A top executive at CryptoQuant says that he’s bullish on Bitcoin (BTC) despite the leading crypto’s rough week.
Chief executive officer Ki Young Ju of the on-chain analysis firm says that a few of Bitcoin’s fundamental metrics are showing signs of rising after a week that saw the king crypto drop nearly 15% from its high of $52,774.
Ki Young Ju tells his 245,600 Twitter followers that Bitcoin’s supply on exchanges is nearing its 2021 lows, which can be interpreted as a bullish signal as it likely decreases the risk of major sell-offs.
“BTC supply on exchanges is about to break its previous low. Hope to see another sell-side liquidity crisis on Bitcoin.”
The CryptoQuant head also says crypto whales moving Bitcoin into derivative exchanges, another potentially bullish indicator.
“Whales are sending BTC to derivative exchanges from other exchanges to punt new positions or fill up margins.
If you look at the historical data, the price goes up in the long term after their accumulation. Their positions seem to be long positions.”
Ki Young Ju has previously made a claim that he believes Bitcoin will skyrocket to $100,000 this year.
“No doubt it’ll hit $100,000 this year, but in the short-term, if we wouldn’t see any significant buying pressure from Coinbase Pro, I think BTC would be bearish.”
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Bitcoin’s negative price action continues, with BTC down 7.6% this week.
Market analyst Ben Lilly told Crypto Briefing that weakness has been creeping into the Bitcoin market since February.
Lilly is optimistic about Ethereum because of its rising prominence in the traditional finance world.
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The slump in the crypto market continues. Bitcoin’s price fell below $35,000 to lows of $32,150 this morning. It’s now down 7.6% this week and only 12.5% higher than its yearly opening at $28,900. In an interview with Jarvis Labs analyst Ben Lilly, Crypto Briefing attempts to understand the underlying dynamics that have moved since last year and what may lie ahead for the asset.
The Market’s Leading Players
Traders cannot justify the volatility of crypto assets on Elon Musk’s tweets or assuming that weaker hands sold alone.
To understand the noise, there is on-chain data that can help identify trends. Jarvis Labs has designed several on-chain models that help them spot short and long-term trends. They deploy AI techniques and trading bots to identify the leading players in the market. Their meticulous analysis reveals that there is always a phase gap or time-lapse before a trend plays.
The dominant players in any trading niche are market makers. They sustain the market’s liquidity by constantly buying and selling to capture spreads in the order book.Market makersoften change their strategies according to the market conditions.Usually, their strategy involves low-risk income opportunities from the premiums paid by retail traders on crypto-related products—for instance, the premium arbitrage trade of Grayscale shares.
There are other categories of metaphorical fish in any market ecosystem.The most important among them are whales: the large investors with deep pockets.Then there are market movers, otherwise known as sharks. Market movers are active traders and investors who feed on the weaknesses of the market. Finally, there is the market itself: the ocean, which consists of all other investors in the ecosystem. When Crypto Briefing spoke to Jarvis Labs analyst Ben Lilly, he started the conversation by explaining how market movers have impacted the rest of the ecosystem.
“The most influential market movers appear to be tied not necessarily to one another, but with the media,” he explained. “Tracking specific wallets and their movements can often help us anticipate news drops or regulatory announcements. This is a bit of a change from what we saw in 2018 when pods of whales were more common.”
Bitcoin is trading at around $32,150 today—roughly 50% off its all-time high. According to Lilly, the recent drop is the result of sharks “attacking the softness in the market that was building up from whales and miners selling.” The weakness in the market can be traced back to late February when the demand for Bitcoin started to slow.
Bitcoin’s Bear Build-Up
Lilly added that the early stage of the bull cycle through late 2020 and early 2021 was heavily focused on the spot market. “In late 2020, it was all about the spot market,” he said. “This is why we saw such incredible price action that spilled over into 2021. But with this price action came some larger players unloading some of their Bitcoin. This is a normal activity.”
The decline in the spot market set the stage for derivatives to shine, which led to a surge in the futures market. Lilly explained that the high spreads in the futures market were a factor in the market’s slowdown because so much capital was allocated to derivatives rather than spot buys for Bitcoin or any other asset. He said:
“The demand in the spot market slowed a bit, and we saw the derivatives market take over once again. This was on full display, with spreads in the futures market expanding to more than 40%. With this spread, larger firms began to allocate capital towards this spread. It’s a great trade as firms can hold a neutral position relative to price and capture that 40%+ spread. The trade-off was capital was no longer being used to buy bitcoin, buy altcoins, or any other instrument. It was being used to capture this spread. This contributed to the market losing upside momentum.”
