BTC Now: Week #9

The On-chain BTC Weekly Forecast: Week #9/2022

Overview

1. Long-term Outlook - Sentiment: Bullish - The fundamentals for the Bitcoin Network remain strong during these tumultuous times. BTC has weathered many bearish and difficult periods over the years and has continued to thrive as the world’s first cryptocurrency. Moving forward, we continue to observe more BTC transferred into illiquid supply as HODLers stack more coins in cold storage wallets. Greater amounts of illiquid BTC combined with relatively low distribution from long-term holders (LTH) are contributing to a supply shock that is forming in the weeks and months ahead.

2. Mid-term Outlook - Sentiment: Neutral with Caution - Spent Profit Output Ratio (SOPR) broke above 1 this week for the first time since mid-February, signaling a potential for bullish recovery. “Dry-powder” stablecoin levels are at all-time highs as crypto investors wait for uncertainty to leave the global stage. Any longer-term recovery seems highly dependent on a resolution to the kinetic situation in Ukraine. Investors should be extremely cautious during all time horizons at this time.

3. Short-term Outlook - Sentiment: Neutral with Caution - The price of BTC rose this week, as did a slight uptick in short liquidations compared to late last month. Derivatives seem to be driving the price of BTC as we are observing more inflows into derivatives markets via Open Interest. 40% of the Futures Open Interest is being financed by risky crypto-margined accounts; the price of BTC could quickly move if price action moves to unravel leveraged positions.

Long-term Outlook - Sentiment: Bullish

As with most assets, the long-term price of Bitcoin is nearly exclusively driven by supply and demand dynamics. As we look far into the future of the Bitcoin Protocol, we must understand that eventually, BTC mining will no longer produce the block rewards that contribute to the hard limit of just under 21 million BTC. In other words, no new BTC will be created and Bitcoin will change from using a Proof-of-Work system that issued block rewards to one where miners only earn fees to validate transactions and write new blocks.

Stockpiling BTC for the Future

Without understanding all the technicalities of mining and staking BTC, the key takeaway here is that a number of investors who may be individuals, organizations, or even crypto exchanges are stockpiling BTC in cold storage. These investors believe that global demand will eventually far outpace demand, contributing to a supply shock that could possibly send the price of BTC soaring; with some estimates reaching into the millions of dollars per Bitcoin. 

With this perspective in mind, a bullish case for BTC’s price appreciation will continue as long as we see more and more coins purchased today, with the expectation that that coins purchased today will be sold in the distant future (increasing illiquid supply). The chart above illustrates this point quite clearly. Over the past two years, we can see the evidence of this playing out week after week as more BTC is moved off the market into the safety of wallets that are not connected to the Internet or ready to be sold at exchanges. 

LTH Take Profits Amid Global Unrest

Currently, supply is quite muted with relatively meager outflows coming from LTH wallets. With BTC’s price up 16% from a recent low of $35,000 USD, the modest sales of BTC from LTH suggest strategic profit-taking during a time of global uncertainty rather than a large sell-off from entities looking for exit liquidity. If the situation changes and we begin to see a mass exodus of LTH from Bitcoin, such as sell-offs we saw in 2017 and 2013, the long-term outlook should be evaluated at that time.

Mid-term Outlook - Sentiment: Neutral with Caution

Using Adjusted Spent Output Profit Ratio (aSOPR) in the chart below gives a simple metric that we can use to infer the market’s sentiment and the behavior of the people in it. When aSOPR is > 1, then investors are in profit when they spend or sell their BTC, otherwise, below 1, they are executing transactions at a loss. 

SOPR Shows Mainly Losses in 2022

With the close of Q1 quickly approaching at the end of the month, we can use SOPR to confirm that 2022 so far has been a pretty tough year, particularly for short-term holders. Many of the investors who purchased BTC at the most recent ATH last fall have all but sold off their expensive coins during the long drawdown that has extended over 100 days. The SOPR metric has been reflecting this bearish sentiment, rejecting any values above 1 as short-term holders mitigate losses and sell at a loss.

Looking below at the LTH SOPR we see an entirely different experience on-chain. Long-term holders of Bitcoin have been enjoying a long period of profitability with SOPR dipping below the value of 1 only once this year. 

Stablecoins Keep Value in Crypto Markets

Cryptocurrency coins that are pegged to the dollar - so-called “stablecoins” - have been growing exponentially over the last two years. In February 2020, the stablecoin market was worth about $5 billion, growing by 40x to $200 billion today - close to 10% of the entire crypto market cap. Tokens like USDC, USDT, BUSD, and others are used as proxies for fiat currency that traders can use on crypto exchanges. Stablecoins offer low volatility for traders and are attractive “placeholders” for value before entering or when exiting trades. It should be noted that currently stablecoins are traded at volumes higher than any other type of cryptocurrency, denoting their popularity and usefulness. 

