Reconciling rifts
Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
The consistent strength of recent weeks came to an abrupt halt on Tuesday as BTC failed to solidify support above the dominant trading range, once again finding itself a hair shy of $44k at the time of writing. With Do Kwon’s purchase of an additional $230m in bitcoin failing to ignite a rebound toward local $47k highs, it’s evident that significant sell pressure remains above current resistance.
Macro outlook
Crypto wasn’t alone in retracing this week, with equities also bearing the brunt of an increasingly arduous economic and geopolitical climate. Cross-sector losses have been further compounded by the publication of US Federal Reserve minutes from the body’s last meeting, which emphasise the immediate need for aggressive tightening of monetary policy to curb record inflation levels. These are not astounding revelations - after printing trillions of dollars in stimulus, the US is now forced to deal with the highest inflation rates the country has faced in four decades.
Given the present positioning of the US dollar as the global reserve currency, the nation’s economic woes have had a major impact on the global economy, with increasing reports of food shortages and skyrocketing costs of living in many parts of the world. Despite the glaringly obvious nature of the problem, confirmations such as the latest publication serve to further drain optimism from markets standing on already shaky ground due to the ongoing energy crisis prompted by Russia’s invasion of Ukraine.
On-chain activity
Given that this has been the most stringent test of Bitcoin’s strength in the face of volatility since its inception, it’s reassuring to note that the market leader has shown significant resilience. Despite remaining tightly correlated with equities, catalysts such as Terra’s accumulation and the move toward ETH 2.0 offer optimism for crypto enthusiasts.
Interestingly, on-chain metrics seem to affirm this optimism. Reserves of BTC on exchanges continue to sink to new lows, potentially indicating that investors are moving their bitcoin off exchanges as they continue to accumulate, with no intention to sell in the short term. At present, only ~2.3m of the 19m BTC in circulation are held on exchanges - roughly 12% of coins currently in circulation.
While exchange reserves continue to decline, Net Unrealised Profit and Loss (NUPL) finds itself rebounding from the lows observed in July 2021 and much of 2020. Put simply, NUPL indicates the ratio of investors who are currently in profit, but have not yet realised those profits by selling their crypto. High unrealised profits could indicate incoming sell pressure, while the converse is true for losses. The ratio, currently below 0.5, indicates that while a notable proportion of traders are currently in profit, these levels are still well below the ranges that marked 2021’s successive all-time highs.
Forward focus
We currently find ourselves at the crux of a glaring disconnect between the global economy and speculative markets. Speculative rallies in the face of widespread economic downturn are rightfully head-scratching phenomena, and can be difficult to rationalise or even fully explain. However, in the case of Bitcoin and the wider crypto market, we have before us the tools that could reasonably provide a lifeline for many as the stability of traditional systems continues to deteriorate. BTC’s relative strength, both on-chain and on the charts, increases this writer’s conviction that, despite the noise, questionable memes, oversized egos, and token-specific tribalism; crypto truly has the potential to change the way we understand, share, and communicate value - for the better.