Trading View (next 2-4 weeks): We like to be neutral bitcoin.
Investment View (next 1-3 years): We like to be long bitcoin.
- We expect no hike tomorrow and no increase in the median 2023 dots, but we do still expect two hikes by end-2023 based on no expectation of significant disinflation over the remainder of the year.
- We believe the FOMC reaction function has turned more dovish.
- The probability of a recession within the next 12 months remains high.
- Overall, the macro backdrop is neutral.
- Our on-chain signals show two bullish, one bearish, and three neutral signals this week.
- The on-chain signal is neutral overall.
- With the macro backdrop neutral, and our on-chain/flow signals neutral, our overall view is neutral bitcoin (Chart 1).
Macro: SEC Crackdown
Regulatory action against some of the largest cryptocurrency exchanges by trading volume has taken centre stage in crypto land over the past week following back-to-back SEC litigations against Binance and Coinbase. The charges have been the cause of much volatility in crypto markets recently.
The SEC filed charges against Binance on Monday last week alleging that they blatantly disregarded federal securities laws and ‘enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk’ (Chart 2).
Coinbase was charged on Tuesday with the SEC alleging ‘Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities.’
On the same day, the SEC filed for an emergency action application for a temporary restraining order freezing assets to ensure Binance.US customers’ assets are protected.
It does not just stop at the exchange level either, in both lawsuits the SEC stated that several tokens, including Solana (SOL), Cardano (ADA), Polygon (MATIC), and BNB (BNB) ‘was offered and sold as an investment contract and, therefore, was and is a security.’ This may lead to other exchanges cutting ties with such protocols. Indeed, Robinhood recently announced it will be delisting Cardano (ADA), Solana (SOL), and Polygon (MATIC) later this month which has caused their prices to plunge.
Overall, the current messaging from the SEC seems to be that crypto is not welcome in the US. The longer-term effects of this could see crypto exchanges move overseas and leave the US market completely.
On-Chain/Flow: ETF Outflows Resume
Two metrics give a bullish signal this week:
- Futures activity: Perpetual funding rates are still positive.
- Liquidity demand: A bias exists for exchange outflows.
One metric gives a bearish signal:
- Institutional demand: ETF outflows resume.
The remaining metrics give a neutral signal:
- HODLer behaviour: Increased movement of older coins over the past month but most (68%) of the coin supply has not moved in at least a year.
- P&L of investors: The profitability of the coin supply has dropped recently, but realised profits still dominate on chain.
- Mining activity: The hash rate sets new all-time highs, but miner revenues are down.
On balance, on-chain/flow metrics are giving a neutral 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. Outflow have returned with around $13mn leaving the Bitcoin ETFs we track over the past 5 days (Chart 3). This is bearish bitcoin.
Demand for Liquidity and Exchange Activity: Bullish Bitcoin
On exchange flows:
- Short term, a bias for outflows from exchanges exists. Net c. 15,213 coins exited exchanges over the past two weeks (Chart 4).
- Longer term, the 30-day change in the exchange balance has sits in negative territory (Chart 5).
Overall, the bias for exchange outflows is bullish for bitcoin as it suggests more investors are happy to keep their coins in an illiquid capacity where it is harder to sell (as compared to keeping them on an exchange).
Futures Activity: Bullish Bitcoin
On futures markets:
- Futures open interest ($8.2bn), a good measure of investor interest, is down -1% MoM (Chart 6).
- Perpetual funding rates have, on average, remained positive (Chart 7). This means traders are paying a premium to keep open long positions, which is bullish for bitcoin.
Overall, positive (and increasing) funding rates bode well for bitcoin given a large majority of its futures open interest sits in perpetual (non-expiring) futures contracts. An uptick in the overall futures open interest would bolster this view, but it is bullish, nonetheless.
HODLers: Neutral Bitcoin
On HODLer metrics:
- The 30-day moving average of the coin days destroyed (CDD) metric is up +23% MoM (Chart 8).
- The 30-day moving average of the 1y+ revived supply metric is up +36% MoM (Chart 9).
- The 1y+ vintage dominates around 68% of the coin supply (+44bps MoM, Chart 10).
Overall, there has been an increased movement of older coins over the past month, but on aggregate most of the coin supply has not moved in a year and this proportion is still growing. Together, this is neutral for bitcoin.
Investor Profit and Loss: Neutral Bitcoin
On profitability of the coin supply:
- The percentage of circulating supply in profit (PSIP) sits at 64%, down -4pp MoM (Chart 11).
- Net unrealised profit/loss (NUPL) is 0.24 (24% of market cap, -3pp MoM, Chart 12). The metric means the supply is in a net profit position (NUPL > 0), with market cap exceeding realised cap.
- Year to date, the spent output profit ratio (SOPR) has spent 65% of time above one (realised profits, Chart 13). Looking at the last month alone, SOPR has been above one for 70% of the time.
The profitability of the coin supply has taken a hit recently, but the supply remains in an (unrealised) net profit position (NUPL > 0) and realised profits on chain (SOPR > 1) dominate year to date. Overall, this is neutral for bitcoin.
Mining Activity: Neutral Bitcoin
The hash rate continues setting new all-time highs and is up +15% MoM (Chart 14). Meanwhile, miner revenues are down -3% MoM (Chart 15). Together, this is neutral 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.