Long & Short Crypto: This Bear Market May Not Last Long

Cryptocurrencies are in a bear market.

This is not a call to be taken lightly. Analysts have already issued premature bear market calls twice this year, dazedly applying a standard rubric (a 20% drop from a benchmark market index).

In cryptocurrencies, bitcoin is the benchmark for the entire market. Bitcoin’s dominance, its share of the estimated total market value of all cryptocurrencies, fell in the mid-1940s, and it still has no analogy to stocks. If Apple, the largest S&P company with a $ 2.2 trillion market cap, held as large a share of the total S&P 500 market capitalization as cryptocurrency bitcoin, it would be a $ 17 trillion company. dollars. As a result, all cryptocurrency returns generally have a strong correlation with bitcoin.

This column originally appeared in Long and short crypto, CoinDesk’s weekly newsletter for professional investors.

For bitcoin, declines of 20% are quite common, en route to new all-time highs. Earlier this quarter, we identified a simple method for determining whether such a drop (or rise) ushered in a new market regime: a 20% change in the Bitcoin CoinDesk (XBX) price index, followed by at minus 90 days in which bitcoin does not return to its previous high (or low).

The chart above tracks the bullish and bearish cryptocurrency markets over the years, using this methodology. XBX hit its all-time high on April 14 (UTC): $ 64,888.99. By April 22, it had fallen more than 20%, reaching a low of $ 50,500. (Since that time it has fallen to $ 28,825.76.) As of Sunday, there are 24 days left until that 90-day threshold.

Predicting that bitcoin won’t return to $ 65,000 in the next three weeks doesn’t seem like a particularly bold move. But it’s bitcoin. As of this writing, the XBX is at $ 33,493.55. The recovery of his ATH would represent a gain of 93.7%. Since the inception of XBX in April 2014, bitcoin has made such a 24-day run no less than 25 times.

Here’s why I don’t think this July will do it 26 times, but I think this bear market will be short-lived.

Alternatives to the spot market

Two alternatives are currently easing the buying pressure in the spot market.

1. GBTC discount

Shares of Grayscale Bitcoin Trust (GBTC), the largest bitcoin fund, have been trading below NAV since February. This is unlikely to change, as large raft of actions in the trust are approaching their expiration in July. The GBTC cannot be redeemed, but some investors who could have bought bitcoin in the spot market will likely take advantage of the rebate instead. (Disclosure: Grayscale is owned by Digital Currency Group, the parent company of CoinDesk, and GBTC is benchmarked against the Bitcoin CoinDesk (XBX) price index.)

2. Overabundance of ASICs

Beijing’s crackdown on bitcoin mining appears to be more than just a government, according to a press release. Miners are shutting down across China, leading to an influx of unused mining equipment.

Bitcoin mining is not for the faint of heart or short of capital, but on a certain scale it offers investors the opportunity to acquire bitcoin below the spot market price. It’s unclear whether idling machines in China will be viable in North American operations or other growing mining centers. If so, the accommodation space may not be available. Nonetheless, some large investors who might otherwise buy and hold are undoubtedly considering increasingly attractive capital expenditure projections in a mining and custody alternative.

A rudderless market

Evidence points to a surge in retailing in April: Altcoin volumes, including meme currencies like dogecoin, eclipsed bitcoin’s on spot exchanges. Now retail purchases appear to be exhausted.

Meanwhile, institutional participation barometers, such as volumes on LMAX Digital and open interest in CME bitcoin futures, are not showing signs that institutional buyers are rushing to buy the downside and take the place of retail buyers.

These tea leaves can be deceptive, but the bottom line is that no one is currently in the driver’s seat. Network data confirms this, with active addresses on the Bitcoin and Ethereum networks.

The “fundamentals” say the opposite

A market interregnum may indicate a short-lived bearish regime, between bull markets. Some network data supports this analysis.

Bitcoin does not have true “fundamentals,” in the sense that a bitcoin does not represent a claim on cash flow. However, bitcoin and other cryptocurrencies have a family of metrics that indicate activity on networks. I wouldn’t be naive enough to apply Metcalfe’s Law (which predicts effect, do not value) at the price of bitcoin, but network data provides another layer of information, especially when combined with market data.

The chart above, from Glassnode earlier this week, shows that a growing share of bitcoin that has moved in recent sales has been made up of “young coins” – that is, coins that have been moved. for the last time in the last six months. Short-term investors sell, while longer-term hodlers stand tall. As Lucas Nuzzi of Coin Metrics Noted hodlers’ unrealized gains last week fell below the levels that preceded the previous major bitcoin crashes.

A good time for a vacation

Conclusion: If, like me, you are planning to take a vacation in July, your timing is right.

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