Bitcoin Market Intelligence - Issue #16 (Published: November 15, 2022 on Revue)
Note: This is an old issue which has originally been published on Revue on November 15, 2022
Hey everyone,
Welcome to a new issue of Bitcoin Market Intelligence.
We have had quite a turbulent week with FTX collapsing. While we are already seeing substantial negative effects the final effects have yet to play out.
This includes contagion effects (other exchanges or crypto hedgfunds going under) and also stricter regulations medium- to long-term (they may be beneficial depending on how they will look like).
—————-> Zum Deutschen Newsletter geht es hier. <—————-
I do not want to go too much into detail on what exactly has happened with FTX as this has been discussed in countless articles and newsletters and will rather focus on the effects it has on the market.
FTX implosion
Last week FTX collapsed possibly leaving a hole of about $8billion on their balance sheet.
According to reports Sam Bankman-Fried and Co. misappropriated user funds to fund risky investments or should I rather say to gamble with investors funds?
Amongst others they did likely post highly illiquid tokens as collateral at Alameda Research to fund leveraged bets etc.
The game play here is to release a token which you own most of. With relatively little money you then increase the price artificially and now magically you have a highly valued asset on your balance sheet, that you can post as collateral.
The issue is though that when the worst case happens you will not have a liquid asset that you can sell. If you have to start to sell said token there is no one to sell it to and your collateral will crash in value.
You may be forced to sell it, for example, due to bets going wrong and/or when all of a sudden customers start withdrawing funds.
The liquidity crisis has been kicked of by a Tweet of CZ stating that Binance is going to exit their FTT positions on November 06 likely preceded by a report form Coindesk from November 02.
I wouldn’t be surprised to see more bad news to be revealed over the coming weeks, possibly incriminating news.
At best, it was massive incompetence by the team regarding risk management. But with more and more news coming out, it seems more and more like they have known what they have been doing.
For a more detailed account check out this fantastic thread by Jason Choi.
In any case, this is a horrible situation for people who have had assets on the exchange, and it will likely have long-lasting effects on the space as regulators certainly will now step in, and a lot of trust is lost.
Luckily with Bitcoin, you do not have to trust, you can verify your holdings if you self-custody them.
While regulation may, to some extent, be beneficial, e.g. regarding reporting standards, I fear that it will be overdone. It might even push people into unregulated exchanges if, for example, US-regulated exchanges are not allowed to offer certain products anymore.
In that case, it may push the problem out of the regulatory space and not remove contagion risks and even increase contagion risks.
Net realized losses
Net realized losses on-chain reached $1.9b on Wednesday 09, November last week. While that is quite substantial, this is nowhere near what we have seen during the LUNA crash.
Around that time, we have seen net realized losses of roughly $2.5b on both May 09 and May 11. So more than twice as high as we are seeing it now.
It is also far away from the worst capitulation event on-chain in terms of USD, which occurred on June 13 when rumours came up that Celsius is insolvent, which turned out to be true.
On June 13, $4.2b in net losses have been realized on-chain, followed by $2.5b in net losses on June 14.
Graph 1: Bitcoin net relized profit/loss (Source: glassnode)
This points to the fact that, at least at current prices, few are left willing to capitulate.
However, this is not factoring in potential contagion effects of exchanges and entities that had direct exposure to FTX or Alameda.
Even those not having direct exposure might be coming under pressure due to price effects.
As market participants are hopefully getting more cautious whom to trust their money with (or if it were up to me to take custody of the coins themselves) a rumor of an exchange not being fully backed irrespective of it being true or not could further increase instability in the system.
Medium and Long-term Holders
The relatively low on-chain capitulation can also be seen when observing medium to long-term holder behaviour.
The percent of the bitcoin supply last active 6+ months ago has only decreased to 79% from 81% on Oct. 20. This is pointing towards long-term holders largely holding through the crypto storm until now.
Graph 2: Percent supply last active 6+ months ago (Source: glassnode)
In fact, this drop is due to coins moved 6-12 months ago coming active again on the aggregate. The supply last active 1+ years ago has even increased.
Data zoomed in for the two graphs for visibility reasons.
Graph 3: Percent supply last active 6-12 months ago (Source: glassnode)
Graph 4: Percent supply last active 1+ years ago (Source: glassnode)
Of course, we cannot rule out that some of them will capitulate should prices drop further.
Bitcoin miners coming under pressure
Low Bitcoin prices and rising hashrate have already put some miners under pressure, as can be seen in the miner capitulation risk metric, which has been signalling stress since earlier that year.
