- Recent large investors have acquired 197k bitcoin since the bitcoin price fell below $35k in late June, returning their holdings to late-February levels and reducing liquidity in the market, which supports price in the longer term.
- During the November to April bull run, enough stablecoins flowed into exchanges to buy ~50% of the bitcoin and Ethereum that were sent to exchanges, down from a typical 75% – suggesting fiat buying pushed price to its bull run high. Stablecoin inflows are back to ~75% of bitcoin and Ethereum exchange inflows, but started declining in late July as price went back above $40k – suggesting that fiat demand is returning, another source of long-term support.
- Trade intensity has been high since the May price fall, suggesting that while demand fell when prices dropped, supply declined even further and so the market became illiquid, supporting price. However, trade intensity has declined in the last week, as has price, but this short-term bearish signal is likely to be outweighed by more positive long-term signals.
Cryptocurrency prices are down over the last six days since my last Market Intel Report. The bitcoin price was rising as I wrote last Friday 20 August, closing at $49.3k and reaching $50k on Monday 23 August. However, the price fell from there, to around $47.2k today, Thursday 26 August. Ethereum is also down to around $3.1k, after peaking at $3,379 on Monday.
While prices are down over the last week, they have recovered from late-July lows, when bitcoin closed below $30k on Tuesday 20 July. In this week’s Market Intel Report I’m going to walk through some signals of that recovery.
First up is the accumulation of bitcoin by recent, large investors. They have acquired 197k bitcoin since the bitcoin price fell below $35k in late June, as covered on CNBC! This returns their holdings to the level in late February, when this group sold bitcoin as price rocketed above $55k, as shown in the first chart in the Report. These recent, large investors are self-hosted wallets that have held bitcoin for less than a year, have held at least 1k bitcoin in their lifetime, and on average retain at least 75% of the bitcoin they receive.
The holdings of recent large investors are important because they change the liquidity of the market. As I described in last week’s Market Intel Report, 83% of the bitcoin into exchanges is from other exchanges and large traders. Such flows are bitcoin moving between different liquidity venues, but there is still the same amount of liquidity in the market overall. However, when large investors accumulate, they reduce the amount of bitcoin available to buy, which typically leads to a price increase.
This relationship didn’t hold as strongly as I expected it to during March and April of this year, as recent large investors reduced their holdings but price kept rising. Some of the reduction in their holdings may have been the splitting of bitcoin into new, smaller, wallets – meaning that recent large investors moved rather than sold some of their holdings. But also, and more importantly in my view, retail hype was running hot in March and April. I watch the holdings of large recent investors as a signal on the market over the next month or so, with the short-term price often in the hands of sentiment and retail.
The second signal is stablecoin exchange inflows as a percentage of bitcoin and Ethereum exchange inflows. Let me break that down: every day, bitcoin and Ether are sent into exchanges and these inflows can be given a USD value using the price at the time. Stablecoins, such as Tether and USDC, are also sent into exchanges, and these have a USD value. However, bitcoin and Ether are typically sent to exchanges to be sold, while stablecoins are sent to exchanges to buy other assets, such as bitcoin and Ether. So if $100 of bitcoin and Ether and $75 of stablecoins are sent into an exchange, then stablecoin inflows are 75% of bitcoin and Ethereum inflows. We can then assume that 75% of the bitcoin and Ether sold is being bought with stablecoins, and the remaining 25% bought with fiat. Now this does not account for assets already on exchanges, or trades with other cryptocurrencies, but it is a general signal of fiat versus stablecoin buying.
Stablecoins are typically used to buy at least a majority of bitcoin and Ethereum, as the second chart in the Report shows. However, before late 2020, stablecoin inflows were over 75% of bitcoin and Ethereum exchange inflows, using a 14 day moving average. This dropped below 50% as the bull run picked up pace from November 2020 and remained below 50% until prices fell in late May. This suggests the bull run was largely driven by fiat purchases – and that when fiat demand declined so did the price. Stablecoin buying jumped back to 75% in July but, in a positive signal for the price, the stablecoin share started declining from late July, when price went back above $40k, and has continued to decline as price has continued to climb. This suggests that fiat demand has returned and is driving the price.
The third signal is trade intensity. This measures the trading volume per asset received on-chain by exchanges. So it represents how many times an underlying asset changes hands on an exchange. If an exchange received just a single actual bitcoin but had 10 bitcoins worth of trades then there would be a trade intensity of 10. If the next day the exchange received two bitcoin via the blockchain and there were 16 bitcoins worth of trades then there would be a trade intensity of 8. So while there was more supply, bitcoin received on-chain, and demand, trade volume on the second day, there was less demand relative to supply on the second day, as the trade intensity was 8, rather than 10.
Trade intensity is currently high, and has been high since the May price fall, as the third chart in the Report shows. This suggests that, while demand fell when prices dropped, supply declined even further. People stopped buying as the price fell from $50k, but they also stopped selling, providing support to the price.
In general, as described in the first table in the Report, if both trade intensity and price increase, then demand is greater than supply and sentiment is also bullish, suggesting that price is likely to continue rising. If both trade intensity and price decrease, then demand is falling relative to supply and sentiment is bearish, suggesting that price is likely to continue to fall.
If trade intensity decreases but price increases, then demand is weakening relative to supply, a bearish signal, but speculation is, for the moment, overcoming that, suggesting that price will soon peak. If trade intensity increases but price decreases, then demand is strengthening relative to supply, a bullish signal, but fear is, for the moment, overcoming that, suggesting that price will soon find a floor.
Trade intensity has declined a little in the last week, and price has fallen somewhat. However, I don’t think that means the market is going into reverse. Trade intensity is historically high, and is a shorter-term indicator, which I think is currently balanced by more positive longer-term signals, such as accumulation by recent, large investors and increases in fiat buying.
If this Report isn’t enough, there is more! If you are an institution that is thinking of investing in cryptocurrency, I have a new series of articles in Institutional Investor, on bitcoin, stablecoins, DeFi, and 10 predictions for what is next for cryptocurrency. Chainalysis also recently published a preview of its 2021 Global Crypto Adoption Index and first ever Global DeFi Adoption Index. These show that worldwide crypto adoption is up by 880% in a year, while DeFi adoption is more concentrated in the countries with the most advanced crypto markets.
And there are upcoming events! I will be at Money 20/20 Europe on 21 to 23 September, where I am moderating a debate on ‘How do we manage the risks of DeFi to absorb the advantages it offers?’. If you are attending and would like to meet, please reach out here. I’ll also be exploring the Tokenization of Traditional Assets at the Benzinga Crypto Festival at 12:40 pm EST on 31 August. As always, if you’d like to get in touch, you can reach me at firstname.lastname@example.org.
Philip Gradwell, Chief Economist