Bitcoin in-the-money (ITM) addresses have fallen to lows not seen since March 2020, according to digital asset exchange, prime brokerage and custodian BeQuant’s research.
So does Bitcoin likely have further to fall? Bitcoin ITM addresses was barely a majority, at 51.28% of the total. That contrasts with highs in November and December 2021 and in early 2021 of around 97-98%.
The findings will not surprise market watchers given the downward pressure on prices in evidence across the crypto complex this year. Bitcoin is trading more than 50% below its highs of $67,500 registered in November last year.
Rising interest rates have seen crypto markets caught up in the sell-off of higher-risk assets such as tech stocks dependent for their valuations on future earnings prospects – prospects that are harmed by higher interest rates and other monetary tightening measures.
On top of that, inflation has added to stock market turmoil and contrary to expectations in some quarters, bitcoin has not been a positive diversifier in that department either.
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BeQuant analysts: Bitcoin “$10k bottom possible but incredibly unlikely”
Emiliano Bruno, research analyst at BeQuant noted in a release published on 8 June, “The number of bitcoin addresses in the money reached lows not seen since March of 2020 after achieving dizzying heights last year.”
He continued: “The low level of in-the-money addresses points to capitulation, bearing in mind lower lows were seen in the 2015 (30%) and 2018 (45%) bear markets.”
So with only 51% of BTC addresses currently in-the-money, it implies that further falls are likely for BTC.
Business2Community asked Bruno if this suggests that $26-30k range is unlikely to be the bottom for bitcoin, with a number of analysts talking about a trough not emerging until lows of around $10k.
Bruno thinks $10k is unlikely. “With all these things, a $10k bottom is possible but it is incredibly unlikely. It is behaving more and more like traditional asset classes. If a huge, catastrophic event happens, Bitcoin could still fall to that level like other asset classes such as stocks.
Terra trigger: Daily liquidations of longs a harbinger of doom
Bruno looked at total daily liquidations at the time of the terraUSD depegging event that has added to negative sentiment for the reasons described above in the crypto space.
“On May 12th, triggered by Terra and the macro backdrop, liquidation of levered traders hit $1.22 bn, the highest since January, as bitcoin fell to $26.7k, and the crypto market cap slid by 16%.”
With the likes of Mike Novogtratz’s Galaxy Digital among the institutional investors in the terra ecosystem, and the previous bragging on the part of founder Do Kwon regarding its bitcoin reserve, market participants appear to have stayed long under false pretences: “Positioning was long and traders were carried out on contagion from the Terra turmoil as it was expected that the Luna Guard Foundation would use its BTC reserves to defend the stablecoin.”
The defence never came or was inadequate to the task. Will terraUSD’s implosion prove to be a fatal blow, presaging the demise of other algo stablecoins such as DAI? Bruno thinks not.
“The difference between UST and DAI is that DAI is an over collateralized stablecoin and is collateralized by a basket of assets, such as ETH, WBTC, USDC, and others. Instead, UST was only collateralized by LUNA.”
Bruno added: “Therefore DAI is a safer algo stablecoin than UST due to both diversification and overcollateralization reasons.”
So we might say then that some algo stablecoins are more equal than others, to borrow from George Orwell.
New landscape for stablecoins – Harmonization the name of thgame says BeQuant’s Bruno
Wreaking havoc across markets, the demise of Terra LUNA has brought discernible change to the stablecoins, even if it would be highly premature to sign the death warrant of much more safely designed instruments such as DAI.
So even the largest fully collateralized stablecoin – Tether – briefly traded below its peg and saw its market capitalisation fall as redemptions came in from worried holders (see BeQuant chart reproduced below). “A by-product of the algorithmic stablecoin turbulence was de-risking and net reduction in stablecoin exposure, with centralized Tether (USDT), viewed as the riskiest, facing almost $10 billion in redemptions as it briefly lost its peg,” said Bruno.
Bitfinex, the issuer of Tether, is yet to have the stablecoin’s reserves audited by one of the big four accountancy firms and that has led to persistent doubts as to whether its reserves are in fact fully backed by cash or cash equivalents. Bruno explains: “Centralized stables like USDT and USD Coin (USDC) are pegged 1:1 to the USD and are meant to hold reserves to back each coin, but Tether has the lowest exposure to cash and cash-equivalents.”
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In the wake of the implosion of terraUSD, market capitalisation of Tether has been falling and that of USDC rising. That trend seems to have slowed in recent days but could it be a forewarning of the flipping of USDT by USDC?
Bruno feels that is unlikely. “It is possible but what is more likely is that investors have realized that stablecoins still do have some risks, so they will diversify their investments across multiple assets, so we’re likely to see the market harmonize between stablecoins such as USDT and USDC rather than one rise to prominence over the other.”
As for terra Classic (LUNC – the old chain) and Terra (LUNA) the new chain minus stablecoin – attempts at recovering something from the wreckage seem to have failed, but there are still plenty enough willing to buy LUNC and Buy LUNA 2.0 on a wing and a prayer.
Winter is coming? It might be passing sooner than you think
Looking at the wider picture, how does Bruno see the tech stocks sell-off affecting BTC, given the strong positive price correlation between tech and crypto seen this year?
Could this coupling of crypto and tech – which is a new factor compared to past bearish periods – make the drawdown more protracted and a reason why BTC might violate the higher lows printed after the expiry of previous bull runs?
“In periods of uncertainty, riskier assets are the first to go down but it does not mean it is going to implode. This may just be a period of re-balancing and allowing people to move from risk-on assets to risk-off assets.
“Similar to 2008 and the birth of fintech, now is the time the environment is changing. Traditional hedge funds are engaging in the broader crypto market. This means institutional money will start to become more and more interested in sub-sectors such as DeFi, NFTs, or new protocols and projects for example. Bitcoin is part of what is now a huge new financial market.”
According to a recent PWC report, a third of traditional hedge funds are invested in crypto.
That could be interpreted as implying that we may not be looking at a Crypto Winter comparable to that which set in at the beginning of 2018. On that reasoning winter might be passing sooner than some market pessimists fear.
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