Over the past two weeks, cryptocurrencies have been hit with a double dose of negative news. First, Elon Musk kicked things off by announcing that Tesla would no longer accept Bitcoin (BTC) payments and adding key tweets about Bitcoin’s energy-consuming use. Then a bigger wave hit: the news that China was cracking down on bitcoin miners and traders.
The resulting sell-off was painful in the short term. But in the long term, the foundations of cryptocurrency are being built and a huge shift is taking place.
In the past few days, there have been reports that China’s State Council, has announced regulation of bitcoin mining and trading. While China has a long history of regulating cryptocurrencies, this is the first time that bitcoin mining has been specifically mentioned at a State Council committee meeting.
While it is unclear exactly what type of enforcement action will be taken, the comments are said to have led some Chinese miners to sell their mining equipment and bitcoins. Other miners have already begun to migrate out of China and restart their operations in other countries.
On-chain data provides support for these reports. The amount of BTC transferred out by miners has spiked to the highest level since March 2020, suggesting that some miners may be moving their BTC for sale. While there has not been a big spike in funds flowing directly from miners’ wallets to exchanges, the net outflows support reports that miners have been selling on the OTC.
For an in-depth analysis of how we arrived at our miner metrics, and a further breakdown of the impact of potential Chinese miner migration, see our latest research report.
If these reports are true, it helps explain at least part of the sell-off. But it also has big implications for the future of bitcoin. For years, some investors have expressed concern about the relatively high concentration of BTC miners in China.
Specifically, people have often questioned China’s ability to potentially influence bitcoin, as well as the relatively high carbon emissions associated with some of China’s coal-powered mining operations. If the Chinese government does crack down on mining, much of the computing power currently concentrated in China will end up being reallocated abroad. A shift in power allocation would not only make the Bitcoin network more decentralized, but it would also address the last big criticism holding back BTC’s growth.
Algorithm power (7-day average) has also dropped by about 21% in the last 10 days. This is a possible sign that Chinese miners are being forced offline. If these miners are indeed forced to relocate, we could see a big arithmetic correction in the near future as mining operations start to come back online. However, there is a misconception that the daily arithmetic numbers provide an authoritative view on miners pulling the plug. In reality, it is impossible to get an accurate daily change figure by just looking at the on-chain data.
The Binance Boom
On May 12, after Musk’s tweet, net BTC inflows to exchanges (14-day average) began to spike, meaning that the amount of BTC being deposited to exchanges was relatively high compared to the amount of BTC being withdrawn. By the 19th, net inflows to exchanges reached their highest level in years.
The sudden inflow suggests that some investors are moving BTC to exchanges for sale. But there are several other factors contributing to the large net inflows. Breaking down the net flows by exchange, Binance easily accounts for the largest portion. This is not surprising considering that Binance is the largest exchange in the world, and Binance also has a large futures market, so some of the inflows are probably used to pay for collateral for leveraged positions.
But a look at the net flows on other exchanges shows an interesting contrast. Huobi’s net flows fell sharply, implying a relatively large net outflow. This again coincides with reports that China-based exchanges such as Huobi may be under threat of investigation. Binance appears to be less threatened because it is not officially headquartered in mainland China. The crackdown on Chinese exchanges and trading could be another factor in the shift of bitcoin if that supply ends up leaving China and getting into the hands of other countries.
Short-term Selling Pressure
While selling pressure from China has been the main reason for the price drop over the past few days, the sell-off had started well before that. on May 12, Elon Musk set off the initial shockwaves in the market when he tweeted his concerns about bitcoin’s impact on the environment. Musk later clarified his comments, saying that Tesla was not selling any BTC. but by then, the sell-off had already begun.
After Tesla publicly announced its $1.5 billion BTC purchase in early February, an influx of retail investors helped push the price to an all-time high of more than $63,000. But now, after Tesla’s change of heart, many new entrants seem to have pulled out. Much of the supply that was bought during the wave of Tesla hype over the past few months is shifting into the hands of more powerful users.
The chart below shows the amount of BTC supply that resumed after a period of holding (i.e. sent as part of a trade). After May 12, the amount of BTC being held for 90-180 days and then recovered began to spike. By May 19, the amount of supply being held for 30-90 days and then resumed also peaked. This means that the large supply flowing to the exchanges was likely bought between December and May 2020, with a large amount bought after February.
