September Slide Continues Despite Positive Underlying Trends

Sep 22, 2021 • 10 Min Read

Key Takeaways

  • Crypto markets stumble as global equity markets go risk-off in the wake of Evergrande fears.
    Strongest selling pressure was from those with high exposure to Asian assets seeking liquidity to hedge against a potential “Lehman” moment for China.
  • This week reminds us that Bitcoin is relatively early in its adoption phase and consequently, is still a risk-on asset. Macro remains the roadblock between Bitcoin and $100,000 price.
  • We suspect continued trepidation in equities markets may lead to a continued dovish stance from the Fed, which may result in greater capital flow into risk-on assets.
  • On-chain metrics point to Chinese investors selling Bitcoin, long-term Hodlers accumulating, and broader Ethereum selling from retail investors.
  • Miners continue to flee China, building out new operations in friendlier jurisdictions.
  • The Bottom Line: As China-related fears spark risk-off sentiment in global markets, digital assets show positive underlying trends among institutional adoption, Hodler accumulation, and mining operations.

September Slide Continues

If the last seven days gave us anything, it was a fresh reminder that regardless of its ultimate use case as a digital monetary base, Bitcoin is relatively early in its adoption phase and consequently, is still a risk-on asset.

This fact was on display on Monday and Tuesday as global markets reeled over the news about Evergrande’s debt crisis. When Asian markets opened for trading on Monday morning, Bitcoin plummeted from $47,000 to approximately $43,000. Global equities experienced a massive sell-off all day on Monday as the financial world learned of a default on loan payments by one of China’s leading property developers. When Asian markets reopened on Tuesday morning, Bitcoin continued its decline pushing below $42,000. Ultimately, Bitcoin would find its weekly low just under $40,000 on Tuesday afternoon before finding ample buying support.

Some things to keep in mind with this latest sell-off:
Due to the timing of the sell-off, and the outsized volume on Asian exchanges, we think that the strongest selling pressure was from those with high exposure to Asian equities or property seeking liquidity to hedge against a potential “Lehman” moment for China.

This was much different than the drawdown we experienced a couple of weeks ago in which price dropped precipitously due to $4 billion in long positions being liquidated within a short timeframe. The chart below lays this out quite nicely. As demonstrated by the red arrow, you can see that the drawdown two weeks ago was a perfect vertical line downwards, indicating that investors were generally unprepared, and were over-leveraged relative to spot demand. In contrast, the blue arrow demonstrates a spot-driven sell-off this week in which there were few major liquidations, and most leveraged positions were closed out gracefully.

Finally, there is the on-chain element to consider. As we have discussed in prior weeks, long-term holders continue to see a structurally bullish market for Bitcoin (and consequently the wider crypto market), as evidenced by their appetite to buy into red candles. We will dive into this, in addition to some other on-chain metrics below.

September Slide Continues Despite Positive Underlying Trends
Source: Glassnode

Macro Roadblock

It has been our stance that the only thing standing between Bitcoin and $100,000 by year-end are macro headwinds. Internally, we are watching how the Chinese government handles this Evergrande debacle, whether they bail the company out or not, and what the overall reverberations in the global economy will be. We think that this is consequential for China and its real estate industry, but the government will do its best to rectify the situation to save face on the global stage.

We further surmise that any continued trepidation in equities markets from this news, combined with continued concerns about domestic recovery from COVID, may lead to a continued dovish stance from the Fed (or a stance that is not beyond what the market has priced in). If this plays out, we think that markets will start to allocate to more risk-on assets, and perhaps market sentiment will ultimately turn in crypto’s favor.

We can see in the chart below that 10-year rates have generally held well up in the face of Evergrande news, indicating that the market is not pricing in as much risk as headlines would suggest, and a positive note from the Fed may be the juice we need to see more traditional capital file into BTC and ETH.

September Slide Continues Despite Positive Underlying Trends
Source: TradingView

Institutions Slowly Coming Back

Something encouraging to note – Coinshares, a leading digital asset manager published its weekly report on institutional capital flows into crypto products on Monday. According to the report, digital asset investment products experienced inflows totaling $42 million last week across all digital assets, with Bitcoin accounting for $15 million of these inflows. This was the 5th consecutive week of net inflows, perhaps signaling a rebound in investor sentiment in blue-chip cryptoassets.

