If Bitcoin’s transformation towards more decentralization does happen, it will only become stronger.
Original title: “Coin Metrics 丨 The Big Selling Hasn’t Changed the Fundamentals of BTC? 》
Written by: Nate Maddrey
Translation: Harris
In the past two weeks, cryptocurrencies have been hit by a double negative news. First of all, Elon Musk announced that Tesla will no longer accept Bitcoin (BTC) payments, and added a key tweet about Bitcoin’s energy consumption, which kicked off the matter. Then a bigger wave hit: the news that China is cracking down on Bitcoin miners and traders.
The resulting sell-off is painful in the short term. But in the long term, the foundation of cryptocurrency is being established, and a huge transformation is taking place .
Miner panic
In the past few days, there have been reports that China’s State Council has announced the regulation of Bitcoin mining and trading. Although China has been monitoring cryptocurrencies for a long time, this is the first time that Bitcoin mining has been specifically mentioned at a meeting of the State Council Committee.
Although it is unclear what type of enforcement actions will be taken, these comments are said to have led some Chinese miners to sell their mining equipment and Bitcoin. Other miners have already begun to migrate out of China and restart their operations in other countries.
On-chain data provides support for these reports. The number of BTC transferred out by miners has soared to the highest level since March 2020, which means that some miners may be transferring their BTC for sale . Although there has not been a major surge in funds flowing directly from miners’ wallets to exchanges, the net outflow supports reports that miners have been selling on OTC.
For an in-depth analysis of how we derive miner indicators and a further breakdown of the impact of potential Chinese miner migration, please refer to our latest research report.
If these reports are true, it will at least help explain part of the sell-off. But it also has a great impact on the future of Bitcoin .
Over the years, some investors have expressed concern about the relatively high concentration of BTC miners in China. Specifically, people often question China’s ability to potentially affect Bitcoin and the relatively high carbon emissions from some coal-powered mining operations in China.
If the Chinese government really cracks down on the mining industry, much of the computing power currently concentrated in China will eventually be redistributed abroad . The shift in power distribution will not only make the Bitcoin network more decentralized, but will also address the last big criticism that hindered the development of BTC.
The computing power (7-day average) has also dropped by about 21% in the past 10 days. This may be a sign that Chinese miners have been forced to go offline. If these miners are indeed forced to relocate, we may see a big correction in the near future as mining operations start to go online again.
However, there is a misunderstanding that the daily computing power figures can provide an authoritative view on how miners unplug. In fact, it is impossible to get an accurate daily change number just by looking at the data on the chain.
In a special report, Lucas Nuzzi, Head of Network Data at Coin Metrics, analyzed how computing power is measured, including potential pitfalls. In addition, he also introduced in detail how our miner indicators were derived and discussed in depth the impact of China’s regulatory actions.
Binance boom
On May 12, after Musk’s tweet, the exchange’s net inflow of BTC (14-day average) began to soar, which means that the amount of BTC deposited in the exchange is relative to the amount of BTC that was withdrawn. Higher. By the 19th, the exchange’s net inflow reached its highest level in many years .
The sudden inflow indicates that some investors are transferring BTC to exchanges for sale. But there are several other factors that contributed to a large net inflow.
Breaking down the net traffic by exchanges, Binance easily accounts for the largest portion. Considering that Binance is the largest exchange in the world, this is not surprising. Binance also has a large futures market, so some of the inflows may be collateral used to pay for leveraged positions .
But looking at the net traffic of other exchanges, you will find an interesting comparison. Huobi’s net traffic has dropped sharply, which means that there has been a relatively large net outflow. This again coincides with reports that China-based exchanges such as Huobi may be threatened by investigations. Binance seems to be less threatened because its official headquarters is not in mainland China. The crackdown on Chinese exchanges and transactions may be another factor in the transfer of Bitcoin if these supplies eventually leave China and enter the hands of other countries .
Short-term selling pressure
Although the selling pressure from China is the main reason for the price decline in the past few days, the selling has already started before. On May 12th, Elon Musk posted on Twitter his concerns about the environmental impact of Bitcoin, which caused an initial shock wave in the market. Musk later clarified his comments, saying that Tesla did not sell any BTC. But by then, the sell-off has already begun.
After Tesla publicly announced the purchase of $1.5 billion in BTC in early February, a large number of retail investors poured in to help push the price to a record high of more than $63,000. But now, after Tesla changed its attitude, many new entrants seem to have withdrawn. Most of the supply that has been bought in the Tesla hype in the past few months is shifting to more powerful users .
