) fell to 50.9 in September against an expected 52.2. This is its lowest reading since May 2020, which indicates Fed tightening is starting to impact more parts of the economy. However, Fed speakers remained hawkish last week, and we are also expecting nonfarm payrolls data on Friday – any surprises could rile markets. Lastly, recession probabilities remain elevated near 80%. The macro backdrop is still bearish for crypto.
On-Chain/Flow: Hash Rate at New Highs
Three metrics give a bullish signal this week:
- Liquidity demand: Bias for outflows from exchanges.
- HODLer behaviour: The 1y+ vintage remains elevated (66%).
- Mining activity: The hash rate soars to new highs.
One metric is giving a bearish signal:
- P&L of investors: Profitability of the coin supply is still low and realised losses still dominate on chain.
The remaining two metrics give a neutral signal:
- Institutional demand: ETF flows are muted.
- Futures activity: Futures open interest is falling, but perpetual funding rates are positive.
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: Neutral Bitcoin
Our preferred metric to track institutional demand is flows into bitcoin ETFs. Most of September saw muted ETF flows (Chart 5). There have been inflows recently, but these are small. Overall, we view the subdued ETF flows as neutral for bitcoin.
Demand for Liquidity and Exchange Activity: Bullish Bitcoin
On exchange flows:
- Short term, a bias exists for outflows to exchanges. Net 33,9672 and 29,515 coins left exchanges over the past seven and 14 days, respectively (Chart 6). This is bullish bitcoin.
- Longer term, the 30-day change in the exchange balance reveals fluctuations in the supply held on exchanges month on month. On Wednesday last week, this metric hit its highest level since July 2021 (80,266, Chart 7). It has been falling sharply since then but remains in positive territory. Despite just remaining in positive territory, it has come off significantly from its highs, so we view this as constructive for bitcoin.
Futures Activity: Neutral Bitcoin
Futures open interest is down 7% over the past 30 days – it is currently around $9.1bn (Chart 8). Around $7.6bn (84%) 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 9). This is bullish bitcoin.
HODLers: Bullish Bitcoin
The 30-day moving average of the coin days destroyed (CDD) metric has been falling recently (Chart 10). It is currently down 14% over the past week. The 1y+ revived supply metric is also down over the past week (Chart 11). Together, this suggests less movement of older coins. The 1y+ vintage continues to rise slowly – it is around 66% of the coin supply now (Chart 12). Overall, there has been little movement of older coins despite the macro headwinds crypto markets have faced this year. This is bullish for bitcoin.
Investor Profit and Loss: Bearish Bitcoin
On profitability of the coin supply:
- The percentage of circulating supply in profit (PSIP) is 49% (Chart 13). This is down 2pp over the 30 days.
- Net unrealised profit/loss (NUPL) is now -0.09 (9% of market cap) (Chart 14). This means the supply sits in a net loss position (NUPL < 0), with realised cap currently exceeding market cap.
- The spent output profit ratio (SOPR) has remained below one since 13 September (Chart 15). This means that there have been realised losses on average every day since then.
The profitability of the coin supply is low, and it sits in a net loss position (NUPL < 0) accompanied by realised losses on chain (SOPR < 1). On balance, this is bearish for bitcoin.
Mining Activity: Bullish Bitcoin
The hash rate is up 24% over the past 30 days and has hit new all-time highs (Chart 16). Miner revenues have been fairly flat on average over the same period (Chart 17).
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.