September Slide Continues Despite Positive Underlying Trends
Source: Bloomberg, CoinShares

Some Perspective

One last thing to keep in mind before we dive into some on-chain metrics is that this is still September, and as highlighted a couple of weeks ago, Bitcoin and Ethereum do NOT like September.

Below is a chart that we included in our weekly on 9/1. As demonstrated by the abundance of red bars, Bitcoin has generally underperformed in September. We speculate that this may be due to generally choppy performance during the summer months, leading to profit-taking and a “rinse” of crypto tourists heading into fall and winter.

To provide some added perspective, we can see that the average return in September since 2011 is -7%. This means that if we were to experience an “average” September (meaning that we decline 7% from the closing price on 8/31), then based on a starting price of $47,136, we would find ourselves hovering around $43,870 on September 30th, which is a stone’s throw away from the market price at the time of writing.

September Slide Continues Despite Positive Underlying Trends
Source: Fundstrat, Glassnode

On-Chain Analysis: China sells Bitcoin to Hodlers while everyone sells Ethereum

This week in our on-chain analysis we revisit exchange balances to better understand Bitcoin and Ethereum’s short-term price action. We also zoom out to get a higher-level perspective on Bitcoin’s token supply and Hodler behavior – both of which are critical in understanding Bitcoin’s long-term price action.

As we’ve highlighted in previous newsletters, the number of tokens on exchanges can be a useful metric to gauge the supply and demand for a digital asset. Over the past few weeks, we’ve noted that in aggregate bitcoins have been flowing off exchanges and into private wallets. However, the opposite trend can be observed on Binance – the popular Chinese exchange – indicating Chinese investors have been net sellers (orange line below) while the rest of the world has been net buyers (purple line below) of bitcoin since early August. Moreover, as U.S. and other investors took advantage of the recent price drawdowns by adding to their stacks, Chinese investors continued to sell into weakness.

September Slide Continues Despite Positive Underlying Trends
Source: Glassnode

Interestingly, while Chinese and non-Chinese investors have had differing opinions on Bitcoin, they have been very much on the same page around Ethereum. Heading into September, on the back of strong positive price action, both cohorts were net buyers of ETH, steadily accumulating tokens off exchanges. However, this trend reversed on September 7th when over $4 billion of leveraged longs were liquidated across the crypto market and ETH declined over 20%. Since then, ETH has been flowing back onto exchanges at an accelerating pace.

September Slide Continues Despite Positive Underlying Trends
Source:​ Glassnode

One possible explanation is a shift in retail investor sentiment around Ethereum in the short-term. This is supported by U.S. search data from Google Trends shown in the chart below. While interest in the phrase “sell bitcoin” has increased 241% week-over-week, “sell ethereum” is up 1420%. This may also support the broader notion that relative to Bitcoin, Ethereum has gained in popularity amongst retail investors who view it as a higher beta digital asset.

September Slide Continues Despite Positive Underlying Trends
Source: Fundstrat, Google Trends

Zooming out a bit, we continue to observe Hodler behavior as a strong indicator for Bitcoin’s longer-term price action. Generally, Hodlers accumulate in times of weakness while taking chips off the table during speculative price run-ups as seen in the first half of 2021. More recently, though, Hodlers have been accumulating at a faster rate than what was observed in 2020 before Bitcoin’s price increased from $10k to 60k.

September Slide Continues Despite Positive Underlying Trends
Source: Glassnode

Stepping even further back we can observe the importance of Hodler accumulation in reducing available supply and driving price. Bitcoin Magazine recently published a chart that we’ve recreated below showing the long-term trend of increasing illiquid supply – or supply held by entities with very low historical selling activity. To date this has been the nature of Bitcoin. Short-term price volatility leads investors with low conviction to sell to investors with high conviction causing illiquid supply to increase and liquid supply to decrease.

September Slide Continues Despite Positive Underlying Trends
Source: Glassnode, Bitcoin Magazine / @DylanLeClair_, Fundstrat

Just this year, while Bitcoin’s circulating token supply has increased 1.3%, illiquid supply has increased 2.4% and the supply of both liquid and highly liquid tokens have decreased. In other words, Hodlers are accumulating faster than the rate at which new bitcoins are being minted via mining.

