58% of Bitcoin Transactions Are Realizing Profits as BTC Falls Below $40,000

After reclaiming a higher price level and flipping resistance for the support band, bitcoin is once again showing weakness. In a week, the price of BTC fell more than 15%, leading to a 200 billion drop in total crypto market capitalization. With high correlations between altcoins and bitcoin, they have also lost significant value. 

Bitcoin’s struggle to maintain upside momentum and break out of the current choppy market is, however, not that surprising. The high correlation between equities and bitcoin is continuously moving up in short-term and medium-term periods. So, when the big tech companies that dominate the market start to fall and Nasdaq corrects heavily, we expect to see a meltdown in the crypto market. 

On the other hand, we also have rising inflation and monetary tightening. In a recent White House press conference, it was said that the consumer price index is expected to be “extraordinarily elevated”. While the government is pinning high inflation on President Putin’s actions, many believe the underlying flaws of the monetary policy are stunting economic growth. 

This is also increasing the risk of recession. A couple of months back, most of us expected the FED to raise interest rates three or four times. But now, the whole scenario seems to have changed. We can see in the below graphic that markets expect to see nearly nine rate hikes in 2022. 

Source- Crypto Hayes 

With aggressive moves from the FED, shrinking the balance sheet a lot faster than most anticipated, it is highly unlikely for equities to make a strong recovery. Another reason is the inverse correlation between equities and the fixed-income market. As we can see in the chart below, the 10-year yield is breaking out, which will impact the equity markets in the opposite direction. 

Source- Will Clemente 

According to Arthur Hayes, former BitMEX CEO, the short-term picture for bitcoin is bearish, and the price may drop to $30,000. In his recent blog, the expert derivative trader claims that tech stocks are plummeting and Russia’s invasion will cause heavy damage to crypto by the end of Q2 this year. 

This is a high-level overview of what’s happening to the crypto markets and what might be in store in the coming months. Now, let us look at a few on-chain metrics and see if they align with our short-term thesis. 

Spent Output Profit Ratio (SOPR) 

The SOPR metric is mainly used to understand the state of the market, whether it is profitable or not. If the ratio is greater than one, network entities sell for a profit. Otherwise, they simply realize losses. 

Currently, the ratio is less than one, implying investors realize losses. We do not want to see this trend lower, as it can make things harder for a strong recovery. 

Number of Active Entities 

The growth of the bitcoin network is famously used to demonstrate its bull case in the long term by many industry experts. However, its current state of active entities is not showing a big difference from previous years. According to Glassnode’s lead on-chain analyst, checkmate, the number of active entities is still in the six-year bear market channel. A break-out would mean a sustained expansion after the bull market hype in 2021. 

Realized Profit 

In the earlier SOPR metric, we have seen that entities are selling for a loss. And most of them are short-term holders. But some entities are constantly realizing profits, absorbing the supply and potentially sending the price higher. The daily profit realized is 13.3k BTC. Here, the main thing to understand is that investors are not exiting the market. They are finding positions of strength and reducing the sell-side pressure. However, we are yet to see sustained dominance in realizing profits. So we can’t say that sentiment is shifting to the bullish side. 

Short-Term Holder Cost Basis 

Since the major drawdown from all-time highs to low 30s, the short-term cost basis that bitcoin needed to reclaim sits at $46,000. Though it managed to get over it, it failed to turn it into support and move higher to $52,000 cost basis. So, it needs to sustain that level to have a chance to trend higher with more momentum. 

Mean Hash Rate 

The amount of competition for mining bitcoin has grown tremendously over last year. Every major energy and tech company is looking to plug their machines to the bitcoin network. Recently, Elon Musk and Jack Dorsey agreed on a partnership to use 100% renewable energy sources to mine bitcoin. With increased participation, the demand for more efficient mining machines is surging to never seen before levels. What this also means is that the block reward for mining bitcoin goes down. 

Source- Glassnode 

Open Interest 

Open interest is a crucial metric to track. High OI indicates extreme volatility is coming. And at the moment, the OI is relatively high compared to March. So we can expect to see some long liquidation cascades, wiping out the leveraged traders. This needs to be flushed out soon, or else we see sudden bleeding in the markets in the coming weeks. 

Closing Thoughts 

The crypto markets are open 24/7. Things can change pretty quickly. Momentum can shift in a matter of a few days. So it is better to stay out of this choppy market and wait for more favorable conditions. If you are a long-term investor, you can continue to the dollar-cost average. For bitcoin, the value is at $30k, and momentum will take over at $47k. Simply put, the macroeconomic conditions have to get better with inflation and war to see a positive reaction in the crypto markets.