Jess

BITCOIN'S ROAD TO $100K - TEAR DOWN THIS WALL this is a private research note sent to clients and counterparties of @galaxyhq. trade or invest with us to receive it directly. Bitcoin has not traded below $90k for the last week and anticipation that the world’s oldest cryptocurrency will pass the $100k milestone has been building for weeks. Bitcoin had risen as much as 50% from the day before the U.S. election on Nov. 4. After setting new all-time highs of $99,860 on Friday, Nov. 24, BTCUSD has traded down as much as 8% to $91,420. In earlier Bitcoin times, this drawdown wouldn’t have raised eyebrows, as sharp corrections were extremely common. These days, however, all eyes are on Bitcoin, including many that have not been in the trenches of Bitcoin volatility for years. Corrections are healthy, and as I wrote on Mar. 6, 2024, bull markets climb a “wall of worry.” (xitter.cf/intangiblecoins/status…) Just 8 days later, on Mar. 14, 2024, BTCUSD reached $73,835, an all-time high that would not be surpassed until Nov. 6, 2024, the day after the U.S. presidential election (or more accurately, the early hours of the morning). Between those dates, BTC chopped in downward range for 237 days, or 7 months and 23 days, forming one of the biggest and longest-to-resolve bull flags I’ve ever seen. Those almost-8 months were volatile, with Bitcoin ranging between the $73,835 all-time high and $49,005, with peak to trough being a 40% drawdown. For a variety of reasons, we believe the Bitcoin bull market has legs. There will be corrections and hiccups, which is normal. There could even some twilight regulatory or law enforcement actions from the outgoing Biden administration that jitter markets. But a combination of increasing institutional, corporate, and potentially nation-state adoption, a new U.S. administration that is shaping up to be extremely pro-Bitcoin, and solid positioning and network data all point to higher over the near and medium term. Important questions I cover in this note: · What is the current state of bitcoin supply and network fundamentals? · Who is selling and why? · What does leverage look like in the system? · When might Bitcoin resume its march to $100k? History of Drawdowns In prior bear markets, such as in 2012, 2015-2016, and 2019, BTCUSD traded lower than -80% from its prior all-time highs. March 2020 and late 2022/early 2023 saw Bitcoin drop to -75% of its prior all-time high. Despite Bitcoin’s meteoric rise over the past 15 years, bear markets have historically been severe. However, Bitcoin’s -8% dip over the last week barely rates when compared to the volatility during the 237 days of downward channel chop between Mar. 14, 2024 and Nov. 6, 2024. The 2017 bull market, which saw Bitcoin rise 20x in 12 months, experienced many significant drawdowns on the path to its Dec. 17, 2017 all-time high of $19,891. As I was involved at the time, the 40% correction around Labor Day 2017 was particularly grueling. This happened a month after SegWit activated on Bitcoin and Bitcoin Cash forked off, and there was real fear and questions at that time that BCH would “win” against Bitcoin (Narrator: it did not). [2017 drawdowns image in next post] 2021 was no different, though at a higher market cap and with more liquidity, the drawdowns were less intense than in 2017. Still, starting from the COVID low on Mar. 12, 2020, BTCUSD experienced at least 16 drawdowns of 10% or more and 7 drawdowns of 15% or more. [2020 drawdowns image in next post] Lastly, comparing this week’s 9% drawdown in BTCUSD to the rest of 2024, there were at least 7 bigger drawdowns during the chop between Mar. 14, 2024 and Nov. 1, 2024. Supply Distribution We can look at onchain data to gain information about selling pressure. A common metric for analyzing coin movements is the statistical grouping of “long term holders” (“LTH,” those who have not moved coins for 155 days or more) and “short term holders” (155 days or less). This chart has been widely circulated and shows that the supply held by LTH has been declining as BTCUSD has risen post-election. In fact, LTH positioning has declined more in the last couple weeks since the profit taking that capped the run to all-time highs in March. [LTH supply change image in next post] This doesn’t tell the whole story, though. Before the new all-time highs were reached in the last couple weeks, it had been 237 days since the prior all-time high in March 2024. LTH supply includes both any holder with coins older than 155 days, as well as truly long-term holders like those who bought last year, or 5 years ago, or 10 years ago. We can observe through onchain data that truly long-term holders are not stepping in here to take profits, but instead that it’s more recent LTH supply taking profits. First, Coin Days Destroyed (CDD) is not spiking in any material way, indicating that very old coins are not moving onchain at scales seen during other topping events. (Note, the spike in mid-2024, the largest reading ever