The recent market crash erases nearly $1 trillion in market capitalization. With Bitcoin breaking a major support level at $40k, the global market sentiment turned bearish. And many market participants are expecting BTC to reach 30K before making a bounce. The sentiment towards altcoins also flipped. Some of the top cryptocurrencies are down by more than 60-80% from their previous ATH.
Are the fundamentals broken? Absolutely not! We are experiencing a major correlation with the equity markets. Due to the recent announcements made by the FED about interest rate hikes and monetary tightening, it has many investors worried about the state of the economy. To overcome that uncertainty, they sell risk-on assets like Bitcoin and high growth tech stocks.
Usually, we consider Bitcoin as an uncorrelated asset and a store of value. But with the institutionalization of Bitcoin in full effect, we have to take into account general equity markets. This week, we have seen the correlation between Bitcoin and Nasdaq hit an all-time high. On top of equity stocks plummeting, investors are also worried about Russia-Ukraine tensions. The global markets will be heavily impacted if something unprecedented occurs.
Another aspect affecting Bitcoin’s price is high open interest. Last week, we saw Bitcoin hovering below $45k with no major OI wipeouts. As a result, the demand below the 40s increased and we crashed hard. Even after falling to $35k, the open interest is still considerably high, causing more than 700 million in liquidations. So what’s next for Bitcoin? How to navigate from here? To understand possible future scenarios, let us look at a few on-chain metrics and charts.
Net Realized Profit/Loss
Even though the fear in the markets is constantly rising, the number of investors capitulating and booking losses is decreasing. Most of them are either waiting for a relief rally to exit the market or want to add more Bitcoin to their long-term positions at these discounted price levels. We need to check if this trend continues if Bitcoin goes down even further to $30k.
Supply in Profit
The percentage of Bitcoin supply in profit is down to 65%. This resembles the market conditions in summer 2021. We had a great rally then, but we cannot compare both situations. The macro outlook has changed. So this metric can only be used to track the profitability of the market participants.
Whale Entities
One important on-chain metrics that determine possible future scenarios is whales filtered for all known entities. If whales are entering the market and accumulating, it is a good sign. But if their spending activity is decreasing, they don’t want to enter the market and want to hold. We have not seen whale entities increase after reaching a new all-time high at $69,000. They distributed their holdings, reducing the total supply held by long-term investors by 1%.
Open Interest
Even after major liquidations this past week, the open interest still hasn’t flushed, indicating a further downside movement. This has many investors worried about their crypto holdings. With the increase in leverage in markets, we have to expect extreme volatility. And over the last few weeks, we have seen the volatility only in the downwards direction. We need to reset the open interest and flush out leveraged market participants to have a decent price recovery.
Mayer Multiple
According to the lead on-chain analyst of Glassnode, Checkmate, the mayer multiple has fallen to 0.75. Considering the historical data, this has only happened for 15% of Bitcoin’s life. As a result, we are currently in oversold territory. This is another reason we can expect a rally to $40k in the short term.
Miner Reserve
It is a bad sign when miners sell their holdings in Bitcoin reserves. Fortunately, we do not see that now. The miners reserve continues to increase, despite a 50% correction from ATH. This means they constantly accumulate and add to their reserves at low prices. A continuation of this trend is a positive sign for the Bitcoin network.
Closing Thoughts
No one knows what’s going to happen in the markets. What we can do is manage risk and buy into quality projects for the long term. If your investment horizon is in decades, you should not worry about this massive correction. It will always pay off if you keep stacking at lower prices and just hodl. With that being said, in the short term, I do believe bears will dominate and send Bitcoin’s price to $30k. The best time to exit would be when the market retests levels above $40k. It is also important to monitor US stocks next week. It will help us understand how the market will behave.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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