As we approach the last six weeks of 2021, the battle between HODLer conviction and profit taking is on. After reaching another all-time high of $68.5K last week, bitcoin’s price is down about 10% this week.
The question on everybody's mind seems to be: Is this the end of the current bull cycle or is the market experiencing a temporary correction before another major run-up? It’s become a battleground between the bulls and the bears as to who is right, with no clear consensus.
In this piece, we assess several market trends and on-chain behavior patterns from the past couple weeks and shed some light on both the bull and bear cases for bitcoin going forward:
The Bull Case
1. BTC held on exchanges is falling
Bitcoin’s price tends to trend inversely to the number of BTC held in exchange wallets. This month, the number of BTC held in exchange wallets has steadily decreased, reaching lows of 2.3M BTC. Bitcoin exchange outflows continue to increase, indicating a preference among investors to HODL their BTC in wallets rather than keeping their assets available to trade on exchanges. This speaks to a strong case where the market is likely still in the quiet accumulation phase, underscored by low activity, large exchange outflows, and very modest strategic spending by experienced holders.
2. New bitcoin addresses are on the rise
The number of newly created bitcoin addresses has also been steadily increasing over the past 4 months. An increase in new bitcoin addresses typically suggests new retail users are buying bitcoin. We saw this take place earlier in the year when we saw 500,000+ new wallets daily from November, 2020 to April, 2021. With the holiday season historically causing FOMO fireworks among retail users, there is reason to believe new wallet addresses will continue to climb over the next 6 weeks.
3. The Taproot upgrade does change things
Taproot, the highly anticipated code upgrade with a focus on improving the network’s security, was finally activated this past weekend at block 709,632. This is the first big upgrade to the Bitcoin network since the Segregated Witness upgrade in 2017. While primarily designed to increase Bitcoin’s privacy features, the upgrade also opens the door for lower transaction fees as well as the ability to finally jump into smart contracts and other blockchain features. If you think it’s unusual that BTC price would fall after such a positive upgrade over the weekend, welcome to the "buy on the rumor, sell on the news" club that defines a lot of anticipated market events. What is undeniable, however, is that the Taproot upgrade will make Bitcoin a lot more useful going forward.
4. Selling alts for bitcoin
For many traders, a key role that BTC services is to reduce risk and take profit from long positions in alts. After a massive year, traders are taking profits on their alt tokens and moving it into bitcoin because bitcoin has been de-risked. If you’ve made a good amount of gains in other aspects of crypto, you might, instead of rolling back into a stablecoin or cash, leave your money in bitcoin. Expect more traders to do this as we close out the year.
The Bear Case
1. Leveraged liquidations
Bitcoin’s drop this week seems to be related to excessive leverage in the system being flushed out, as many traders were vulnerable to liquidations as prices dropped. When markets experience dips or surges, over-leveraged trading positions are liquidated automatically by exchanges when traders can no longer fulfill their margin requirements. It is worth pointing out that the vast majority of positions that were liquidated during the course of this week’s dip were long, meaning that traders bet on the price of an asset going up.
2. Bitcoin spot ETF gets rejected
With October’s rush of newly approved bitcoin futures ETFs, many were hopeful the SEC would approve the much anticipated spot bitcoin ETF. This was not the case, as the SEC has rejected the most recent spot ETF submitted by VanEck. This wasn't the first time the SEC didn’t play ball with the idea of a spot bitcoin ETF. Such ETFs date all the way back to 2018 when the Winklevoss twins attempted to launch their own, only to be stopped by the SEC. Three years later and the song remains the same. The price of bitcoin dipped following the release of the SEC’s decision. The reason it’s not getting approved? SEC staffers are just as skeptical of market manipulation on spot bitcoin as ever. While the going is slow in the U.S, however, some countries have been quick to approve spot bitcoin ETFs, such as Brazil, Canada and multiple countries in Europe.
3. Fears over tighter monetary policy
The annual U.S. inflation rate rose to 6.2% in October, the highest since 1990 and well above economists forecasts of 5.8%. Many fear that persistent inflation over the recent months might trigger the Fed to tighten monetary policy. If the Fed does decide to tighten monetary policy, this could put downward pressure on assets considered more risky, such as bitcoin. Many investors are attracted to bitcoin as an inflation hedge due to its finite supply. But in a world where the Fed raises interest rates to curb inflation, appetite for holding riskier assets may soften, a bearish sign for bitcoin.
4. The newly signed infrastructure bill
On Monday, President Joe Biden signed the $1 trillion infrastructure bill. The crypto community was on high alert after the bill was signed as one particular clause seeks to expand the definition of a broker for Internal Revenue Service purposes. The bill would require all brokers to report any crypto transactions under the current tax code. The main concern here is that the definition of a broker is broad and might include miners and other parties that don’t necessarily facilitate transactions. Another provision in the bill will require recipients of any crypto transaction over $10k to be reported to the IRS, requiring the sender's identity and social security number to be reported. While these provisions won’t take effect until 2024, many are concerned about the implications they might have on the wider crypto ecosystem.
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 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.
We believe that a combination of strong supply dynamics, exchange outflows, and relatively low network activity points to a fairly bullish outlook for bitcoin for the remainder of Q4.
No matter what happens next, volatility — and opportunity — are likely here to stay. Prepare for the next market movements on CoinList.
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