Dear subscribers,
In this edition of Uncharted: Bites, we summarize the major points from Uncharted #15. We begin with an analysis of the systematic selloff that drove bitcoin below $30k. After, we deep dive into the increased volume and analyze the selling and buying pressure in the market. All in the context of the rising inflation, the Fed's course of action, and extreme fear in the market.
Let’s dig in!
TL;DR
Bitcoin dropped below $30k as the bond selloff spread to risk-on assets.
The Fed's course of action will continue to pressure markets given the rising inflation and current tightening conditions.
The correlation between the S&P 500 and bitcoin hit unprecedented levels, while Swissblock's Bitcoin Risk Signal suggests increased risk.
On-chain volume soared while exchanges saw intense selling pressure in the spot and derivatives markets.
Extreme fear rattles a bitcoin-driven market as this week's CPI prints suggested a higher than expected inflation rate.
Rapid selling of bonds
Bitcoin dropped below $30k as the Fed’s readiness for “short-term pain” rattled the market. A new significant price level is forming around $26-$32k as Swissblock’s Bitcoin Risk Signal edged towards the extreme (100) (Figure 1).
Figure 1: Significant price level forging around $26-$32k
Uncertainty spread across markets while the US bond selloff drove drawdowns from all-time highs to levels not seen since the March 8, 2020 crash. We are entering a similar regime as 1968-1975, where an increasing US 10-year maturity (bond selloff) pressured the S&P 500 downward (Figure 2).
Figure 2: Diverging US T-bond yields and S&P 500
We believe that uncertainty, and potential retraces, will persist as the Chicago Fed’s National Financial Conditions suggested that further tightening is possible given the current macroeconomic environment (Figure 3). Bear in mind that a subsequent negative GDP print would imply a technical recession.
Figure 3: Macro environment demanded tighter conditions
Consequently, investors priced a rate hike at a 95% probability in the upcoming FOMC meeting (June 15), which led to US equities outflows (Figure 4) as a sign of decaying sentiment in the market.
Figure 4: US fixed-income securities inflows dominated as net flows barely broke even
On the other hand, bitcoin saw $45 million in inflows (Figure 5) following the $131 million outflows noted in Uncharted #14. We believe that the change in net flows represented a boost in institutional and newcomers’ confidence in bitcoin as a viable alternative investment.
Figure 5: From $131 million in outflows to $45 million in inflows
So, the question remains what the key driver behind bitcoin’s correction was.
On-chain disconnect from strained off-chain
Swissblock’s Bitcoin Risk Signal indicated an increased risk as ties between bitcoin and the S&P 500 hit unprecedented levels (Figure 6). Once the selling pressure spread to US equities, bitcoin followed.
Figure 6: Sharp correlation between bitcoin and the S&P 500
This selling pressure was exacerbated by Luna Foundation Guard’s unloading of their entire bitcoin position of 82k BTC in the course of a few days, following the UST unpegging. The total transfer volume reached nearly 45 million BTC in the past week (Figure 7).
Figure 7: Rolling 7-day mean total transfer volume at 2017-high levels
However, increased activity/transfer volume is not indicative of bullish fundamentals without analyzing selling and buying pressure. The figure below shows that older cohorts’ balance slightly increased alongside unrealized losses (Figure 8, red area), indicating holding behavior and reduced buying power.
Figure 8: Holding behavior and reduced buying power
From a selling perspective, it appears that, unlike past transitions from anxiety to fear, investors did not realize losses at the same rate (Figure 9). In other words, realized losses, or selling pressure, were not as intense as they were in the past.
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