“The miner capitulation risk tool is a two part model, which seeks confluence between implied miner income stress (Puell Multiple), and observed hashrate decline (Difficulty Ribbon Compression). It highlights periods where there is an elevated risk of capitulation in the mining industry, which may lead to the release of additional BTC volume from distressed miner balance sheets.”
More on that metric here.
Graph 5: Bitcoin miner capitulation risk (Source: glassnode)
With the latest developments, prices have also dropped below the geometric mean of the Difficulty per Issuance Pricing Model.
The geometric mean is an estimate of the typical miner cost of production and shows a price which may trigger acute miner income stress.
Staying at current prices for longer or moving to even lower prices puts significant pressure on some of the miners in the market.
Graph 6: Difficulty per issuance pricing model (Source: glassnode)
We have yet to see a significant capitulation of miners. But we are already starting to see some outflows from miner wallets.
Graph 7: Miner reserves (Source: CryptoQuant)
While the 30-day moving average of the hashrate remains close to all-time high levels, we have seen it start to flatten over the last two to three weeks and currently seeing signs of it declining.
However, it is a bit too early to tell right now whether we are actually going to see miners switch off over the coming weeks and the hashrate come down.
All in all, while miners may not have been directly exposed to FTX, they may suffer due to the indirect contagion effect via the price and may be forced to sell their bitcoin holdings to cover their costs which could potentially contribute to further downward pressures on the price.
Graph 8: Bitcoin hashrate (Source: CryptoQuant)
NOT YOUR KEYS, NOT YOUR COINS!
One positive development is that we are seeing Bitcoin exchange reserves coming down. We have seen more than 200k Bitcoin leave exchanges since the start of the FTX crash.
Note: Due to how exchange flows have to be derived, the newest data is subject to change. So take it with a grain of salt.
We may have witnessed one of the biggest weekly net outflows of Bitcoin, if not the biggest one, from exchanges in history as long as data does not change.
Graph 9: Bitcoin exchange balances (Source: CryptoQuant)
More and more people are finally waking up to the importance of the phrase:
Not your keys, not your coins!
FTX has once again shown us how dangerous it is to leave your bitcoin on exchanges and trust them to do the right thing and to not gamble with your funds.
In the worst case, they do not actually hold the stated bitcoin and just issue fake paper bitcoin that does not exist (see FTX). This is, on the one hand, bad for you as you will only find out if they have been swimming naked once the exchange implodes, accompanied by you losing all your funds.
On the other hand, this artificially increases the bitcoin supply in the short-run, suppressing the price and preventing actual price discovery.
Yes, I know these are not real bitcoin, but as long as the exchanges issuing fake paper Bitcoin remain operational, the effect is there.
While exchange reserves are on the right track (down), there are still more than 2 million bitcoin on exchanges.
Do not leave your coins on shady unregulated exchanges, which e.g. do not show proof-of-reserves.
Ideally, take your bitcoin off of exchanges for your own safety if you can.
I know taking custody of your coins is scary and also has its risk, but it is worth it. If you are doing so, however make sure you have a plan to back up your keys, your seed phrase etc., properly. If you do not have a plan, you risk losing all your funds.
Here are a few possible starting resources:
How To Use A Bitcoin Hardware Wallet - Bitcoin Magazine - Bitcoin News, Articles and Expert Insights
Bitcoin Wallets For Beginners - Bitcoin Magazine - Bitcoin News, Articles and Expert Insights
I would recommend you to go for one of the hardware wallets out there, as they are the easiest and safest to use for beginners. There are many out there, such as e.g. a BitBox, ColdcardWallet, Trezor or Ledger.
A positive side effect of the FTX disaster is that more and more exchanges are now announcing that they will provide proof-of-reserves. Kraken is already doing that for quite some time, but now amongst others, Huobi, Binance, Crypto.com, Deribit, Kucoin and Okx have also announced that they will show proof-of-reserves going forward.
While that is not an excuse to leave your coins on an exchange, it is a start to improving the resilience of the ecosystem.
No one can really tell what the consequences are of the collapse of the second-largest crypto exchange will be.
Contagion effects are still playing out, regulatory risk has increased and more.
One thing is for certain though, this has not made it easier for Bitcoin to move out of the bear market. We may see further downward corrections depending on who is next to blow up (I am almost certain that we going to see others getting into trouble due to FTX blowing up), and this may have added to the duration of the bear market.
Stay safe out there! Don’t trust! Verify! Make up your own opinion and consider multiple sources.
Jan Wüstenfeld
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.