Trading View (next 2-4 weeks): We like to be bearish bitcoin.
Investment View (next 1-3 years): We like to be long bitcoin.
- The Fed hiked rates 75bps last week.
- Equities have been selling off, and bitcoin’s correlation to the NASDAQ remains over 75%.
- The probability of recession is over 50% again on a flattening of the 2s10s yield curve slope.
- The macro backdrop remains bearish.
- Our metrics are mostly bearish this week: one bullish signal, four bearish, and one neutral.
- With the macro backdrop still bearish, and our on-chain/flow signals bearish overall, our overall view remains bearish bitcoin (Chart 1).
Macro: Rate Hikes and Layoffs
Inflation and aggressive hiking paths remain at the forefront of the bearish global macroeconomic outlook for cryptocurrencies. Bitcoin’s correlation to the NASDAQ is still over 75%, and equities have dragged crypto down with them in response to rate hikes announced by the Fed last week. But that is not all. Several other factors still weigh on crypto sentiment:
- Recession risks run high as yields soar.
- One of the biggest and most active hedge funds in the crypto space, Three Arrows Capital (3AC), failed to meet margin calls last week. It has appointed legal advisors to find a solution. BlockFi was reportedly involved in the liquidation of 3AC.
- Crypto exchanges BlockFi, Coinbase, and Crypto.com have been laying off large proportions of their workforces amid challenging market conditions. Bybit appears to be the latest to take similar measures to cut costs.
Miner Flows Are Bearish
Mining bitcoin (and other proof-of-work cryptocurrencies) is energy intensive. It requires ongoing investment in time, electricity, and hardware. Yet as inflation accelerates, rising energy prices have reduced mining profitability.
Why does that matter? Miners have an incentive to sell when they need to offset potential losses on miner revenues, which occur when prices draw down. And understanding how miners are reacting to bearish price action can indicate broader market sentiment. So, what are they doing during the current bloodbath?
Miners Are Sending More Coins to Exchanges
We can examine miners’ behaviour via their interaction with exchanges. We previously looked at how the overall exchange balance relates to bitcoin returns. And we found a relationship: an increase (decrease) in exchange balance corresponds to a decrease (increase) in returns. The rationale is that during bearish periods, investors move coins onto exchanges to hold them in a liquid capacity that is easier to sell.
This behaviour is perhaps even stronger for miners. Bitcoin miners aim to profit directly from their mining efforts with the block rewards they receive. So, in bearish markets, they will likely move their coins onto exchanges when they want to sell to offset extra costs in electricity or a reduction in miner revenue.
We can look at the 30-day moving average of the coins sent from miners to exchanges to understand miner flows (Chart 2). This metric started an uptrend on 7 June. This is a sign that miners have been increasingly liquidating their coins on exchanges as high energy costs and considerably lower miner revenues has weighed on mining profitability.
We can gain a historical perspective on miner outflows by looking at the outflow multiple (Chart 3). This is the ratio of miner outflows (the daily total amount of coins transferred from miner addresses) to its 365-day moving average. This metric considers all outflows (not just those that have exchanges as the receiving addresses) so is broader. We again see increased outflows over a similar period to that of the miner flows onto exchanges, indicating outflows are higher than the historical average.
What Are Miner Flows Revealing?
Miners are an important part of the bitcoin ecosystem. They are the only way new bitcoins are introduced to the network. As such, monitoring their flows is useful to help understand their sentiment and conviction. Mining margins are tight, and miners need to cover their operating costs. The combination of rising energy prices and plunging miner revenues has led to sell pressure from bitcoin miners. Whilst it is not immediately obvious whether miners are selling due to a bearish view on bitcoin overall or just to cover their running costs (which is inevitable eventually), the sell-side pressure is bearish, nonetheless.
On-Chain/Flow: Bitcoin Moves to a State of Unrealised Losses
One metric gives a bullish signal this week:
- Bias for exchange outflows.
Four metrics give bearish signals:
- ETF outflows.
- Futures open interest and perpetual funding rates plunge.
- Reduced profitability of the coin supply, the market moves into a state of unrealised losses (NUPL < 0), and a bias for realised losses on chain.
- Hash rate and miner revenue are decreasing.
Lastly, the remaining metric gives a neutral signal:
- There is little movement among the HODLers, but we could be at a turning point for the 1y+ vintage.
On balance, on-chain/flow metrics are giving a bearish 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 huge spike in outflows from ETFs (Chart 4). We will watch this metric closely over coming weeks to assess whether a trend in outflows persists. This is bearish bitcoin.
Demand for Liquidity and Exchange Activity: Bullish Bitcoin
In the short term, a bias for outflows from exchanges exists. Net 88,000 and 87,000 coins have exited exchanges over the past seven and 14 days, respectively (Chart 5). 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. This metric has fallen into deep negative territory again (Chart 6). This means the exchange balance is decreasing relative to the last 30 days, which is bullish for bitcoin.
Futures Activity: Bearish Bitcoin
Futures open interest has plummeted over the past week – it is currently $9.6bn, down 26% over the past seven days (Chart 7). Around $6.1bn (64%) of this comes from perpetual futures contracts. This is bearish bitcoin.
Perpetual funding rates reveal the directional bias of investors. Funding rates are in a sharp downtrend, suggesting investors are paying a premium to keep open short positions. This is bearish bitcoin.
HODLers: Neutral Bitcoin
The 30-day moving average of the coin days destroyed (CDD) metric is relatively flat on the week (Chart 9). The 1y+ revived supply metric follows suit (Chart 10).
The 1y+ vintage of the coin supply continues to dominate – around 65% of the coin supply has been accumulating for at least a year (Chart 11). This vintage had been increasing throughout 2022 but has recently started to decline. Could this be a turning point?
We may be at a turning point in HODLer accumulation as the 1y+ vintage starts to decline. We need to see if this trend continues before reconfirming a bullish or bearish signal. In the short term, we view these HODLer metrics as neutral for bitcoin.
Investor Profit and Loss: Bearish Bitcoin
On profitability of the coin supply:
- The percentage of circulating supply in profit (PSIP) has dropped to 53%, down 4pp over the past two weeks (Chart 12).
- Net unrealised profit/loss (NUPL) is now -0.08 (8% of market cap) (Chart 13). The market is now in a net loss position with realised cap currently greater than market cap (i.e., the aggregate value of each UTXO at the price when they last moved is greater than the current aggregate value of those UTXOs).
- The spent output profit ratio (SOPR) is still showing a bias for realised losses on chain with a value of less than one every day for the last 14 days (Chart 14). Further back, it has been less than one for 28 of the last 30 days – meaning just two days of realised profits on chain over the past 30 days.
Overall, the reduced profitability of the coin supply and realised losses on chain are bearish for bitcoin.
Mining Activity: Bearish Bitcoin
The hash rate is down 8% over the past 14 days (Chart 15). Miner revenues have fared even worse. They are down 40% over the past 14 days (Chart 16). Together, these metrics are bearish 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 outflows from exchanges. Bullish bitcoin.
- Futures activity: futures open interest and perpetual funding rates plummet. Bearish bitcoin.
- HODLer behaviour: we could be at a turning point for the 1y+ vintage. Neutral bitcoin.
- P&L of investors: decreased profitability of the coin supply and a bias for realised losses on chain. Bearish bitcoin.
- Mining activity: hash rate and miner revenues decreasing. Bearish 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.