On May 19, 2021, the Bitcoin market experienced one of the most significant liquidation events and price declines since Black Thursday in March 2020. This market capitulation occurred after Bitcoin had been adjusting above $50,000 for months and after the market failed to reach new all-time highs following the highly anticipated direct listing of Coinbase.
This worst sell-off on May 19 saw the largest daily chart in Bitcoin history, with an intra-day price range of $11,506. In total, the bitcoin price has fallen 47.3% since May 9.
This dramatic downward price action took the entire market by surprise, especially since this event occurred during the largest bull market in Bitcoin history. As a result, many are wondering if the bull market is over and if Bitcoin has entered a long-term bear market structure.
In this article, we examine the indicators that describe the market structure that led to the sell-off, as well as an assessment of future bull and bear market conditions. This article will explore.
Indicators: Early warnings for mitigating institutional demand and allocation in the on-chain spending model.
Analysis: Token flows to and from exchanges, and the need for exit liquidity in stable coins.
Comparison with previous market cycles, sell-offs and holder behavior to determine if a macro bull market continues or if a bear market is coming.
This article from The Week On-chain (week 21) newsletter details the magnitude of the market sell-off, the market reaction, and the losses and gains realized during the event.
Changes in Institutional Demand
As the Bitcoin market grows and matures in valuation, it both attracts and requires greater capital and volume to sustain and reach new highs. The primary driver of this bullish momentum is undoubtedly institutional inflows, primarily in response to the extraordinary monetary and financial response to the COVID pandemic.
The largest investment vehicle available to traditional investors is the grayscale GBTC trust product. Through much of 2020 and early 2021, investors are taking advantage of strong institutional demand through in-kind arbitrage of the ongoing GBTC price premium. This serves a dual purpose as it removes BTC tokens from liquidity circulation, thereby creating a self-reinforcing supply crunch that drives growing institutional demand.
By January 2021, inflows to the GBTC Trust approached 50,000 BTC, while GBTC traded at a consistent premium of between 10% and 20%. In late January arbitrage began to push the premium below 10%, and BTC inflows began to slow dramatically. In late February, inflows stopped completely and GBTC began trading at a deteriorating negative premium to the spot price.
GBTC prices have now been trading at a negative premium for more than three months, hitting a negative premium low of 21.23% on May 13. the existence of a negative premium for GBTC both eliminated a huge supply sink and provided advance warning of a significant weakening in institutional demand since late February .
However, with the recent sell-off, GBTC’s negative premium has begun to narrow to -3.8%. This suggests that institutional interest or conviction among arbitrage traders has risen as the bitcoin spot price has fallen.
Grayscale Premium Real-Time Charts
To tell a similar story, the Purpose Canada Bitcoin ETF received consistent capital inflows from late April through early May. Since then, outflows have begun to dominate as the market begins to show signs of weakness. However, similar to GBTC, demand flows appear to be recovering significantly following the price correction, with inflows picking up again as of late May.
Purpose ETF Inflows Live Chart
Inflows into both GBTC and Purpose ETFs suggest that institutional demand weakened from February through May, and both will have an impact on liquid BTC supply. On the positive side, the recent sell-off appears to have motivated investors in both products as the negative premium on GBTC begins to wane and inflows into the Purpose ETF resume.
Bitcoin’s ascension to the world macroeconomic stage after March 2020 is an effect that can be clearly observed in the balances held on exchanges. Exchange balances have undergone a dramatic reversal from permanent accumulation to uninterrupted outflows. The volume of BTC is shifting from liquidity to illiquidity, resulting in a self-reinforcing supply crunch, with tokens moving from exchanges to institutional custodians and/or cold wallets.
The change in illiquidity measure shows the rate at which coins have shifted from a liquid to illiquid state in the last 30 days (green bars). The accumulation over the last two years has been predictable, but the size of the May sell-off is also notable. Investors were clearly spooked during the recent sell-off.
While it may take time to determine the trend, a return to accumulation in this indicator would be a strong signal that conviction has returned. If not, it could indicate that further token distributions are on the horizon.
