In the 18th century, Baron Rothschild of the famous Rothschild banking dynasty was credited with saying ‘the time to buy is when there is blood in the streets’, later he went on to make fortunes by buying the panic that stemmed from the Battle . of Waterloo. Right now, the market is waging a war on sentiment, especially this recent weekend. Blood flow is strong within crypto markets, and directional leveraged traders are packing up and heading home, having been sold off in last week’s brutal sell-off, or dealing with portfolio revaluations of painful proportions. . In contrast, over the past few weeks, well-capitalized delta neutral arbitrage traders have reveled in the dizzying panic-driven volatility that sparked lucrative price dislocations on exchanges being systematically exploited for profit, these traders have seen extremely profitable days as of late. As an example of price movements, Bitcoin has now experienced the largest monthly candle in history, a staggering $ 29,000 directional move.
Chart showing the historical movement of Alternative.me cryptocurrency sentiment data. Currently at cycle lows.
This latest 25% weekly drop means that BTC has corrected, at its peak, a surprising ~ 50% in the last two weeks, and many others have suffered further as the narratives around cryptocurrencies widely change. Two weeks ago, it was ESG’s concerns around the energy-consuming Bitcoin proof-of-work consensus and Musk’s rather tactical tweets, which were later multiplied by mainstream media outlets. Over the weekend, 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, and many ignore the ‘FUD’ as an added distraction. However, a closer look at history added legitimacy to the “China bans cryptocurrency” story that we are all used to over the years. This time, the source was direct from the highest Chinese official to date who has expressed regulatory concerns regarding the dominant Chinese mining industry. CCP Vice Premier Liu gave a stern warning late on Friday night …
The second is to resolutely prevent and control financial risks … strengthen supervision of the financial activities of platform companies, 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 advisory will be implemented have yet to materialize, but the market has already taken precautionary measures with reports that miners have begun to limit their exposure to Chinese investors and seek to deploy their operations outside of China. Some Chinese exchanges have also taken action to restrict certain leveraged derivatives contracts to Chinese traders in anticipation that the ‘China bans cryptocurrency’ narrative will have serious consequences this time, not just for miners but for thousands of retail traders. They speculate and invest through exchanges.
It is often difficult to assess the real consequences of news like this coming out of China but, without a doubt, the acute fear that Chinese market participants will be forced to liquidate their cryptocurrency holdings and downsize / close deals is very real and it is the main one because that has led the entire market to the downside. Stepping back from fear to get a better perception and sentiment, it is worth following the major players on the ground in China, such as Jiang Zhuoer, CEO of BTC.TOP, who controls about 2% of the global hash. Velocity. This possible purge of Chinese miners may, in the long run, be a positive net result for the improved decentralization of security that mining brings to the Bitcoin network, a concern that has held the Bitcoin community and skeptics for many years.
With Musk’s Twitter activity now feeling like old news, the market this week remains in a high panic. As seen, with sentiment at record lows, the inevitable turnover of perceived riskier digital assets is taking place and back to ETH and BTC. Bitcoin’s dominance has now recovered from the low of 40% and is at around 48% at the time of this writing, reflecting the capital flight towards ‘safety’ within cryptocurrencies. In hindsight, Dogecoin, Asscoin, CumRocket, Shiba Inu, et al. These were all signs that the market had gotten too hot during this bull market, and as we noted in April Weekly, the capital in these meme currencies would likely find its way back to Bitcoin and Eth, which appears to be the case now.
Now the million dollar question is, where does this leave the market?
Looking at the previous bull markets as a guide, there should still be a way to go for the market and despite the failure of on-chain analytics to anticipate this correction, many of the major metrics still look solid for further gains through. as this year progresses. A painful lesson to remember for many is that sentiment and narrative overwhelmingly trumps on-chain data and analytics, especially in a market full of leverage, regardless of how optimistic the signals are.
If we enter a prolonged bear market at this point, with Coinbase’s public offering as the pivot point, then it will be the shortest cyclical bull market in bitcoin history and would invalidate the most popular pricing models such as the flow of stocks from Plan B. Our opinion is that this will not be the case.
Graph showing historical bull markets compared to the current cycle, which is approximately 50% complete based on historical periods Graph showing current bull market price action overlaid with the 2010-2013 bull market
Some possible bullish news to round out this Weekly is that despite the bloodshed, it is clear that large amounts of stablecoins remain in liquid circulation with new issues. This is a possible indication that traders and investors are unwilling to permanently withdraw and exchange their digital USD for real fiat money, but are happy to stay on the sidelines of USD liquidity until this latest move has at least matured and is has established a new trading range. It would be concerning if we saw a drop in the stables in circulation, which would indicate that investors are actually exiting cryptocurrencies, however, the exact opposite has happened. The firepower of this dry powder is significant, when and if it is deployed is another matter.
Chart from The Block Crypto, showing the total stable coin supply over time.
In short, our opinion is that nothing significant has changed around the investment case for Bitcoin, Ethereum and other selected alts. There is an ESG angle with Bitcoin that will need to be resolved in order for some parts of the market to feel comfortable with its adoption, but overall, compared to 2017, the cryptocurrency markets are comfortably on the right trajectory for higher adoption and price gains. . overtime.
In the midst of panic, it’s easy to lose sight of some of the incredibly bullish developments within the markets – the latest interview with Ross Steven, NYDIG CEO, is one example. In our opinion, NYDIG is one of the biggest Bitcoin-centric companies on the market right now, recently enhanced with the transfer of John Dalby from Bridgewater Associates to NYDIG as CFO.
Another significant development is that the Taproot signaling reaches a 95% mining consensus, which means that the Taproot protocol update will be blocked during the next mining epoch if the 95% consensus is maintained, more on this next week.
“On Saturday I spoke to the head of three of the world’s largest central banks about US inflation and Bitcoin … I suppose there is a 50/50 chance that a central bank will declare Bitcoin legal tender or reserve currency within 12 months. ” ‘
Ross Steven, NYDIG CEOs.
Weekly performance of cryptocurrencies: May 25, 2021. Source www.bitgur.com