Asia | Bitcoin & Crypto | Europe | Monetary Policy & Inflation | US
US, Europe, or Asia – Who is Most Bullish Bitcoin?
- By Dalvir Mandara
- 4 min read
Summary
Trading View (next 2-4 weeks): We like to be bullish bitcoin.
Investment View (next 1-3 years): We like to be long bitcoin.
Macro
- We expect the Federal Reserve (Fed) to hike 25bp (alongside consensus) and Chair Jerome Powell to address questions on possible cuts this year.
- Q4 GDP came in higher than expected.
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Summary
Trading View (next 2-4 weeks): We like to be bullish bitcoin.
Investment View (next 1-3 years): We like to be long bitcoin.
Macro
- We expect the Federal Reserve (Fed) to hike 25bp (alongside consensus) and Chair Jerome Powell to address questions on possible cuts this year.
- Q4 GDP came in higher than expected.
- The probability of a recession within the next 12 months remains high.
- The macro backdrop is slightly less bearish.
On-Chain/Flow Signals
- Five bullish signals and one neutral.
- The on-chain signal is very bullish.
Overall View
- With the macro backdrop slightly less bearish, and our on-chain/flow signals very bullish, our overall view is bullish bitcoin (Chart 1).
Macro: US, Asia, or Europe – Who is Most Bullish?
Bitcoin More Than Recovers from FTX Contagion
Bitcoin has had a stellar start to the year. Our latest Crypto Index Tracker revealed that it could be in for its best January in a decade (it returned 55% in January 2013). But with less than 24 hours left in the month, bitcoin is unlikely to claim that title – it would need to breach c. $25,800. That said, this January comes comfortably in second place, with bitcoin gaining 40% year to date.
But have crypto markets truly recovered from the FTX debacle? To find out, we rebase our crypto indices to 30 October 2022. This is around 11 days before FTX declared bankruptcy, sending bitcoin to multi-year lows as the events unfolded. All major crypto sectors (as defined by our five indices) have more than recovered from the FTX contagion, with our DeFi index being the only (just) exception (Chart 2). Bitcoin comes in second place after our Metaverse index.
US Investors Are More Bullish Than EU and Asia
Is the bullish momentum into H1 shared equally globally? Or are some regions more bullish than the rest of the world? To help answer this, we can look at the regional MoM price change metric (Chart 3). This metric shows us the 30-day change in the regional price set during US, EU, and Asia working hours. According to Glassnode, geolocation of the price changes is done using price movements based on working hours in the US, Europe, and Asia.
We can interpret the data in several ways. Firstly, do the regions agree about the direction of prices (i.e., are they all showing that bitcoin prices are increasing or decreasing)? Secondly, does the magnitude of price changes across the regions differ?
The answer to the first question is ‘yes’ – all three regions have consistently had positive MoM price changes in January (Chart 3). However, the MoM price change for the US has eclipsed that of Europe and Asia recently, suggesting US-based investors are considerably more bullish than the rest. Currently, the MoM price change during US working hours is around $3,980, which is more than double that of the EU ($1,860) and over three times that of Asia ($1,325).
It looks like US investors are supporting the rally the most at the moment.
Macro Backdrop: Ambiguous Macro Environment
A busy data and Fed week lie ahead. The most important events are the 1 February FOMC meeting and January NFP data (Friday). We expect the Fed to hike 25bps, in line with consensus, and NFP to continue to slow closer to labour supply.
Dominique notes that since the December 2022 meeting, lower inflation and strong employment growth have created an ambiguous macro backdrop that decisively validates neither hawks nor doves. Due to this, she expects limited market impact from the FOMC meeting as Powell is unlikely to be hawkish enough to get markets to price a December 2023 FFR nearer the December 2022 SEP.
On-Chain/Flow: ETF Inflows Resume
Five metrics give a bearish signal this week:
- Institutional demand: ETF inflows resume.
- Futures activity: Futures open interest is rising, and perpetual funding rates are staying positive.
- HODLer behaviour: Most (66%) of the coin supply has not moved in at least a year.
- P&L of investors: The profitability of the coin supply is rising.
- Mining activity: The hash rate sets new all-time highs, and miner revenues soar.
The remaining metric gives a neutral signal:
- Liquidity demand: Exchange outflows have slowed.
On balance, on-chain/flow metrics are giving a very bullish signal. Here are the details of each metric (with explanations in the Appendix).
Institutional Demand: Bullish Bitcoin
Our preferred metric to track institutional demand is flows into bitcoin ETFs. Inflows returned mid-January, and we have seen a trend of increasing flows into ETFs over the past two weeks as crypto markets rally (Chart 4). This is bullish bitcoin.
Demand for Liquidity and Exchange Activity: Neutral Bitcoin
On exchange flows:
- Short term, a bias for outflows from exchanges exists. Net c. 6,822 coins exited exchanges over the past two weeks (Chart 5).
- Longer term, the 30-day change in the exchange balance reveals fluctuations in the supply held on exchanges month on month. This metric turned just positive earlier in the month but has returned to negative recently (Chart 6). Despite turning negative, the magnitude of the month-on-month change is small.
Many coins exited exchanges after the FTX implosion as investors lost trust in centralised exchanges. The magnitude of these flows has dropped significantly recently, which suggests outflows as a direct result of the FTX contagion have likely abated. For now, we view these metrics as neutral for bitcoin.
Futures Activity: Bullish Bitcoin
Futures open interest ($8bn), a good measure of investor interest, is up 21% MoM (Chart 7). Perpetual funding rates are, on average, the highest they have been in a year (Chart 8). Funding rates are positive when there is a bullish directional bias, as it implies investors are paying a premium to keep open long positions.
Together this is bullish bitcoin.
HODLers: Bullish Bitcoin
On HODLer metrics:
- The 30-day moving average of the coin days destroyed (CDD) metrics is up 3% MoM (Chart 9).
- The 30-day moving average of the 1y+ revived supply metric is up 28% MoM (Chart 10).
- The 1y+ vintage dominates around 66% of the coin supply now (Chart 11).
Overall, there has been some movement of older coins recently as shown by the increase in CDD and the 1y+ revived supply. This is to be expected somewhat as investors take profit during the recent rally. That said, the proportion of the overall supply that has not moved in at least a year is still 66%, a comfortable majority.
Overall, we still see the strong conviction to hold by most of the coin supply as a bullish signal for bitcoin.
Investor Profit and Loss: Bullish Bitcoin
On profitability of the coin supply:
- The percentage of circulating supply in profit (PSIP) has jumped to 73% (Chart 12). This is up 23pp over the past 30 days.
- Net unrealised profit/loss (NUPL) is now 0.18 (18% of market cap) (Chart 13). The movement to positive territory for this metric means the supply is back in a net profit position (NUPL > 0), with market cap exceeding realised cap.
- Year to date, the spent output profit ratio (SOPR) has started the year with a roughly equal number of days above one (realised profits) and below one (realised losses), with no clear bias for either (Chart 14).
The profitability of the coin supply is increasing, and the supply is again in an (unrealised) net profit position (NUPL > 0) whilst realised profits/losses on chain are equal in frequency. Overall, this is bullish for bitcoin.
Mining Activity: Bullish Bitcoin
The hash rate is again setting new all-time highs and is up +10% MoM (Chart 15). Meanwhile, miner revenues have soared +42% MoM as miners reap the benefits of the broader crypto rally (Chart 16). Together, this is bullish bitcoin.
Appendix
Institutional Demand
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.
Liquidity Demand
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.
Futures Activity
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.
HODLers
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.
Mining Activity
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.