Many traders use these tokens as a primary vehicle for opening and exiting Bitcoin positions on exchanges. Stablecoins play a critical role in the supply and demand dynamics of various global cryptocurrency markets, which in turn can directly influence the price of BTC. Stablecoins live natively on the blockchain, allowing on-chain analysts to observe the supply and demand dynamics between BTC and USD.

Investors use stablecoin to deploy capital into crypto markets and also use them as proxies for fiat currency when they are deciding to leave crypto. When we observe large levels of stablecoin in wallets, we can assume that those investors are planning on using those funds to quickly enter markets – otherwise, we would see them converted on exchanges into fiat currencies. Overall, large amounts of stablecoin can be viewed as a bullish signal since investors are keeping “dry-powder” ready to be deployed at short notice in the crypto ecosystem.

Plenty of Stablecoin Ready to Deploy

We can see today that stablecoin levels are still quite high, near an ATH. The chart above shows that exchanges have added over $8B USD of stablecoin value to investors' ledger balances over the past month. In recent days, news of investors in conflict zones purchasing large amounts of USDT, or Tether, has emerged in light of stunning financial sanctions and the collapse of Russia’s national currency, the ruble. While typically large amounts of stablecoin ready to deploy can be and usually is a bullish indicator, special consideration needs to be made at this time with the war raging in Ukraine.

Short-term Outlook, Sentiment: Neutral with Caution

Earlier this month we saw what appeared to be a tentative recovery as BTC bounced from the recent $35k USD bottom that set in after months of downward price action. This week started out with a surprising boost in pricing amidst devastating reports of escalating conflict and war in Eastern Europe. 

Futures Open Interest on the Rise

Open Interest spiked during the bullish price action this week, notably on more retail exchanges (i.e. Binance). As the price of Bitcoin soars, investors - particularly inexperienced retail investors - use leverage to amplify their positions, often creating risky positions that more experienced investors (i.e. whales), can exploit to capture liquidity from short-term holders with relatively low conviction in the protocol. This cycle seems to repeat itself, with many short-term speculators consistently being handed losses as they spin up their leveraged positions into price action.

Evaluating the Quality of Open Interest

Another metric we can use to evaluate the quality of the investments being made into Bitcoin is looking at the percentage of the Open Interest that is being secured with crypto-assets. Currently, as illustrated below, 40% of the Open Interest in derivatives markets is being funded with other cryptocurrencies. To put this in perspective, in May of last year with BTC just below $60,000 USD, nearly 70% of Open Interest was Crypto-Margined. This set the stage for the “mini-bear” market that appeared last summer and flushed out long positions.

With Open Interest being relatively low and with it being funded primarily from non-crypto sources, the current market structure could easily be perceived as bullish. We could argue that a great deal of risk has been removed through deleveraging that occurred all throughout November and December of 2021 and that the Bitcoin Network rocket is being prepped for launch with billions in stablecoin ready to fuel its’ rise.

However, with the global situation still fluid and as investors ingest mountains of data coming from the war in Ukraine; the price outlook for the short term is uncertain at best. On the positive side of things, as soon as the macro-environment clears, the current market structure is poised and ready to support a strong recovery and stable price appreciation.

Impact of a negative macro-environment 

Over the past few months, the correlation between equities and Bitcoin has been strong, with the major events that plagued risk on growth equities spilling over into Bitcoin and other digital assets. A significant looming risk in the interim thus remains to be the negative macro backdrop. The expectations of a more aggressive timeline on policy tightening and rate hikes by the Federal Reserve has negatively impacted risk assets in general, with the tech-heavy Nasdaq 100 down nearly 16% YTD. 

There are various other potential negative macro factors such as a tense geopolitical environment with Russia, or uncertainty around the impact of Omicron on countries and economies. A significant drop in equity markets is expected to pull BTC down with it in the process - despite relatively strong on-chain fundamentals. Whereas we would expect BTC to recover relatively quickly in such a scenario, it still could lead to heavy losses in the short term. 

Whereas our on-chain long-term indicators indicate a more bullish outlook, the mid-term and short-term perspective is much more mixed and is dependent on other, non-fundamental, factors - in particular the negative macro environment. 

Conclusion

Considering the current situation facing the world this week, the Bitcoin Network has remained notably resilient. Long-term holders continue to hold the line with relatively low distribution rather than panic-selling and capitulation. As investors save more BTC in off-line wallets, fewer BTC are available to be purchased at exchanges contributing to a tightening in supply and setting the stage for future price appreciation. 

Mid and short-term timeframes are highly dependent on a resolution to the conflict in Europe. Even while fundamentals look promising, black swan events can drive investors into a frenzy for more BTC–quickly boosting prices–or do exactly the opposite, and send BTC holders into a panic as we saw during March of 2020. With the current market structure, the potential for a quick recovery as billions in stablecoin are poised to be deployed is present. Until then, the market waits for developments in the global environment.

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