Published: November 23rd, 2022
A new report from crypto data analytics firm CoinShares suggests more investors than ever are banking on the price of Bitcoin and other cryptocurrencies to sink.
Trader sentiment was ‘extremely negative’ last week (wc 14th November 2022) in the wake of the still-unfolding FTX scandal, the report said, as inflows to short positions ballooned to 75% of the total, the largest inflow the firm has ever tracked.
Short positions let investors bet that the price of a cryptocurrency asset will go down in a given time period. In the example seen last week, investors were in a rush to place their bets on the price of BTC and ETH continuing to decline.
CoinShares analysts said that the value of the assets under management in crypto investment instruments had also sunk to a two-year low, settling at around USD 22 billion on 21st November. ‘That points to aggregate sentiment being excessively downbeat for crypto as an asset class.”
The report also highlighted that the trend had moved beyond Bitcoin, as more investors than ever before were also buying investment products that shorted Ethereum (ETH), for inflows of around USD 15 million.
Demand for instruments allowing forex traders to short crypto was ‘almost certainly’ a direct outcome of the ongoing collapse of bankrupt crypto exchange FTX.
The CoinShares report noted that traders had cashed out close to six million USD in altcoins last week, mainly XRP, Solana, and Polygon.
The long-suffering crypto market has been hammered again this month by news that FTX, previously one of the most popular crypto exchanges, may have squandered billions in investors’ cash.
The firm was allegedly using client cash to finance personal real estate purchases and make high-risk investments through sister company Alameda Research, a trading firm owned by FTX founder and CEO Sam Bankman-Fried.
After a run on its funds, FTX was forced to admit it wasn’t holding one-to-one reserves of customer assets, which led to withdrawals being blocked and the company filing for bankruptcy.
Analysts at Bloomberg say the firm’s balance sheet shows roughly USD 1.2 billion in assets, against more than USD 9 billion in liabilities.
At the time of writing, BTC’s price had fallen by 3.5 per cent in 24 hours, trading at USD 15,989. Ethereum experienced a six per cent dip in the same period, trading at USD 1,104.
In May, large investors used rising price volatility to shift more of their assets into Bitcoin, Ethereum, and exchange-traded instruments that derive their value from other cryptocurrencies.
A May report from Coinshares showed that that crypto investments drew an additional USD 40 million in net inflows over the previous month while Bitcoin saw inflows of around USD 46 million. Investors seemed to see price volatility as an opportunity to expand their positions in exchange-traded Bitcoin products, especially when prices dipped.
Well known products like Grayscale’s Bitcoin Trust (GBTC), which tends to move more or less in parallel with BTC price movements were down 19 per cent over one five-day period, while BTC saw a roughly similar 22 per cent drop.
‘It's worth noting that we haven’t witnessed the same spike in investment product trading activity as we would expect to see during extreme periods of price weakness,’ the forward to the CoinShares report says. 'The question is: does this mean the month-long run of negative crypto sentiment we’ve seen is finished?’
One reason mooted for the anomaly was the reality that negative price action at the time was actually less severe than the falls seen in past bear markets.
‘Compared to the deepest lows of past BTC bear markets, the current movements aren’t as bad. In June July 2021 BTC reached a drawdown of -53.3 per cent, and the crypto bear markets of 2015, 2018 and 2020 saw lows between –77 per cent and –85 per cent off their all-time-highs.’
One parallel between May and November 2022 has been the direction of price speculation. A record amount of money, USD 4 million, flowed into Bitcoin short positions in May. Investors created them using derivatives like futures to bet on whether a coin would rise or fall in price.
That’s drove up the total value invested in short Bitcoin products to USD 45 million, then an all-time-high. Despite that, the value invested in long Bitcoin positions was still far beyond the short money. As a percentage, CoinShares says the USD 45 million in shorts amounts to about 0.15 per cent of the USD 30 billion held in long Bitcoin products.
That indicated a level of crypto optimism, but other analysts thought the upbeat sentiment would soon wane.
Blockchain analytics firm Glassnode predicted in a newsletter that if prices fell to around USD 33,500 per BTC, it wouldn't be long before crypto investors found themselves facing the same headwinds seen in previous bear markets. Hours after
Glassnode’s report was published, BTC fulfilled the prophecy, dropping as low as USD 30,517 before bouncing back slightly.
While CoinShares’ report analysed exchange-traded funds that offer indirect exposure to cryptocurrencies, Glassnode looked at blockchain wallet data where there was direct exposure to crypto market spot price moves.
By Glassnode’s calculations, more than 60 per cent of the BTC network had sustained unrealized losses.
‘These levels are associated with profitability achieved in the 2018,2019 and 2020 bear markets.’
Having spent the last four weeks in slow but steady decline, the two biggest cryptocurrencies by market capitalization, Bitcoin and Ethereum, were down about 50 per cent from their all-time highs at time of writing.
Leader Bitcoin still commands close to 42 per cent of the market with a capitalisation of USD 627 billion. Figures from CoinMarketCap show it trading at USD 32,933, a level not seen since August of 2021.
It indicates a nearly 52 per cent plunge in value since BTC set its all-time high of USD 68,788 on November 9th 2021.