The market looks healthier this week after its participants were spooked by worrying reports, according to Jeff Dorman, Chief Investment Officer (CIO) at a US-based blockchain- and crypto-focused investment advisor Arca.
As many other cryptos and tech stocks soared, bitcoin (BTC) tanked, said Arca, stressing that the reason behind this is leverage, as it exacerbates price action when something organic causes sell pressure – which is what happened last week.
“Before the much-needed correction, the perpetual swaps funding rate was at 6-month highs, meaning longs were paying shorts almost 25 bps per day for the right to stay long (the funding rate is meant to incentivize participation on the other side to restore balance). Skew was also at all-time negative lows, meaning calls were 40% more expensive than puts earlier in the week, as the put/call ratio sunk to recent lows,” Dorman said. A call option gives the investors the right to buy an asset and a put option gives the right to sell it.
However, according to the CIO, “heading into this week, the market appears to be on much healthier footing following the leveraged unwind.”
That said, while it’s unclear what actually caused the selling, Dorman found that some reports “spooked market participants, even though each was thoroughly dismissed,” these being:
- Janet Yellen says cryptocurrencies are used for illicit purposes: though the recently confirmed US Treasury Secretary clarified her statement, and even though blockchain forensics firm Chainalysis’ report showed that cryptocurrency-based criminal activity fell from 2.1% to 0.34% of total transaction volume – the damage had been done.
- The BTC double-spend: many believed that this supposed double-spend would invalidate Bitcoin and blockchain, said Arca.
Meanwhile, according to crypto intelligence firm Con Metrics, while the FUD (fear, uncertainty, and doubt) caused some investors to panic-sell there are likely also other factors at play in the recent BTC price drop.
“Sophisticated investors may be taking advantage of the temporary fear to accumulate more BTC,” they said in a newsletter today.
The number of addresses holding at least BTC 1,000 (USD 32m) increased by about 25 over the past week to a total of 2,443, signaling that the number of large holders is increasing, according to Coin Metrics.
Also, over the last week, money kept on flowing in the Grayscale Bitcoin Trust, which is one of the main ways that institutions get exposure to BTC.
“Fear, uncertainty, and doubt are sure to pick up as the attention around BTC grows. But the largest holders appear undeterred, and ready to keep on accumulating,” the firm concluded.
Also, CoinShares’ Meltem Demirors noted that “market makers are bullish,” adding that the digital asset management firm traded USD 1.5bn in the first two weeks of 2021, while spot volumes are skyrocketing – “BTC/USD trade pair volume has ~7x’ed since August, institutions instead of crypto native firms (who use USDT),” she said.
Furthermore, according to on-chain analysis firm Glassnode, investors are confident the price will rise further. In a report, the firm also noted that it’s unlikely that investors will be selling at a loss currently, and that the firm has been looking for a Bitcoin Adjusted SOPR (Spend Output Profit Ratio) reset “in order to generate some stability in the market and pave the way for the next bull run.”
12.6% of the #Bitcoin supply (2.3M BTC) was moved at prices above $30,000 USD.
This is substantial, given that $BTC crossed $30k just this year. It suggests investors are injecting capital, and therefore confidence in further price appreciation.
Chart: https://t.co/Q0OZye5SIk pic.twitter.com/mUFA2cRtPw
— glassnode (@glassnode) January 25, 2021
However, analysts are also discussing a possibility of another drop before shooting higher. “If we start closing below [USD 30,000], then it looks [very] bearish and we’re probably going down to [USD 24,000 – USD 25,000],” said crypto trader Nik Patel. Similarly, Crypto-TA.nl founder Crypto Ed argued that “another leg down is very well possible,” but if the price breaks out of the current pattern and “break [USD 34,000] […] I’m a bull tard again.” And crypto trader Loma finds that “retracement and choppy conditions are a necessary evil” in a run up.
That said, Vijay Ayyar, head of Asia Pacific with crypto exchange Luno, was quoted by Bloomberg as saying that over the next 3-10 years, bitcoin will be “slowly inching away at gold’s market capitalization,” and if that happens, “you are way over [USD] 50,000.”
At the same time, the trend shifted from bitcoin leading the market, retracing and going stagnant, to turning the market over to ethereum (ETH) and altcoins to rally as the assets rotate. “These sporadic spurts of growth in the rest of the digital assets market are usually paired with organic interest – in 2020, Decentralized Finance went through a Cambrian Explosion, and this time Layer 2 (ETH 2.0) growth was the spark that lit the powder keg,” concluded Dorman.
At the time of writing (14:20 UTC), BTC trades at USD 31,691 and is down by almost 9% in a day and 14.6% in a week, trimming its monthly gains to less than 16%. The price is up by 264% in a year.
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