Lilly added that the peak in open interest on futures matched the peak in the spread. As whales began to distribute their capital, the spot market lost some of its strength.
“A telltale sign this was taking place was the rising amount of capital being used in the futures market,” he said. “Note how the peak in Open Interest pairs up with the peak in the spread. So in Q2, we had the spot market losing a bit of momentum with whales distributing and more and more capital getting tied up into a trade, taking advantage of the market getting overheated through more shorting. Eventually, these spreads compressed, and the momentum shifted to the downside.”
Market Movers Plucked the Wound
The market suffered a particularly hard blow throughout May. On May 12, Elon Musk revealed that Tesla would stop accepting Bitcoin payments citing environmental concerns. China also doubled down on mining bans and pledged that it would tighten crypto regulations.
The worst blow came on May 19 when three self-regulatory organizations in China clarifying the country’s stance on cryptocurrencies, reiterating bans from 2013 and 2017 that blocked payments services from offering crypto services and ICOs. On the same day, it was revealed that Inner Mongolia had set up a hotline for reporting Bitcoin miners (the region had banned mining in April). Bitcoin’s price dropped 30% to lows of $30,000 from $42,800. This was when the market movers struck to initiate the downtrend, Lilly says.
“It’s important to note a lot of these inflows were not just a one-off from the ban,” he explained. “We saw miners selling more coins than they generated since May 5, well before the selloff. But what’s interesting is with this drop, we had multiple areas of crypto involved in selling. Miners were one group. We also had market movers taking part.”
Lilly added that Binance is generally the dominant exchange market movers and miners use for selling, adding that “the most recent selloff was no exception.” Although there was some activity in other China-friendly exchanges following the miner ban, the selloffs paled in comparison to Binance. Jarvis Labs recorded significant inflows from market movers they had tracked before and during the crash.
Is the Bull Market Over?
Since the selloffs, many crypto enthusiasts have begun to ask “Is the bull market over?” Lilly pointed out that as spreads have returned to near neutral, the spot market could be due for an uplift. He said:
“Now here we are with virtually neutral spreads. This means it is now time for the spot market to gain momentum for another run higher. It’ll take a bit of time.”
The institutional inflows of Q2 2020 have certainly dried out in 2021. Tesla, Ruffer, and many others have booked profits from their BTC investment above $50,000. Grayscale’s demand has also decreased with premiums mostly in the negative since February. Still, Lilly is mildly optimistic about the return of premiums and Grayscale getting an ETF approval. He added:
“The end of unlockings in 2020 created an immense amount of new GBTC shares in the market. This fresh injection of supply takes time to get eaten up. And to be honest, it’s taken longer than I expected. An excellent way to think of this is like a halving event. It takes a bit of time before the drop in new supply issuance impacts price.”
He also said that it will be some time before the new equilibrium works itself out, explaining that the recent drop sped the process up, and “acted as a rest for the Trust.” He added that when the discount moves closer to a premium, “the impact GBTC has on spot prices is likely to return as private investors accumulate BTC on the spot to allocate towards the Trust.”
Bitcoin vs. Ethereum
Lilly also shared his thoughts on the second-largest cryptocurrency by market cap, Ethereum. He commented on the blockchain’s strengthening narrative among institutional investors and key players in the traditional finance world. Ethereum futures went live on CME Group in February, while data shows that whales have been accumulating ETH. “I don’t see this slowing down,” Lilly said.
Lilly added that he thinks it “makes more sense” to many investors in the traditional finance space to invest in ETH over BTC. He said:
“I know I’m flying against the wind on this one, but if you reside in traditional finance and understand the dance regulators and Bitcoin are having, the “threat” Ethereum poses to the U.S. dollar is less. Which is not to say Bitcoin is in trouble or anything like that. Ethereum is just less.”