Many of these sellers appear to have sold at a loss.
The BTC Spend-Output-Profit Ratio (SOPR) fell to 0.977 on May 19, the lowest level since April 2020. The BTC SOPR is the ratio of the price of bitcoins at the time they were spent at UTXO to the price at which they were created. In other words, it is a proxy for the sale price divided by the price paid. a SOPR below 1 indicates that investors are selling at a loss. This indicates that some investors who recently bought, when BTC prices were near all-time highs, have capitulated and are selling their positions. Historically, a SOPR below 1 corresponds to the bottom of a local cycle.
However, it is important to note that SOPR is an approximation and not an exact measure of a profitable trade. Not every bitcoin trade is a trade, which means that not every trade represents a profitable sell-in or sell-out.
In the months leading up to the crash, the cryptocurrency market was propped up by record high levels of leveraged futures. However, as the price of BTC fell, massive amounts of leverage quickly began to blow up. Bitcoin saw a relatively large amount of liquidation on May 19 when the price unexpectedly fell below $40,000. When BTC fell to $39,000, a large number of longs were liquidated, opening a temporary price spiral. Leverage is when traders effectively borrow money to increase their exposure to an asset. Leverage increases the potential reward, but also magnifies the risk. If prices suddenly fall, traders may not have enough collateral in their accounts to cover their leveraged positions, which could result in them being liquidated by the exchange and losing their funds.
This could cause a sudden surge in forced sellers, which could lead to a spiral of liquidation – if enough positions are forced to be sold, the price will fall, leading to more liquidation. The chart below shows the liquidation value of the BTC perpetual futures contract as of May 19. The green “buys” represent short sellers, who were forced to buy to cover their positions. The red “sells” represent long positions that were forced to sell to cover.
As BTC fell below $40,000, a large number of long contracts were liquidated in the $39,100-$40,300 range. This led to a cascade of liquidations all the way down to $30,000, with close to $100 million liquidated below $33,500 and over $80 million liquidated below $31,000. The large number of long liquidations compared to short liquidations indicates that a disproportionate number of contracts were long, a sign of a bullish market at the time. Liquidations below $30,700 finally began to dry up as the BTC price approached $30K and then bounced back up.
A spate of liquidations reduced open interest in BTC perpetual futures by more than $3 billion, bringing it to its lowest level since February. Open interest is a measure of the total number of active futures contracts. An increase in open interest indicates that more contracts are being opened and that more money is entering the market.
Open interest can also be used as a proxy for leverage. If the number of open positions is relatively high, it is likely that there is a high level of leverage in the futures market, as contracts are often opened using leverage. The sharp increase in open interest from February suggests that the record run in BTC was driven in part by high levels of leverage.
The BTC perpetual futures open interest has now reset to January levels. This type of rapid deleveraging has led to devastating short-term price declines. Ultimately, however, the removal of leverage helps create a firmer foundation for future growth as it eliminates a large number of potential sellers.
In the past two weeks, the cryptocurrency market has suddenly started to experience several seismic shifts. Government regulation seems to have accelerated the migration of BTC from China to other parts of the world. Tesla’s change of attitude towards accepting BTC payments spooked some retail investors, causing many to cut their losses. A massive futures liquidation event caused a temporary price spiral, but also removed a lot of the outstanding leverage that had been propping up the market.
The situation in China is still developing and it remains to be seen what will happen in the coming weeks. If there is tougher regulation, the cryptocurrency market could continue to wilt. But if things aren’t as bad as initially thought, the worst may be over.
In any case, once the big sell-off is over, strong buyers will be waiting on the sidelines to take advantage in using the relatively low prices. Institutional investors seem to have been mostly unaffected by the selloff. Those who have been waiting for an opportunity to enter the market may finally see it as the right time, while investment giants like Ray Dalio continue to change their views on BTC.
The fundamentals of Bitcoin have not changed. And, if a big shift to more decentralization does occur, they will only get stronger.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/big-sell-off-hasnt-changed-the-fundamentals-of-btc/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.