In the 18th century, Baron Rothschild from the famed Rothschild banking dynasty was credited as saying ‘’the time to buy is when there’s blood in the streets’’, he subsequently went on to make fortunes buying into the panic that was derived from the Battle of Waterloo. Right now, the market is battling a war against sentiment, especially over this recent weekend. The flow of blood is strong within the crypto markets, and directional leveraged traders are either packing up and going home, having been liquidated in last week’s brutal sell-off, or are dealing with portfolio revaluations of painful proportions. Conversely, during these past weeks, well-capitalized delta-neutral arbitrage traders have feasted on the sky-high panic-driven volatility causing lucrative price dislocations across exchanges which are systematically exploited for profit, these traders have seen extremely profitable days of late. As an example of the price moves, Bitcoin has now experienced the largest monthly candle in history, a staggering $29,000 directional move.
Chart showing the historical movement of the alternative.me crypto sentiment data. Currently at cycle lows.
This latest 25% weekly drop means BTC has corrected, at its peak, a shocking ~50% in the past two weeks, with many alts suffering more as narratives around crypto swing widely. Two weeks ago, it was ESG concerns surrounding the energy-intensive Proof of Work consensus of Bitcoin and the rather tactical tweets by Musk, which were then snowballed by mainstream media. Over the weekend, the ESG concerns hampering adoption have moved to renewed reports that the Chinese Government is again looking to restrict mining in China. Reports of this nature are nothing new, with many brushing the ‘FUD’ off as just a further distraction. However, a closer look at the story added legitimacy to the ‘’China bans crypto’’ story we have all been accustomed to over the years. The source this time was direct from the highest Chinese official to date that has voiced regulatory concerns regarding the dominant Chinese mining industry. Vice Premier of the CCP Liu He gave a stark warning late on Friday night…
The second is to resolutely prevent and control financial risks….strengthen the supervision of platform enterprises’ financial activities, crack down on Bitcoin mining and trading behavior, and resolutely prevent the transmission of individual risks to the social field.
Full details of how this warning will be implemented are yet to materialize but the market has already taken pre-emptive action with reports that miners have started to limit their exposure to Chinese investors as well as look to deploy their operations outside of China. Some Chinese exchanges have also taken the action of restricting certain leveraged derivatives contracts to Chinese traders in anticipation of the ‘’China bans crypto’’ narrative actually having serious consequences this time around, not just for miners but for thousands of retail traders that speculate and invest via exchanges.
It is often hard to gauge the real consequences from news such as this coming from China but, without question, the acute fear that Chinese market participants will be forced to liquidate their crypto holdings and scale down / close operations is very real and is the leading cause that has driven the entire market lower. Taking a considered step back from the fear in order to gain better insight and sentiment, it is worth following the main players on the ground in China, such as Jiang Zhuoer, CEO of BTC.TOP, which controls approximately 2% of the global hash rate. This possible purge of Chinese miners may, in the longer term, be a net positive to the improved decentralization of the security that mining brings to the Bitcoin network, a concern which has been held by the Bitcoin community and skeptics for many years.
With Musk’s Twitter activity now already feeling like old news, the market this week remains in a heightened state of panic. As seen, with sentiment at record lows, the inevitable rotation out of the perceived riskier digital assets and back into ETH and BTC is occurring. Bitcoin dominance has now bounced off the low of 40% and sits around 48% at the time of writing, reflecting the flight of capital to ‘’safety’’ within crypto. In hindsight, Dogecoin, Asscoin, CumRocket, Shiba Inu, et al. were all signs that the market had become far too hot during this bull market, and as we pointed out in April’s Weekly, capital in these meme coins would likely find its way back into Bitcoin and Eth which appears now to be the case.
Now the million-dollar question is, where does this leave the market?
Looking at previous bull markets as guidance, there should still be some way to go for the market and despite the failure of on-chain analytics to anticipate this correction, many of the main metrics are still looking solid for further gains as this year plays out. A painful lesson to remember for many is that sentiment and narrative overwhelmingly trump on-chain data and analysis, especially in a market flush with leverage, regardless of how bullish the signals are.
If we do enter into a prolonged bear market at this point, with the Coinbase public offering being the pivot point, then it will be the shortest cyclical bull market in bitcoin’s history and would invalidate the most popular pricing models such as PlanB’s stock to flow. Our view is that this won’t be the case.
Chart showing historical bull markets compared to the current cycle which is roughly 50% complete based on historical periodsChart showing current bull market price action over-laid with 2010 -2013 bull market
Some possible bullish news to round this Weekly off is that despite the bloodletting, it’s clear that vast amounts of stable coins remain in liquid circulation with new issuances taking place. This is a possible indication that traders and investors are unwilling to permanently cash out and redeem their digital USD for actual fiat but are happy to remain on the sidelines in USD liquidity until this latest move has at least matured and a new trading range established. It would be concerning if we saw a drop off of stables in circulation, which would indicate investors actually exiting crypto, however, the exact opposite has happened. The firepower of this dry powder is significant, when and if it gets deployed is another question.
Chart from The Block Crypto, showing total stable coin supply over time.
In summary, our view is that nothing significant around the investment case for Bitcoin, Ethereum, and select alts has changed. There is an ESG angle with Bitcoin that will need to be worked out for some parts of the market to be comfortable with its adoption, but overall, when compared with 2017, the crypto markets are comfortably in the right trajectory for further adoption and price gains over time.
In all the panic, it is easy to lose sight of some of the incredibly bullish developments within markets, the latest interview with Ross Steven, Executive Chairmen of NYDIG, is one such example. In our opinion, NYDIG is one of the most important Bitcoin-focused companies in the market right now, recently enhanced with the move of John Dalby from Bridgewater Associates to NYDIG as Chief Financial Officer.
Another significant development is that Taproot signaling reaching 95% mining consensus meaning the Taproot protocol upgrade will be locked during the next mining epoch should the 95% consensus be maintained — more on this next week.
‘’Saturday, I talked with head of three of the largest central banks in the world about US inflation and Bitcoin….I’d guess there’s a 50/50 chance a central bank declares Bitcoin either legal tender or the reserve within 12 months’’
Ross Steven, Executive Chairmen, NYDIG.
Crypto weekly performance: 25th May 2021. Source www.bitgur.com