Published: May 11th, 2022
The crypto market is losing ground this week, with the total market cap falling to USD 1.4 trillion and BTC’s price headed for USD 30,000. Against that backdrop, blockchain data firms Glassnode and CoinShares have noted some unexpected trends in crypto investor activity.
There’s evidence that large investors used last week’s price volatility to shift more assets into Bitcoin, Ethereum, and exchange-traded instruments that derive their value from other cryptocurrencies. Unlike retail investors, ‘whales’ (institutions, hedge funds, and other corporate investors with large holdings) have the financial flexibility to weather market storms and emerge largely unscathed.
Over the past week (wc 2nd May), a report from Coinshares says that crypto investment products saw net inflows of around USD 40 million while BTC attracted net inflows of USD 45 million. It’s a sign, they say, that investors see a market opportunity to move into exchange-traded Bitcoin products at bargain-basement rates.
CoinShares tracked exchange-traded crypto instruments like Grayscale’s Bitcoin Trust (GBTC), which is invested in Bitcoin passively and moves more or less in parallel with BTC price movements. For example, on Monday 9th May, shares of GBTC were down 19 per cent over the previous five days, versus a 23 per cent drop in price for BTC.
‘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 is the fact that the price action that's tanked Bitcoin and Ethereum to depths some 50 per cent below their all-time highs is 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.’
What has increased over the last week is price speculation. A record amount of money, USD 4 million, flowed into Bitcoin short positions over the past week. Investors create ‘short’s using derivatives like futures to bet on whether an asset will rise or fall in price.
That’s driven up the total value invested in short Bitcoin products to USD 45 million, and all-time-high. Despite that, the value invested in long Bitcoin positions is 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 indicates sustained crypto optimism, but other analysts think it could soon start to wane.
In newsletter this week, blockchain analytics firm Glassnode predicted that if prices fall 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.
For second-place Ethereum, the story is broadly similar.
Ethereum owns around 19 per cent of the crypto market, with a capitalization of USD 288 billion, but at time of writing it’s worth USD 2,394, or just 50.7 per cent of its former high of USD 4,890.97, reached on 15th November, 2021.
Bitcoin’s price volatility can be understood in part by watching its inflows and outflows on exchanges. Bigger inflows usually signal the onset of a bear market as investors move their BTC onto exchanges so they can sell it for fiat currencies or stablecoins pegged to fiats like USD.
On the other hand, bigger outflows can signal a bull market as investors shift their BTC into cold storage wallets for long-term HODL.
According to Glassnode, Bitcoin’s 15 per cent drop over the last week correlates to net transfer volumes into leading crypto exchanges. On 6th May, there was a net inflow of approximately 12,244 Bitcoin or around USD 400 million at the current price.
Ethereum’s net transfer volumes for the previous four weeks show that most investors have been moving their ETH off exchange, which is usually a bullish signal.
The apparent contradiction between the bearish price action for ETH accompanied by big outflows from exchanges suggests that other forces might be at work. It’s possible, for instance, that Ethereum holders are taking their idle coins off-exchange for staking purposes, given the network merge scheduled for Q3.
Investors might also be dumping their ETH holdings on decentralized exchanges (DEXs) which are more opaque and not tracked by Glassnode.
Alternatively, the ETH leaving exchanges might be getting deployed in DeFi borrowing or lending protocols, used to mint stablecoins, or other DeFi activities that don't constitute an asset sale.