VYSYN Ventures Weekly Insights #4
This post was originally published on VYSYN VENTURES.
Bitcoin is widely recognized as a high-risk asset but this rarely deters enthusiasts from entering the market. Every so often, speculators are faced with the harsh reality that Bitcoin is extremely volatile.
March was one of these times. On March 12th, Bitcoin investors were shaken as price declined >50% within 48 hours. This price drop catalyzed almost $2 billion in liquidations in the Bitcoin futures market. This set a fearful tone for trading throughout the rest of March and April.
However, after an over 13% price increase at the end of April and a rise to above $10k at the start of May, investors had a more optimistic outlook entering a new trading month in May. What ensued was a volatile month with price finding strong selling pressure around $10k on several occasions.
June kicked off with another increase above $10k but this was quickly followed by a sharp decline. In this week’s release, we present what the underlying data suggests about how Bitcoin market dynamics have changed in recent months.
Short-Term BTC Outlook
On a logarithmic scale, Bitcoin price has been consolidating between the December 2017 high and December 2018 low. Expectations about the long-term bullish potential of Bitcoin had been brimming in the lead-up to the May 2020 halving.
Such expectations may soon be realized if an explosive breakout to the upside of the consolidation pattern is ignited. On the other hand, Bitcoin has repeatedly failed to sustain prices in excess of key levels which may suggest that the asset could trade at depressed prices for longer.
Both $10k and $10,550 have proved to be important psychological points for the Bitcoin market. Rises above these levels have repeatedly found strong seller liquidity.
For instance, open interest in the Bitcoin futures markets approached March highs on June 1st. But after the CME June futures contract surpassed $10,550, strong selling pressure ensued and trading closed at $9,585.. The decline catalyzed roughly $500 million in liquidations across the Bitcoin futures market as illustrated in the above graphic.
Price action has highlighted $10,550 as an important level. The highs of both October 2019 and February 2020 in the spot market were formed around this price and the recent selling pressure beyond this price has shown that traders are taking notice.
If the bullish expectations many hold for the Bitcoin market are to materialize, there needs to be sufficient buying pressure to surpass the sell walls beyond both $10,000 and $10,550. Furthermore, volume tapering off in the second half of May weakens the prospect of strong buying pressure coming in and pushing price above these levels.
Long-Term BTC Outlook
For the longer-term outlook, demand-supply dynamics are setting up favourably. On the supply side, miners are a consistent and strong source of selling pressure. Miners sell the vast majority of the BTC they generate to meet fiat-denominated expenses. After the halving, the main source of miner revenue was cut in half resulting in miners bringing less BTC to the market.
Furthermore, when revenue drops as was the case with the halving, the most inefficient miners are removed from the market. These inefficient miners oftentimes sell in excess of the Bitcoin they generate by dipping into their treasury reserves when their income is not sufficient to meet expenses. In events such as the halving and price drops, these inefficient miners are forced out of the market and their income gets distributed to more efficient miners after difficulty levels adjust downwards.
These more efficient miners operate at healthier margins and apply less selling pressure on the market. The previous two difficulty adjustments suggest that roughly 14.7% of computing power has been removed from the market since the halving.
On the demand side, recent reports have highlighted heightened buying from institutions with major Bitcoin purchasing activities. Grayscale, an institution that provides the GBTC index, reported a record quarterly inflow into their Bitcoin product in Q1 2020.
The GBTC product received an inflow of $388 million in Q1 2020. Grayscale uses these inflows to purchase BTC and gives their investors exposure to Bitcoin price through the GBTC index. Grayscale dominantly caters to institutional investors but the demand from companies serving retail has also spiked.
Square Crypto sold $306 million in Bitcoin purchases to their users in Q1 2020. Square Crypto allows retail investors to purchase Bitcoin through their Cash app. These $306 million in purchases by Cash app users made claims on 21.7% of Q1 Bitcoin mined supply.
With the mining rate of issuance reduced in half on May 11th, the percentage of new supply issuance demanded by Square Crypto can be expected to significantly increase. Grayscale and Square Crypto alone represent huge demand claims on the supply issuance of Bitcoin. If the market is to facilitate demand from these huge players, the value of BTC must rise to accommodate.
Bitcoin Value to Increase to Accommodate Demand?
Bitcoin is undoubtedly the bellwether of the cryptocurrency market. It’s movements reverberate across the entire crypto market. Analysing its price prospects is therefore paramount when assessing the outlook of any crypto.
In the shorter-term horizon, Bitcoin has repeatedly failed to maintain valuations above the $10,000 and $10,550 levels. If it is to show bullish movements in the near-term, sufficient buying pressure needs to come in to overcome the seller liquidity lying above these levels.
However, in the longer-term, demand-supply dynamics have adjusted favourably since the halving. Institutions such as Grayscale and Square Crypto have revealed huge demand for new supply issuance in Q1. If this demand continues to grow, the value of the Bitcoiin network will need to grow to cater for the purchases made by these institutions and others.
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