Real-time chart of illiquid supply changes
In the months leading up to the sell-off, a trend could also be seen in the increasing volume of deposits sent to exchanges. Conversely, as prices have fallen, the opposite trend has been seen recently as investors step in to buy low and a large number of tokens flow to exchanges.
The declining trend in exchange balances has continued for over 434 days, but a significant increase in exchange inflows was observed on April 3. This is consistent with the flow of previously illiquid coins re-entering the liquidity cycle in the chart above. Note that there are multiple explanations for this behavior, which are likely to occur simultaneously.
Exchange inflows for distribution and sales purposes.
Collateralization for lending, futures and margin transactions.
Capital shifts to other assets (particularly ETH, which we analyze here).
Retail-led speculation and trading, especially in relation to the Coin Smartchain.
A closer breakdown of this trend shows that exchange outflows actually continue or are net balanced for most exchanges, with the exception of three: Binance, Bittrex and Bitfinex. These exchanges witnessed accelerating inflows across BTC in 2021, with Coinan particularly leading the way. During the May sell-off, the total balance held by these exchanges increased by over 100,000 BTC in 1 week.
Considering these non-US exchange-serving entities, this may indicate differences in market reactions and beliefs about the events that led to the sell-off across international jurisdictions.
Exchange Balances Live Chart
Conversely, balances at US regulated exchanges Coinbase, Gemini, Kraken and Bitstamp continued to decline, having a significant impact on trends throughout almost the entire month of May.
Real-time chart of exchange balances
The percentage of on-chain transaction fees used for exchange deposits has also accelerated recently. Similar to the macro top of 2017, demand for exchange deposits accelerated throughout the bull market before reaching a new ATH, this time exceeding 20% of all on-chain fees. This indicates an urgent need for token holders to prioritize deposits, either out of panic or to rehypothecate margin positions during a correction.
Real-time chart of exchange fee dominance
Finally, on the exchange side, there has been a massive deleveraging of the derivatives market, leading to a cascade of market sell-offs, margin calls and liquidations. Starting with a peak of $27.4 billion of open futures contracts set in mid-April, more than 60% of the open positions have been cleared from the books. It is important to note that open futures contracts are only one form of leverage available in the cryptocurrency market. Additional sources of margin are coming from crypto loans, options markets, and increasingly, DeFi protocols, and we will discuss the reaction to this sell-off further in this article.
Real-time chart of open futures positions
Exit liquidity and “dry powder” (i.e. total cash available for investment)
Stablecoins undoubtedly play the role of reserve assets in the industry, each with a unique mechanism to maintain “stability”. As such, the price performance of stablecoins relative to their $1 peg provides insight into the need for exit liquidity. In particular, in March and April, the three major stablecoins, USDT, USDC and DAI, all traded above their pegs until Coinbase went public directly. This suggests that there may be strong demand for exit liquidity from stablecoins, possibly in anticipation of “sell-off news”.
Stablecoin Price Live Chart
However, on the other side of the sell-off, the supply of stablecoins in circulation has since hit an all-time high. Since the price correction began on April 14, the supply of stablecoins has increased by the following amounts over the past 1.5 months.
USDT market cap increased by $14.2 billion (+30%)
USDC market cap increased by $9.72 billion (+88%)
DAI market cap increased by $1.22 billion (+38%)
Stablecoin Supply Real-Time Chart
The Stablecoin Supply Ratio (SSR) compares Bitcoin’s market cap to the total supply of all stablecoins as a measure of crypto-local, dollar-denominated purchasing power. A lower SSR value implies a larger supply of stablecoins (dry powder, i.e., total cash available for investment) relative to the bitcoin market cap. With bitcoin valuations contracting and stablecoin supply increasing, the SSR ratio has now fallen to an all-time low of 7.5x.
This convincingly represents the largest crypto local dollar buying power in history.
HODLer Spending Behavior
Finally, we will investigate the spending and HODLing (holding) behavior of the market. In particular, we will focus on the balance of new investors who may be relatively new to the volatile and FUD-driven world of Bitcoin (short-term holders, STH), while long-term holders (LTH) have beliefs that have been shaped through years of battle scars.
