Friday Night Frights

Key Takeaways

• We are writing to update our clients on the events of this past weekend and highlight a few data points we will be keeping an eye on moving forward into the next couple of weeks. 
  
• On Friday, December 3rd, over $2 billion in long positions across the global crypto market were liquidated, nearly $850 million of which were from BTC futures.
  
• Almost $500 billion in total market value was wiped from the global crypto market cap, as Bitcoin fell over 20% from $57k to a low of approximately $45k (Source: CoinMarketCap). The rest of the crypto universe essentially followed suit. 
  
• We ultimately saw strong buying support at the 200-day moving average as the Bitcoin price has since steadied and at the time of writing fluctuates between $48k and $49k. 
  
• Altcoins have performed more robustly in recent weeks, leading us to consider that the institutionalization of Bitcoin may be leading to outsized influence from macro uncertainty as compared to the rest of the crypto market. 
  
• While there is reason to believe that Bitcoin consolidates around its current level before heading higher, we have yet to find substantial evidence that Bitcoin is entering what we would consider a prolonged bear market.

Leverage Wipeout

On Friday evening, Bitcoin’s price dropped precipitously in the wake of cascading liquidations of leveraged positions across multiple exchanges. According to data from Coinglass, on Friday, December 3rd, over $2 billion in long positions across the global crypto market were liquidated, nearly $850 million of which were from BTC positions. Below we can observe a significant flush of leverage as denominated in BTC. Total open interest had dropped by over 70,000 BTC or 18% as of Sunday morning.

The futures leverage ratio (futures contracts / BTC on exchanges) was subject to a significant reset, as indicated by the chart below.​

Strong Support at the 200-day SMA

When all was said and done, nearly $500 billion in total market value was wiped from the global crypto market cap, as Bitcoin fell over 20% from $57k to a low of approximately $45k (based on CoinMarketCap data), and the rest of the crypto universe essentially followed suit.
We ultimately saw strong buying support at the 200-day simple moving average as the Bitcoin price has since steadied and at the time of writing fluctuates between $48k and $49k.

Interestingly, the previous two times that BTC challenged the 200-day SMA served as good buying opportunities, as the market remained structurally bullish but was simply over-leveraged. We will pay close attention this week to any further challenges of the 200-day.

Profitability On-Chain

We will also be looking on-chain to see how BTC holders react to current price action. Below we chart out entity adjusted SOPR (Spent Output Profit Ratio), which essentially measures the profitability of all coins being sold.

During periods of favorable price action, this metric tends to drift higher as holders maintain their positions with the objective of selling at an increased level of profitability. During times of consolidation or weakness, this metric will often either hit 1 (breakeven) and return to negative levels or remain soundly in negative territory, an indication of capitulation among investors who choose to sell at a loss.

Over the next couple of weeks, we will watch closely to see how SOPR reacts around that breakeven level to give us a feel for investor sentiment.

Bitcoin vs. Rest of Crypto Market

A development that we are watching closely is Bitcoin’s apparent outsized correlation to macro uncertainty as compared to the rest of the crypto market. Below we chart out the returns of BTC market cap starting with the daily low last Friday, the day on which markets sold off on news of the Omicron COVID variant. We also highlight the shakeout from Fed Chair Jerome Powell’s comments regarding an expedited Fed taper, as well as the sell-off brought on by action in the derivatives markets on Friday.

In each circumstance, we note that the rest of the crypto market recovers at a much faster pace than BTC. We think this speaks to the overwhelming level of institutionalization of Bitcoin over the prior 12 months as well as the independent market dynamics throughout the rest of crypto. This might explain why there was so much capitulation in Bitcoin markets on Friday evening, as legacy institutions look to preserve annual gains heading into year-end.

Business as Usual

At present, Bitcoin’s current drawdown from its all-time high sits around 32%. As demonstrated by the chart below, we have experienced drawdowns of similar (often greater) magnitudes during Bitcoin bull markets. While there is reason to believe that Bitcoin consolidates around its current level before heading higher, we have yet to find substantial evidence that Bitcoin is entering what we would consider a prolonged bear market.

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