The figure below shows the BTC supply recovered after holding it for a period of time (ie sent as part of the transaction). After May 12, the number of BTC recovered after being held for 90-180 days began to soar. By May 19, the supply recovered after being held for 30-90 days also reached its peak. This means that the large amount of supply flowing to the exchange is likely to be bought between December and May 2020, with a large number of purchases after February.
Many of these sellers seem to have sold at a loss . The BTC cost-to-production profit ratio (SOPR) fell to 0.977 on May 19, the lowest level since April 2020.
BTC SOPR is the ratio of the price of Bitcoin when UTXO was spent to the price when they were created. In other words, it is the representative of the selling price divided by the paid price. The SOPR is below 1, indicating that the investor is selling at a loss. This indicates that some investors who have recently bought have surrendered and are selling their positions when the price of BTC is nearing its all-time high. Historically, a SOPR below 1 corresponds to the bottom of the partial cycle .
However, it is important to note that SOPR is an approximation, not an exact measure of profitable trading. Not every Bitcoin transaction is a transaction, which means that not every transaction represents a profit from selling or selling.
Option liquidation
In the months before the crash, the cryptocurrency market was supported by a record high level of leveraged futures. However, as the price of BTC fell, a large amount of leverage quickly began to liquidate.
On May 19th, when the price unexpectedly dropped below $40,000, a larger amount of Bitcoin liquidation occurred. When BTC fell to USD 39,000, a large number of long positions were liquidated, starting a temporary price spiral.
Leverage means that traders effectively borrow money to increase their risk to certain assets. Leverage increases potential returns, but also amplifies risks . If the price drops suddenly, traders may not have enough collateral in their accounts to cover their leveraged positions, which may cause them to be liquidated by the exchange and lose their funds. This may cause a sudden surge of forced sellers, which may lead to a spiral of liquidation-if enough positions are forced to sell, the price will fall, leading to more liquidations.
The chart below shows the liquidation value of the BTC perpetual futures contract on May 19. The green “buy” represents short sellers who are forced to buy to make up their positions. The red “sell” represents a long position that is forced to sell to cover.
As BTC fell below $40,000, a large number of long contracts were liquidated in the range of $39,100-40,300. This led to a series of liquidations that fell to 30,000 U.S. dollars, with close to 100 million U.S. dollars less than 33,500 U.S. dollars, and over 80 million U.S. dollars under 31,000. Compared with short-term liquidation, a large number of long-term liquidation shows that there is a disproportionate number of contracts in long, which is a sign of the bullish market at that time. Liquidation below $30,700 finally began to dry up, as the BTC price approached $30K and then rebounded again.
A series of liquidations reduced the open interest of BTC perpetual futures by more than $3 billion, bringing it to its lowest level since February. Open interest is a measure of the total number of active futures contracts. The increase in open positions indicates that more contracts are opened and more funds enter the market .
Open positions can also be used as a measure of leverage. If the number of open positions is relatively high, there is a high possibility of high leverage in the futures market, because contracts are often opened with leverage. Beginning in February, the sharp increase in open interest shows that BTC’s record operation was partly driven by high levels of leverage.
The open BTC perpetual futures contracts have now been reset to January levels. This type of rapid deleveraging has led to disruptive short-term price drops. But in the end, removing leverage will help create a stronger foundation for future growth because it eliminates a large number of potential sellers .
Strengthen the fundamentals
In the past two weeks, the cryptocurrency market suddenly began to undergo several seismic changes. Government supervision seems to have accelerated the prelude to the migration of BTC from China to the rest of the world. The change in Tesla’s attitude towards accepting BTC payments has frightened some retail investors and caused many people to cut their meat. A large-scale futures liquidation incident caused a temporary price spiral, but also removed a large amount of unpaid leverage that supported the market.
The situation in China is still developing, and it remains to be seen what will happen in the coming weeks. If there is stricter regulation, the cryptocurrency market may continue to languish. But if things are not as bad as originally thought, the worst may have passed.
In any case, once the big sell-off is over, strong buyers will wait on the sidelines to take advantage of relatively low prices. It seems that most institutional investors have not been affected by the crash. Those who have been waiting for the opportunity to enter the market may finally think this is the right time, and investment giants like Ray Dalio continue to change their views on BTC.
The fundamentals of Bitcoin have not changed. Moreover, if there is a major shift towards more decentralization, they will only grow stronger.