September Slide Continues Despite Positive Underlying Trends
Source: Glassnode, Fundstrat

Exiled from China, Crypto Miners are Finding New Homes

Bitcoin mining companies are gaining steam on the global stage. After being pushed out of China, miners have migrated to friendlier countries like Kazakhstan, the United States, Argentina, and others that have embraced the new business.

China, the ex-global leader in crypto currency mining with almost half of the world’s crypto-mining operations in 2021 continued its crack down on crypto-mining in the country. Xinjiang, Inner Mongolia, Sichuan, and Yunnan were the biggest crypto-mining provinces in China. The consequences of the crackdown resulted in a major decline of China’s global crypto-mining share and Chinese crypto-miners moving their business operations abroad. A large portion of the mining capacity moved to North America, while some has gone to Kazakhstan, Russia, and a small percentage to Argentina.

Kazakhstan has been one for the biggest beneficiaries of China’s long-standing adversarial approach to crypto-mining. Its global share surged by 610%, from 1.4% to 8.6% from September 2019 to April 2021 as data shown by the University of Cambridge. In the exhibit below, we can see the overall global hashrate percentage by country prior to April when China doubled down on its mining ban which further accelerated the flow of miners out of the country.

Hashrate is a measure of the computational power contributed by miners to secure the network. It is measured in units of hash/second, meaning how many calculations per second a miner can perform. Machines with high hash rates can process large quantities of data in relatively short time frames.

With a cost of roughly $0.03–0.04 per kW/h (depending on the tenge-dollar exchange rate), electricity tariffs in Kazakhstan are among the cheapest in the world. Kazakhstan’s largest crypto-mining rivals charge $0.06 per kW/h (Russia), $0.08 per kW/h (China) or as much as $0.09–0.12 per kW/h (United States) according to data from Informburo.

September Slide Continues Despite Positive Underlying Trends
Source: Statista​

Shenzhen-based BIT Mining Ltd., a cryptocurrency mining company that provides cloud mining equipment rental services, ceased operations in China and moved 320 crypto miners to Kazakhstan. The company has plans to ship an additional 2,600 crypto-miners. BIT mining Ltd. has spent close to $10 million on logistical and transportation costs. With high conviction in the future of crypto mining in Kazakhstan, the Company raised $50 million from investors to expand operations.

Chinese crypto-mining company and BIT mining Ltd., competitor, Canaan has also begun to move operations and increase its digital footprint in Kazakhstan. Canaan is one of the world’s largest manufacturers of ASIC bitcoin miners.

The Kazakhstani government intends to support cryptocurrency mining operations by introducing some of the lowest taxation rates among major cryptocurrency mining countries. This has already produced a surge of activity. As of June 2021, Kazakhstan hosts 20 crypto farms, many of them recent migrants from China.

Chinese miners are also moving to the United States as they look for stability and opportunity. The largest Bitcoin mining operation in North America is in Rockdale, Texas. Occupying over ninety acres of land, Riot Blockchain, operates 60,000 crypto mining machines. BIT mining Ltd. plans to also make Rockdale a main crypto mining operation site with an investment of $26 million to build out a data center. Beijing-based Bitmain is expanding its crypto-mining facility in Rockdale. This small town with less than 6,000 residents will not be the next big hub for crypto-mining operations. So why Texas? It’s not just the great barbeque ribs. Texas offers cheap power and open land to build out mining facilities. Cryptocurrency-mining companies prefer sites with significant electrical-grid infrastructure and open land where solar or wind power-generation facilities can be built near mining operations, making their power sources more varied and, ideally, more reliable. Texas has all of that, as well as a deregulated energy market that already offers some of the cheapest power in the country.

Another state that has been friendly to crypto is Ohio. BIT Mining Ltd. plans to invest $12.14 million to develop an 85-megawatt crypto-mining center via a joint venture with Viking Data Centers. Ohio has also signed a five-year deal with Bitcoin mining company, Standard Power to service a nuclear-powered mining center.

As China continues to crack down on cryptocurrencies and crypto-mining, we will continue to see an exodus of crypto-related businesses out of China and an inflow into crypto-friendly countries that can also provide cheap electricity.

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