Lilly expanded on his thesis by explaining that Ethereum’s network effect is one of its key strengths. Ethereum has long established itself as the home of DeFi and NFTs this year, with billions of dollars in value locked across protocols like Aave, Uniswap, and MakerDAO. He added that while Bitcoin acts as a competitor to traditional currencies, Ethereum could complement a government’s plans, explaining:
“[Ethereum] is expanding further into traditional FinTech channels than Bitcoin. To me, this is something I’ve heard from investing professionals that view the asset as having more use cases from a financial plumbing point of view. It’s not competing as a currency like Bitcoin is. Ethereum acts more like a facilitator to a country’s global agenda, not as a competitor.”
Lilly also pointed out that Ethereum has EIP-1559, its highly anticipated “ETH buyback” fee burning proposal, on the horizon. EIP-1559, due to ship on Jul. 14, could make ETH a deflationary asset if the network sees enough activity. Lilly said that he expects Ethereum’s investment narrative to grow “in the coming months” as EIP-1559 approaches.
In conclusion, crypto’s bullish and bearish phases in the last two quarters have highlighted the rising and falling in demand since Q2 2020. Consolidation is likely to begin among whales and market movers in a comparatively stable price range. Moreover, these inflows and the eventual break-out will take time to develop.
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Following the recent moves in GameStop (GME) and AMC (AMC) stocks, and DOGE and XRP tokens, investors across the globe are rightfully questioning fundamental investment analysis. While cryptocurrencies are often heralded as a gambler’s playground, the irony is that digital assets might be one of the few asset classes left for true fundamental investment analysis.
Jeff Dorman, a CoinDesk columnist, is chief investment officer at Arca, where he leads the investment committee and is responsible for portfolio sizing and risk management.
Ideas are a dime a dozen. What separates good investments from bad investments is how you express those ideas to maximize upside and minimize downside. For example, in 2011-2012, many very smart investors looked for ways to express the same idea: that there was going to be a double-dip recession and inflation was going to be rampant after unprecedented monetary policy interjections (of course, the 2009 stimulus was child’s play compared to the reckless government spending today, but 10 years ago, stimulus was a big deal).
What tools did most investors use to express this view?
Shorting U.S. equities (into a 10-year bull run)
Shorting Spanish, Italian and Greek government bonds (yields are now at or below 0% after the European Central Bank essentially nationalized these countries’ debts over the past decade)
Buying gold (which traded straight down and then sideways for seven years before catching a renewed bid post-COVID)
Moving teams of distressed analysts to Europe to buy European bank debt that should in theory be offered by these distressed banks at pennies on the dollar (this didn’t work, as the banks simply kept this debt at par value on their balance sheet, and never ended up selling)
As you can probably imagine, none of these investments worked, even though the idea was sound. In fact, one of the best investments to take advantage of the monetary policy and recession theme turned out to be buying bitcoin. Unfortunately for most investors, this instrument wasn’t in their playbook yet.
Most uninformed investors still believe all digital assets are a copycat version of bitcoin and other cryptocurrency, but the reality is today’s digital assets investable universe is very diverse, unique and idiosyncratic. As such, the playbook has expanded, and so have the investable themes that an investor can express. For example, if you wanted to express that the Coinbase initial public offering (IPO) is going to go up 100% upon listing, there are a variety of ways in which you can express that view:
Buy private Coinbase shares in the secondary market
Buy shares of similar publicly traded companies (Galaxy, Voyageur, etc.) which should benefit from relative value
Buy tokens of other exchanges (BNB, FTT, VGX, etc.) which should reprice after the Coinbase S-1 gives details as to how the company generates revenue
Buy bitcoin or ethereum as a market proxy to represent renewed interest in digital assets.
Not all of these investments will necessarily work. But the point is, coming up with the idea itself is less important than finding the best way to express that view. Paul Tudor Jones’ bitcoin investment thesis back in 2Q 2020 is a good example of this thought process, as it wasn’t a bitcoin investment thesis at all. It was an inflation thesis. Bitcoin was just one of four ways Tudor chose to express this view (the others being a) long the Nasdaq 100, b) long gold and c) buying a 2s/10s Treasury steepener.
Another good example is the recent MicroStrategy (MSTR) convertible bond offering. Given a high cash balance and no other debt in the capital structure, this bond has a very low likelihood of default or impairment. If you bought this convertible note at par, you were effectively being paid 0.75% per year in interest to own a long-dated bitcoin call option. If you were bullish on bitcoin, this was a very cheap and low risk way to express that view.
