May 25, 2022

No surprises

The stock market is falling. Bitcoin is falling. Digital assets are falling. Nothing surprising.

Retrospectively it seems like it was inevitable. How interesting is this market cycle! And we are already in the middle of the road.

In May 2020, we started tracking the growth trajectorybitcoin compared to previous cycles. For a while, everything looked good. I won’t lie, back then it seemed to me that the stock-to-flow ratio narrative was strong enough to push the price of bitcoin above $100,000 by 2022.

Bitcoin after the 3rd halving.How does the current cycle compare with previous ones? The range is determined by the growth trajectories after the 1st (upper limit) and 2nd (lower limit) halvings. The line of average height (geometric mean) is added for clarity.

Now many will say: “Of course, he could not have grown to $100,000 so easily! This is the law of diminishing returns in action.”

This is not a new argument, and last August I alreadyinvestigated the validity of the law of diminishing returns on the example of the shares of the largest companies. And the conclusion was that, in reality, large stocks do not suffer from the syndrome of diminishing returns. Apple, for example, doubled its capitalization from $1 trillion to $2 trillion faster than from $500 billion to $1 trillion. So diminishing returns don't seem like a good enough explanation to me.

And don't forget that the 3rd Bitcoin halvingoccurred just a couple of months after the collapse of the markets in the first wave of the pandemic. What part of the rally from May 2020 to March 2021 is due to the injection of liquidity into the system from the central banks of different countries, primarily the Fed? How many institutional investors have seized the opportunity to enter the bitcoin market? How does the typical investment horizon of these institutions change BTC price behavior?

These are all difficult questions.But I am inclined to think that the specifics of the macroeconomic environment in this cycle influenced the final result much more than the law of diminishing returns. This is why I believe that it is no longer possible to successfully invest in digital assets without understanding how they fit into the overall economic picture.

And how they fit into it right now is quite clear. Long-term correlation between bitcoin and NASDAQ is on the way to a new all-time high.

Bitcoin and tech stocks: long-term correlation

And the short-term correlation of bitcoin with the S&P500 has reached 80%…

Bitcoin correlation with S&P500

The correlation with the S&P500 is wild. For context, 80%+ is the correlation between BTC and ETH.

Correlation between bitcoin and ether. It also doesn't look like a disassociation at all.

So yes, the digital asset picture is pretty clear.

The Fed needs to be shown that they are fighting inflation somehow. After months of talking about how they would someday raise rates and cut liquidity, they finally took action.

The stock market has suffered quite a lot.Bitcoin is now strongly correlated with the stock market, which means that it is declining too. Ethereum is highly correlated with bitcoin, and is also reacting accordingly. And the rest of the crypto market is trading in high correlation with these two assets, so…

So far, no surprises.

Now the Fed cannot ease measures until inflationwill not begin to show signs of decline. They are determined to get inflation under control, more for political reasons than for economic reasons.

The federal funds rate and inflation. The biggest gap between inflation and the Fed rate since the 1970s.

This means that there are only three options:

  • Inflation is slowing down in the next couple of months. Mission Complete. The Fed can relax. Jerome Powell is nominated for the Nobel Prize in Economics.
  • The stock market crashes so hard that they have to deviate from the accepted course.
  • Rates are getting so bad / real economy data look so bad that the Fed can no longer deny that the world is heading into a recession.

All options except the first imply more pain for risky assets in the short term.

Later this week, we'll look at historical examples of when the Fed has routinely changed its policy. But for now, I would bet on a further decline.

Matching size and durationdrawdowns: BTC and NASDAQ. The current NASDAQ drawdown continues for 165 days, and its depth is -25.3% from the record high. The current drawdown of bitcoin continues for 179 days so far, and the depth is -51.8% from the all-time high.

On-chain metrics

In my opinion, on-chain activity is notdefining factor for the market at the moment. So let's just take a quick look at the data to see if there's anything worth looking at here.

Although in this context it would be more correct to sayrather, the absence of any significant on-chain activity. The share of active coin supply over the past year continues to decline. At the moment, the situation in this regard is in full accordance with the typical bear market.

Bitcoin: The share of active coins in the last year in the total supply. At the moment, on-chain activity continues to slow down.

The accumulation rate is also decreasing.

accumulation trends. “Participation Rate” is the proportion of the BTC supply that represents groups of addresses that have accumulated coins in the previous 30 days.

At this level, historical data is essentiallytell us simply that in the short term, the price of bitcoin can change in any direction. There is hardly any benefit to be gained from this information.

accumulation trends. “Participation Rate” is the proportion of the BTC supply that represents groups of addresses that have accumulated coins in the previous 30 days.

Almost all categories of addresses on a 30-day basis return to neutral dynamics.

BTC price and accumulation heatmap for the last 30 days for addresses grouped by balance.

But the on-chain activity of whales (addresses with a balance of 1-10 thousand BTC) attracts attention. In the total balance of this category of addresses, a rather large decline is evident over the past few days.

Accumulation trends by whales (addresses withbalance from 1 thousand to 10 thousand BTC). The change in the total balance of coins for addresses controlling from 1,000 to 10,000 BTC from October 1, 2020 is estimated.

However, as one reader astutely noted, this does not necessarily mean that they were selling off their coins:

@TJ64011832: And one more thing:whales with a balance of 10 thousand BTC are increasing their savings. In this case, the reduction in balances in the category of 1-10 thousand BTC may be associated, among other things, with the accumulation and transition to a larger category.

Indeed, in the total balance of large whales (10-100 thousand BTC), the opposite picture is observed.

Accumulation trends from large whales (addresses with a balance of 10,000 to 100,000 BTC)

Looking at the actual number of coins,from whales to large whales, and correlated with the change in the number of addresses in each group, it turns out that most of the change in the total balance in these groups can be explained by the transition of part of the addresses to a larger category.

In general, nothing remarkable.

BitNews disclaim responsibility for anyinvestment recommendations that may be contained in this article. All the opinions expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading on crypto markets involve the risk of losing the invested funds. Based on the data provided, you make investment decisions in a balanced, responsible manner and at your own risk.