As surely as the earth rotates on its own axis, spring comes after winter. So has the markets, and few markets have endured a winter as brutal as crypto assets. It’s not just the price drop that’s hurting, but also the implosion of key components of the market infrastructure, starting with the Terra ecosystem and ending with… well, that’s yet to be decided.
The twin threads of destiny – a weakening macro environment and structural fragility – fed off of each other, with price declines exposing flawed disclosures, risk practices and stimulus constructs, leading to further price declines and further exposure. Until they didn’t anymore. That’s the part I want to focus on here: why prices stopped falling.
Noelle Acheson is the former Head of Research at CoinDesk and Genesis Trading. This article is an excerpt from their Crypto Is Macro Now newsletter, which focuses on the intersection between the changing crypto and macro landscapes. These opinions are hers and nothing she writes should be construed as investment advice.
In early November, as the shock of the FTX revelations pierced the ecosystem, BTC suffered its final slide, falling to around $16,000. The bad news didn’t stop coming: the bankruptcy, the scale of the fraud, the spread of the damage, the suspension of withdrawals and subsequent bankruptcy of the industry’s “blue-chip” lender, concerns about the largest Bitcoin fund… The Hits kept coming. But BTC didn’t fall any further than, to go by the murkiness of the narrative, it theoretically should have. What happened?
This has to do with the diverse use cases of Bitcoin. Many insist that the asset is just speculation: there is no fundamental value, the price is driven by narratives and no one uses it. This blind assumption comes even from seasoned market watchers, which is an encouraging lesson for the rest of us (nobody understands everything, no matter how well known).
Those of us who’ve been paying attention know we’re wrong: Bitcoin isn’t just for speculation. It’s a speculative asset, for sure. Trading volume recovered from local lows earlier in the year. While still relatively small, the volume is $13 billion a day on reputable exchanges, according to data from The Block. While we don’t know who is behind these trades, on-chain data tells us that the vast majority of BTC moved on any given day was last moved in the last 24 hours (the light yellow-dark yellow area in the chart below). . In other words, most on-chain activity is short-term churn. While some of this could be payments, we can probably assume that at least most of it is the result of speculative moves for now.
However, this accounts for less than half of the bitcoins in circulation. Most BTC held in addresses doesn’t move much. Over 67% haven’t moved in in over a year, nearly 50% haven’t moved in in over two years, although most of this cohort could have sold at a profit so far this year. Even if one is conservative and removes all coins that have been dormant for more than 10 years because they could be considered “lost”, over half of the outstanding BTC has been stationary for over a year.
While any of these holdings could be sold at any time, and many likely will be should the BTC price continue to rise, these address holders are not pure speculators. For them, BTC is a long-term investment, a store of value, a hedge—whatever you want to call it, for them Bitcoin has utility beyond short-term speculation.
One caveat about using address-based analytics: With the recent mass exit from exchange custody amid concerns over market structure, reading address tea leaves is harder than ever. For example, the number of non-zero addresses is skyrocketing – but that doesn’t necessarily mean a surge in activity, it could just be people moving coins over the counter. In other words, these aren’t necessarily new users, they’re just moving coins. Or they could be new users. We just don’t know. However, if we look at Bitcoin, which hasn’t moved in a while, we can be relatively confident in what we’re seeing – there’s no hiding a lack of movement. If anything, HODLer positions are likely an understatement – many investors may have held their BTC on the exchange until the market drama. They are long-term holders, but in the chain they appear as short-term holders.
Back to the thread… Bitcoin is a speculative asset and a long-term investment. For some, it’s a payment tool judging by the growth of the Lightning Network. Bitcoin is all of that at once, and maybe in the future it will also be a platform for non-fungible tokens (NFT). Who knows? This multifaceted use case supports. Back when Bitcoin’s price was at local bottom, the accumulation increased selling pressure from miners and exiting speculators. That provided some price support and goes a long way towards explaining why the price hasn’t fallen further even amid more terrible news.
The following table from Glassnode color-codes accumulation by address size. Purple represents the accumulation of large holders, yellow shows that smaller participants are becoming more active. Back in November, after BTC fell to $16,000, major holders bought the drop. Some of this might have been for speculation. But back then, the mood was darker than ever. Volatility moves indicated that traders were rushing to exit and speculators generally found more attractive risk profiles elsewhere.
This multipurpose case not only provides strong ground support, but also explains why even seasoned traditional market watchers don’t “get it”. Can you think of another asset that has multiple use cases? Gold and real estate come to mind – art maybe. But these have thousands of years of understanding behind them and are rarely confused with speculative assets as their prices are not volatile. These assets are also not particularly liquid (with the exception of gold, although it could be argued that physical bars are only liquid at certain times of the day and certain days of the week when held in a centralized repository, introducing new vulnerabilities). It’s not easy to imagine a liquid, always-available asset that represents different things to different people. This further underscores how “unusual” Bitcoin is – it is speculative and volatile, it is also treated by many as a long-term investment, and history has shown that this supports the investment floor while giving it ample upside potential.
Another reason many seasoned investment veterans don’t “get it” is what they read in the media. Sharp price movements, uncovered scams, exploits and examples of hype make for dramatic headlines that drive clicks and keep media business models afloat. It’s easy to see how those without the time or interest to dig deeper would take this as the full story, especially if they’re used to feeling “smart”.
But Bitcoin’s theoretical and demonstrated price floor is a key feature of the asset’s asymmetric risk – at these levels the potential upside far exceeds the potential downside, especially now that we know the floor is not $0. Truly savvy investors go beyond the headlines, even if it means venturing outside of the comfort zone.
Furthermore, the use cases of Bitcoin are still evolving – one example is the potential use of the network as a basis for NFTs, another is the potential application of smart contracts. Not only will this affect the “intrinsic value” debate, it will also add more levels to the price floor. For more traditional assets, even those that are also poised to benefit from the return of liquidity, this development is not embedded in the asset itself.
This implied price floor goes a long way to explaining why BTC has surged so much this week. The development of the price floor also positions the asset as an intriguing longer-term bet. The narrative shifts again.
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