for the metric, was due to distributions from the Mt. Gox estate, while the early 2022 spike was due to the U.S. government recovering – and moving – coins stolen from Bitfinex). [CDD image in next post] If “long term holder” supply is declining but very old coins aren’t moving, who is moving and selling coins? First I need to explain the UTXO realized price distribution (URPD) metric, which groups the existing supply of coins based on when they were last moved onchain. Observing Bitcoin’s supply by the price the coins were created onchain shows the levels of concentrated ownership and gives an idea of different pockets of cost basis. Recall that Bitcoin uses an “unspent transaction output” model (UTXO) for accounting, not an account-based model (as other chains like Ethereum and Solana use). When a user spends (or sends) Bitcoin, the coins used in the transaction are “destroyed” and new coins (unspent transaction outputs) are created. The chart below (also known as “URPD”) shows the price at which all current UTXOs were created and highlights significant ownership of coins last moved between $52k and $72k (the 237 days of chop from March until November), which should be an area of strong support if BTCUSD goes that low. However, this would represent a full retrace of the post-election bump, which is extremely unlikely. That being said, below $87k there is a big pocket of sparse ownership in which all buyers since November 11 would be underwater. [URPD image in next post] Analyzing the same data based on change in supply at the different price bands gives an idea of where the sell pressure is coming from. Comparing the change in URPD distribution by price between November 1 and November 25, we can see that most of the coin movements have involved coins that were created (UTXOs created, i.e., last moved onchain) between $56k and $72k, or peak “chop” from the March to November period. Just as the Coin Days Destroyed metric suggests, very few very old coins are moving on chain. Rather than whales from eons ago dumping coins, the sell pressure appears to be coming primarily from 2024 buyers taking profits off the back of this move towards $100k. [URPD supply diff image in next post] Options Market Positioning Open interest for the new options on spot-based Bitcoin ETFs totals more than $4.1bn of notional, with the majority ($3.1bn) on call buying. Most call exposure is at strikes of $93k or higher ($2.7bn of the $3.1bn in call OI, or more than half of all the open interest, put or call). Note, options on the ETFs use the ETFs’ prices for strikes, but we transform the data in the chart below to show via equivalent BTCUSD price. Generally, the data suggests market participants are bullish and positioning for further upside. Options markets paint a bullish picture. Based on our analysis using data from AmberData, crypto-native dealers are net short gamma at $93,000. At that level, dealers need to hedge $53m for every $1000 move – buying as price rises and selling as price declines. That negative gamma profile will amplify moves in either direction. Dealers are short gamma when they sell calls into the market. Until BTCUSD reaches $106k, dealers are net short gamma, meaning they contribute to the amplification of moves in either direction, which will increase volatility. Moves above $106k (or below $57k, not likely to occur) see dealers do the reverse, thereby dampening volatility. This profile changes with expiries and other market dynamics. Nonetheless, the market has approximately $20m in negative gamma up to $100k BTCUSD. Looking at Leverage There’s definitely leverage in the system, but in general it looks mostly healthy rather than excessive. Perpetual swap funding rates aren’t near the March 2024 levels, let alone the levels seen during the 2021 all-time high. [Perp swap funding rates image in next post] 3 month annualized basis is increasing on the move since election day but remains well below March 2024 or other prior tops. [basis image in next post] Open interest is at all-time highs, but a huge portion of that is CME and likely related to ETF owners doing the basis trade or hedging by ETF authorized participants (APs). The data below is from Glassnode. [open interest image in next post] Tear Down This Wall I’ve established that corrections are normal in bull runs and they are often severe. Even during the period between March and November of this year, BTCUSD experience 5 drawdowns of 15% or more. The question now is, when does the uptrend resume and what takes us there? While the global rates environment and money supply remain an important factor that could present a headwind for risk assets, the positive catalysts for bitcoin and crypto abound. From my recent report “Entering the Digital Golden Era,” markets are expecting a litany of positive catalysts on the regulatory and policy front. Easing of regulatory headwinds combined with specific interpretive letters, no action letters, or regulatory guidance is likely to