At Arca, we do fundamental research on the digital assets space. That means, we create an overall top-down view of higher-level theses and macro themes that should create long-term growth, then canvass the universe for investable assets that best express these views and then do a bottoms-up analysis on each individual token, stock or bond to ensure that it will accrue value if we are right.
See also: Jeff Dorman – What This Digital Asset Investment Firm Missed and Capitalized On in 2020
Each investment will have different risk/reward setups, different timeframes to measure success/failure and different total return outcomes. An investment that has just 10% upside but carries only 2% downside may be a better investment from a risk/reward standpoint than an investment that has 1000% upside but also carries 50% of downside risk. The goal is to find the most upside potential per unit of potential downside risk.
While perhaps surprising to many, digital assets offer a variety of ways to structure these investment setups, where fundamental analysis can be used to estimate both downside floors and upside potential. The digital assets ecosystem has evolved into a complex asset class and has become perhaps the perfect asset class for fundamental analysis and low-risk, high-reward investing. In addition to simply finding growth assets, there are now great risk/reward setups that often materialize organically. For example:
Are you interested in expressing a view on the growth of digital assets?
If so, there are protocols that are growing volumes and revenues over 100% quarter over quarter, while also spitting off hundreds of millions of dollars of free cash flow. Uniswap (UNI) and Sushiswap (SUSHI) are the clear market leaders in decentralized exchange (DEX) trading, with annualized revenues of over $500 million and $200mm, respectively. While the UNI and SUSHI tokens have uncertain fates in terms of how value from these cash flows will accrue to the tokens, you can still make a strong fundamental argument. For example, the price-to-sales ratio based on forward revenues is under 5x, which is incredibly cheap relative to equity prices of traditional exchanges, which trade on average between 10-20x, and don’t have the same exponential growth potential. It’s not often that you can invest in a blue chip growth asset that is also a value asset at the same time.
Are you interested in buying ethereum with a very cheap perpetual call option on the growth of DeFi attached?
Because that’s exactly what the wrapped nexus mutual (WNXM) token offers. The NXM token is an asset-backed token, backed by the ETH in the capital pool that is used to pay out potential insurance claims. Based on the amount of ETH currently in the capital pool, the net market cap of nexus mutual (in excess of the assets backing it) is only $43 million, and WNXM trades at only 1.2x book value, even though nexus mutual is a cash flow producing entity with very strong growth metrics. Comparable insurance companies in the public equity market trade at 2-5x book value, with high-growth companies like Lemonade and Root trading closer to 50x book value. At one point, you could even have owned WNXM below book value! Owning WNXM is one cheap way to invest in the growth of the Ethereum blockchain and DeFi.
Would you be interested in buying bitcoin at a 47% discount to current trading levels?
While this one has a lot more hair on it and it will take longer to extract the value, buying EOS might be the cheapest way to buy bitcoin right now. The company behind EOS has at least 140,000 BTC ($5 billion) on its balance sheet, while EOS trades at under $3 billion in market cap. This means buying EOS is like buying bitcoin at a 47% discount if you’re able to extract this value.
The list goes on and on but the point is fundamental investment analysis can and is being utilized in this growing asset class. Cash-flow analysis and book value analysis are just a few tools we use to analyze and value these instruments. Much like fixed income, every digital asset is unique and has different properties and attributes that create value. Our job as fundamental analysts is to find and extract this value, and to do so in the least risky way possible. In our view, finding upside is not nearly as important as limiting the expected downside.
See also: Jeff Dorman – Digital Assets Are More Recession-Proof Than You Might Think
We often find that today’s digital assets investors are impatient or have a singular view. In a world of common 50%-100% weekly returns, many want and expect immediate results and gratification. Therefore, anything that doesn’t go up right away must be wrong or must carry too high of an opportunity cost to warrant an investment. We find that to be very short-sighted. Every investor, and every investment, has a different mandate and certain investment setups fit different buckets. We approach investing in digital assets from a value lens, and we believe there is a lot of value in this space when you look beyond charts and volatility.
Disclaimer: Arca maintains positions in BTC, BNB, FTT, NXM, EOS, UNI, SUSHI, ETH as of the date of this writing. This information is not intended to be investment advice and should not be construed as such. Past performance is not an indicator of future results. All investing involves the risk of loss, including the risk of loss of principal.