During the 2020-21 bull market, tokens aged between 6 months and 3 years (representing buyers from the previous cycle) experienced two periods of increased spending.
December 2020 to February 2021, as profits were realized during a stronger market that rose from $10,000 to $42,000.
Late April to mid-May, as older BTC was spent, possibly through capital rotation (when ETH prices doubled) and possibly in response to the weak market structure described above.
However, after these two periods, spending on older coins slowed significantly as prices adjusted. This suggests that older players were quite good at selling prior to the major correction (their token distribution also increased indirect supply), but also tended to regain conviction in their holdings (and possibly buy lower) as prices became cheaper.
If we compare the spending behavior of older coins to the 2017 macro top, we can see a somewhat similar pattern where older players slowed their spending as the market became euphoric. However, as the likelihood of a bear market increased, the percentage of older coins rejuvenated in the first relief rally. A similar event occurred during most of the bear market rallies in 2018 and the eventual capitulation in November.
This is an important indicator to watch in the current market structure as it may indicate whether a similar mass exit of older coins will occur during any relief rally. Conversely, if these older illiquid coins are not distributed, it suggests a more optimistic outlook among crash-traumatized HODLers.
Spend output time period real-time charts
The implemented market cap HODL waveform chart provides a view of the active supply as a percentage of tokens over time. A typical cyclical pattern is.
Old coin sizes inflate during bear markets as accumulation restarts and wealth shifts from speculators to long-term holders.
New coins inflate during bull markets as holders distribute expensive tokens to new, weak-handed speculators.
In the current market structure, we see the first major impulse change in coins less than 3 months old as new speculators enter the market. This is consistent with the initial bull market rally where older tokens were expensed after breaking from $10,000 to $42,000. The significant difference in this cycle is that we can see a decrease in the percentage of new speculators. There are several explanations for this phenomenon.
Increased use of derivatives and instruments to gain price exposure without interacting with the blockchain at all.
Retail speculators’ preference and/or singular bias towards crypto assets other than Bitcoin and similar use of derivatives and off-chain leverage.
Institutional buyers who accumulated early in the bull cycle increased token maturity and holding behavior and were unaffected by the volatility that led to the early expansion of older coins (token maturity).
Looking at this chart upside down, we can see two observations regarding the percentage of old coin holders.
The supply of LTH holdings has actually returned to a state of accumulation, which supports the argument that token maturity and institutional HODLing are still in play. If this were to happen, it would resemble the beginning of a bear market, but would also contribute to an eventual supply crunch.
LTH currently holds 10% more active supply than in all previous market cycles.
The second point may be interpreted as bullish, as it implies that HODlers are distributing fewer coins. However, it may also be considered bearish because it suggests that demand is not sufficient to absorb this relatively small supply of coins for sale.
Ultimately, the ultimate financial pain during a sell-off comes from investors observing the evaporation of unrealized gains, either by returning to a cost basis or surrendering to accept unrealized losses. The Net Realized Gains and Losses metric calculates the total extent of gains and losses held by the unused token supply.
If we filter this metric by STH (coins < 5 months old), we can see that the May sell-off rivaled the bear market and the largest capitulation in Bitcoin history in terms of size. There are a large number of buyers in 2021 who are currently underwater in terms of holding costs. This supply could become indirect supply as prices attempt to pick up, providing resistance for the bulls.
STH NUPL Real Time Chart
If we also filter the tokens held by LTH, we get a chart that shows the market is standing on the knife edge of history. Due to Bitcoin’s tremendous long-term price performance, unrealized gains and losses held by long-term investors tend to be less volatile and more cyclical.
However, the current level of net unrealized unrealized surplus held by LTH is testing the 0.75 level, which has been a make-or-break level between past bull and bear market cycles. Only in the “double pump” situation of 2013 has this indicator recovered. This could also create a new source of indirect supply if LTH’s book earnings continue to fall. On the other hand, a supply crunch caused by higher prices and buying on the cheap would begin to resemble the 2013 “double pomp” scenario.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/may-market-sell-off-analysis-is-a-bull-or-bear-market-next/
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