Is it a bear market now? Listen to the researcher's analysis of the current market situation

By Dylan LeClair, 21st Paradigm

Lianchuang Compilation: 0x137

Bitcoin recently fell to around $33,000. Why is there such price fluctuation? What will happen next? Here is my analysis from on-chain data and derivatives, as well as macro-level analysis:

On-chain data analysis

One of the hottest topics recently is the correlation between Bitcoin and the Nasdaq (and other types of risk assets). Currently, the Nasdaq is down 14% from its peak and is the most oversold since March 2020. The 30-day correlation index of Bitcoin to the Nasdaq is as high as 0.80.

Eurodollar futures can be seen as a market that reflects expectations for the federal funds rate, and it has already responded to four rate hikes in 2022. When there is an expectation of tightening of loose monetary policy, the market will inevitably react.

The increasing acceptance of Bitcoin by macro funds between 2020 and 2021 has made Bitcoin increasingly look like a highly correlated risk asset. We can look at Grayscale, one of the driving forces of the early bull market, which acquired nearly 400,000 Bitcoins on behalf of accredited investors and institutions in exchange for Grayscale shares (GBTC).

These investors sought to purchase GBTC from Grayscale at net asset value and mark their books with a premium to conduct “risk-free” arbitrage trades, but when GBTC began trading at a discount to net asset value in February last year, they realized that this arbitrage model had been broken.

However, it is important to note that $650,000 worth of Bitcoin is still traded as a derivative in the form of Grayscale shares in the OTC market. And as its premium turns to a discount, funds begin to stop entering the market, and investors' motivation to allocate funds to GBTC rather than Bitcoin itself also emerges.

As the market has recently entered a de-risking mode, GBTC has also been sold indiscriminately, and GBTC's discount to net asset value has widened to a record low, but this makes sense given the situation of many trust holders: they are the same macro investors who allocated capital to Bitcoin between 2020 and 2021.

Now let’s look at where Bitcoin is currently trading relative to its historical valuations.

The MVRV ratio (ratio of cost basis to price) shows Bitcoin’s historical boom and bust cycles. Currently Bitcoin’s on-chain cost basis is $24,000 and the MVRV ratio is about 1.5.

Bitcoin's current MVRV ratio is in the 38th percentile of historical readings. Past data shows that when Bitcoin falls below the actual price (MVRV below 1.0), it is almost always an excellent buying opportunity. Although Bitcoin will not necessarily fall to $24,000, this price will certainly be very attractive for buying.

We have also seen long-term holders consistently sell off during the downtrends of the past few months, which is a strange phenomenon in Bitcoin history as long-term holders typically accumulate during bear markets and consolidations and sell off during uptrends.

Obviously, macro-level concerns are one of the driving factors behind this, but the good news is that the trend of hoarding coins has started again.

Token destruction days (CDD) is calculated by multiplying the number of tokens in a transaction by the number of days since those tokens were last used, while the 90-day rolling summary data is generally used to show the relative ratio of asset accumulation and selling. Bitcoin currently has a strong accumulation trend.

Derivatives Analysis

For Bitcoin derivatives, the following points need to be paid attention to:

1. Perpetual Futures

2. Quarterly Futures

3. Types of collateral used to enter derivative contracts

Perpetual Futures

Perpetual futures funding shows whether the derivative is above or below the spot price of Bitcoin. Speculative longs are no longer dominant, but shorts are not too aggressive either. Market bottoms are usually characterized by persistent negative funding, accompanied by extreme greed from shorts in the derivatives market .

For example, the chart below is data from BitMEX, the main derivatives exchange at the time, showing the bottom of the market in 2018-2019, when shorts aggressively shorted the $3,000 bottom after Bitcoin's 85% retracement. The crashes around the COVID-19 pandemic and last summer were similar.

Quarterly Futures

Since last summer, the correlation between Bitcoin price and futures basis has been close to 1:1, which shows that existing derivatives traders have been driving the market. 0% or negative basis should be a signal of market capitulation.

Types of collateral used to enter derivative contracts

The use of crypto collateral for Bitcoin futures continues its long-term downward trend, which is a positive development as stablecoins do not exhibit the same convex relationship as Bitcoin margin futures during market downturns.

DXY is an indicator used to measure the value of the U.S. dollar against other fiat currencies, and it has been on an upward trend since the beginning of 2021. As the Federal Reserve attempts to tighten policy, it will be critical to keep an eye on the strength of the U.S. dollar, as a strong dollar is no good for any asset.

As for when the bull market will return, I think the conditions are relatively mature, with about 81% of the supply in the hands of long-term holders, but supply is only one aspect of the market. Restoring the bull market requires strong spot demand, not derivatives speculation.

Macro market analysis

From a macro perspective, a key question is when does marginal selling by macro funds turn into marginal buying?

The reality is that there are hundreds of trillions of dollars worth of US dollar bonds with negative real yields, which means they are destined to lose money. Therefore, when the Fed changes its tightening policy, Bitcoin will definitely grow rapidly. Yes, it is "when" not "if".

In a long-term debt cycle, the economic development can only have a binary outcome. In a true deflationary scenario, there will be unlimited counterparty risk as the fiat debt is unwound throughout the economy.

Are there more downsides? Perhaps, especially if the stock market continues to fall and spreads to credit markets. If you were a leveraged gold holder during the Weimar Republic, this would have resulted in you being liquidated many times. While the United States is not Weimar, there are still lessons to be learned.

As a capital allocator, your goal is to maintain and increase your purchasing power over time. The mechanics of Bitcoin almost guarantee that marginal production costs will continue to rise forever. Therefore, for 95% of people, the best strategy is to passively allocate funds to Bitcoin and hold it for the long term. In this case, volatility will be your opportunity, and thankfully, it doesn't look like it will disappear anytime soon.