The battle between HODLer conviction and opportunity cost is on. With bitcoin price falling almost 50% from the year’s high and testing price levels not seen since January, the question on everybody's mind seems to be: Is a full bear market trend in play, or is the market experiencing a temporary correction before another major run-up in the bull cycle? It’s become a battleground between the bulls and the bears as to who is right.
In this piece, we assess several market trends and on-chain behavior patterns from the past month and shed some light on both the bull and bear cases for bitcoin going forward:
For the bears:
1. Large volumes on the move: According to Glassnode’s Liquid and Illiquid Supply metric, there are large amounts of bitcoin on the move today. Their research quantifies the amount of “liquid” and “illiquid” BTC supply and its relationship to Bitcoin's price. Illiquid supply tends to be a bullish signal whereas liquid supply tends to be bearish. In May, a total of 155k BTC have transitioned from an Illiquid state (HODLed) to Liquid or Highly Liquid state. On-chain settlement in USD terms was also very high in May, with around $55 billion settled per day, 60% more volume than the 2017 peak. With exchange balances climbing, it is undeniable that a huge volume of bitcoin is on the move and perhaps indicating large volume of sell pressure.
2. FUD news moving markets: May dragged in a flurry of negative news for bitcoin as well as the broader crypto market: Elon Musk announced that Tesla will no longer be accepting BTC due to concerns over bitcoin’s energy consumption, Reuters reported that China has once again banned bitcoin, Binance was under investigation by the DoJ and the IRS, and the US Treasury called for stricter cryptocurrency compliance with the IRS. The combination of these news, along with the possibility of tighter monetary policy from the U.S. Federal Reserve, put significant downward pressure on bitcoin sentiment. And while favorable comments from Elon Musk, Ray Dalio, Michael Saylor, and other influencers sparked some sporadic and minor rebounds, it was not enough to bring BTC out of its downward trajectory.
3. Environmental concerns: In a recent report entitled “Has The Crypto Fever Broken?“, investment research firm MRB Partners cited growing concerns with Bitcoin’s environmental impact, regulatory risks, negative technical trends and a future reduction in monetary stimulus as among the many reasons bitcoin could have a tough time ahead. According to MRB, to reduce the negative impact on the environment caused by more miners entering the space and consuming more electricity, crypto mining systems would need to allow miners to produce tokens for significantly less cost compared to their current price. That increased efficiency could lead to lower energy consumption, which typically occurs during major price corrections and bear markets. While the influence of energy consumption on BTC price is debatable, the energy costs associated with bitcoin mining operations do present a barrier for the industry going forward.
For the bulls:
1. Long term holders are buying the dip: According to Glassnode’s Total Transfer Volume in Profit vs in Loss metric, the majority of spending and selling pressure is driven by short term holders that bought at higher prices and are selling at a loss. Glassnode defines short term holders as relatively new market entrants holding coins younger than 155-days, while long term holders are assumed to be HODLers holding coins older than 155-days. Data shows that short term holders have increased their spending by 5x since the beginning of the sell-off in May, while long term holders appear unwilling to liquidate at reduced prices, choosing instead to buy the dip. According to Santiment, a blockchain tracking firm and analytics provider, on-chain data suggests that “Bitcoin whales aren't slowing down their accumulation of BTC, and the uptrend of tokens held by these addresses holding 1,000+ BTC continues”. In a May report, crypto analytics firm Chainalysis pointed out that “it does not appear that institutions are significant sellers, although they may be more cautious as buyers right now.”
2. South and Central America embrace Bitcoin: Earlier this week, President Bukele of El Salvador announced that citizens won’t pay capital gains tax on Bitcoin because it’s a legal currency. On Wednesday, the Salvadoran congress officially approved Bitcoin as a legal form of money. Shortly after this news, Paraguayan congressman Carlos Reja announced that he will present a bill to attract international mining companies and other crypto businesses to Paraguay, followed by another bill presenting the case for bitcoin as legal tender. In Panama, MP Gabriel Silva retweeted a post from Salvadoran President Bukele writing that he would also “be preparing a proposal” to put before the Panamanian parliament. Joining the movement was Brazilian MP Fabio Ostermann and Argentinian MP Francisco Sánchez who added laser eyes to their Twitter, tagging #LaserEyesTill100k. Latin American countries — whatever their strengths and weaknesses may be or however effectively they implement pro-crypto policies — are waking up to bitcoin and establishing crypto-friendly regulations and incentives.
3. Dry powder: Stablecoin minting has expanded dramatically in recent months, creating the largest crypto-native dollar buying power on the sidelines in history. Glassnode’s Stablecoin Supply Ratio (SSR), which compares the market cap of Bitcoin to the aggregate supply of all stablecoins as a metric indicative of crypto-native, dollar-denominated buying power, indicates that the ratio is at an all-time low of 7.5x. Sellers that want to exit out of BTC and ETH have the choice of selling for USD or fiat and withdrawing to their bank, or selling for stablecoins and keeping their funds readily accessible to buy in as soon as market conditions turn favorable. The fact that people are choosing to keep their value in stablecoins rather than moving it back to the bank is a bullish indicator for the space.
No one said that HODLing was easy, and as fruitful as BTC’s upside volatility can be, it’s downside volatility is not for the faint of heart. The recent sell-off was historically significant and has left a large number of buyers underwater. The better you understand bitcoin’s volatility in previous market cycles, the more equipped you will be to deal with the FUD driving bitcoin’s wild price swings.
No matter what happens next, volatility — and opportunity — are likely here to stay. Prepare for the next market movements on CoinList.