dramatically expand access to crypto for institutional investors in America. - The easing of SAB 121 applicability by the SEC in September, or in the case of an outright withdraw of the guidance, will pave the way for the world’s largest custody banks to enter crypto. BNY Mellon achieved exemption from the onerous account guideline because its primary prudential regulator (NYDFS) did not object, but the OCC is the primary prudential regulator for national banks like Citigroup and JP Morgan. Given we are very likely to see a material shift in the OCC’s posture to banks interacting directly with cryptos, these big banks will eventually have their opportunity to get more involved. - Further institutionalization will in turn increase financing options for crypto assets, make spot crypto more available through existing institutional trading platforms and relationships, and raise the maturity level of the institutional crypto market generally. Relaxation of the SEC’s applicability of Howey to digital assets, or alternatively the expansion of “crypto asset securities” that can be traded inside broker/dealers, will allow more entrants into the exchange space, including perhaps traditional financial institutions like banks, exchanges, or brokerages. Additionally, such a relaxation of the SEC’s application of Howey could result in more spot-based crypto ETFs in the US. - Clarity and permissiveness from regulators could allow traditional financial services companies and investors to operate onchain for the first time, bringing new opportunities for yield and other strategies. - Expanded access to the public blockchain could also revolutionize trading efficiency, transparency, issuance, and other aspects of finance. Depending on regulatory posture and any legislation that is enacted, the merger of tradfi and defi may finally be upon us. - Again, depending on the SEC’s stance on Howey and token disclosures, we could see a wave of new types of tokens, even possibly equity securities, and existing tokens may add more equity-like features to enhance their value propositions. An expanded and improving asset ecosystem will be supportive to the liquid crypto hedge fund industry whose investible universe will both mature and expand. Improved token disclosure and issuance capabilities in the US will finally challenge or even reverse the existing SAFT-to-low-float-high-FDV regime which favors VC capital over liquid. - On the venture side, it’s possible that the IPO market will open more meaningfully to crypto-native companies, finally giving a pathway to realizing return on investments via exits. Today, the only venture-backed crypto startup to go public (other than a few SPACs) is Coinbase. By our estimation, there could be dozens of crypto firms looking to go public in the US if the conditions were right and the regulators were open. Scott Bessent, a known advocate for Bitcoin and crypto, was recently chosen to be the 79th Treasury Secretary, marking the latest in a swath of pro-Bitcoin cabinet officials. VP-elect J.D. Vance owns Bitcoin, Elon Musk and Vivek Ramaswamy (who will run the new Department of Government Efficiency) both own Bitcoin, Commerce Secretary nominee Howard Lutnick owns “shedloads” of Bitcoin and his company Cantor Fitzgerald is deep in both Bitcoin and stablecoin markets, and the Trump family all support digital assets. Fox Business reported today that the Trump transition team is planning for the CFTC to take the leading role in digital assets regulation (versus the SEC), which is seen by observers as favorable to the industry. Talk of a “Bitcoin strategic reserve” has been intensifying over the last few weeks, and given the chatter it’s likely that other nations will seek to front-run the U.S. with more permissive policies on digital assets if not a strategic reserve itself. Already, this week Morocco began preparing new legislation to legalize crypto after banning it in 2017. Bitcoin Inc. (which runs the massive annual Bitcoin conferences) is hosting Bitcoin MENA in Abu Dhabi Dec. 9 and 10, and it’s possible that event, like it’s Nashville cousin earlier this year, will feature some big adoption announcements. The introduction of Bitcoin ETF options could contribute to increased liquidity and potentially reduced volatility, making it easier for large institutions to enter the asset and also potentially spurring the interest of U.S. retail investors, who make up 44% of retail equity options. All this to say that the setup for Bitcoin over the next 12 to 24 months appears unique and bullish. From policy to market structure, adoption to network fundamentals, there is strong reason to believe that BTC is heading higher in the near and medium terms. Once some leverage is flushed and shorter term buyers are done taking profits, we believe Bitcoin may find a strong base of support and could make another attempt to surpass the $100k level (the sell wall!) in the near term. Alex Thorn Head of Firmwide Research, Galaxy New York, NY