Waiting Patiently

Waiting for Demand

Over the last month, we've pointed to the stable spot flows we're observing on-chain.

This has been one of our primary arguments that in these current conditions the market looks unlikely to fall into a deeper correction such as took place in May.

But for a bottom to be formed, not only do we need to see a lack of supply (selling) from investors, they also need to become net buyers.

We've yet to see sufficient demand to drag the market out of this correction. Though spot flows have been stable, we're waiting for them to begin ticking higher to form a tradable bottom and support a Q1 rally.

As pictured here, coins held on exchanges have been flat along with speculative demand.

[caption id="attachment_180922" align="aligncenter" width="1800"] A depletion of exchange inventories points to HODLing behavior as investors store capital in cold storage. Liquid Supply Shock is a gauge to track speculative demand.[/caption]

Furthermore, whale buying/selling has been flat, even tilting to minor net selling. While other trader cohorts have been buying, whales have been in a local regime of selling.

We'd like to see demand tick higher here to help form an accumulation bottom.

[caption id="attachment_180904" align="aligncenter" width="1800"] Whale Supply/Demand is calculated by the 30-day rolling change of whale holdings (entities holding more than 1,000 BTC) when adjusted for exchange balances.[/caption]

Logical Place To Accumulate

Looking at the market from a value perspective, this seems a logical place for investors to begin accumulating in a similar fashion to the June/July period.

The NVT Signal is in a clear oversold zone -- similar readings were achieved prior to the 2018 dead-cat bounce, after COVID and the accumulation bottom earlier last year.

[caption id="attachment_180933" align="aligncenter" width="1800"] NVT Signal is Bitcoin's market cap divided by a 90-day average of transactions taking place on the network. It's seen as an equivalent to a P/E ratio in traditional equities.[/caption]

Derivatives in the Driver's Seat

As we've been pointing out for the last few weeks, elevated levels of leverage in the derivative markets exacerbate volatility. We saw this unwind in the December flash crash, and these same conditions are still present.

When leverage in the futures market was this elevated over the last 12 months, we've seen it dictate price action through volatile swings and unwinds/liquidation cascades.

[caption id="attachment_180930" align="aligncenter" width="1800"] Futures leverage is calculated by dividing open interest by coins held on exchange balances. Elevated leverage increases the probabilities of a long/short squeeze.[/caption]

There are some early signs that a short squeeze could be brewing.

Here's a brief summary of these current conditions:

• Price is falling, and we've seen high levels of long liquidations.
• Despite this, open interest is still near all-time highs. If longs are being liquidated and open interest is at new highs, it suggests shorts are coming into the market.
• Additionally, as pictured below, funding for perpetual swaps has fallen back into negative territory over the last week. This would seem to suggest shorts are more aggressive in their positioning compared to longs in the perpetual markets (i.e., longs aren't exuberant as they're not bidding up perpetual futures).

[caption id="attachment_180931" align="aligncenter" width="1800"] Funding is the arbitrage mechanism for exchanges to keep spot prices in line with perpetual futures contracts and is calculated by the premium/discount of spot to perps.[/caption]

If we begin seeing net buying on the part of spot investors, we could see a similar short squeeze setup to August. Until then, these are unactionable and early signs we're closely monitoring.

The Tendency To Fake Out

Approaching it from a more anecdotal perspective, these markets do have a tendency to fake out around major turning points.

With a lot of long liquidity below this macro support level of 41,000, we're certainly open to the scenario that prices fake out traders before finding a tradable bottom.

Though we're long against this level from a risk-versus-reward perspective, we're of the view it's likely to be a low-conviction entry involving a high degree of whipsaws.

Our expectation is that we're likely to see sideways and choppy price action in the near term.

The market is once again entering a zone of price stability -- price action has had a tendency to contract for a number of weeks before finding a direction.

[caption id="attachment_180934" align="aligncenter" width="1878"] Price stability is simply the width of the 20-day Bollinger bands to ascertain volatility.[/caption]

In Brief

Our expectation for the coming weeks is sideways and messy price action.

We're remaining patient in buying dips, and, apart from a few exceptions, we're sitting out of the action in most alts in the near term.

• Spot flows have been stable, but flat. For a tradable bottom to be formed, we need to see this current lack of selling pressure turn into net buying.
• Leverage in the derivative remains elevated. These conditions mean we should expect volatile swings in the context of contracting price action and an additional long/short squeeze playing out once a directional bias is ascertained.
• There are early signs of a short squeeze brewing.
• We're aware of the tendency for these markets to fake out around major turning points. This continues to appear like a low-conviction dip to buy in the near term.

Be sure to reach out if you have any questions at all.

Allstarcharts Team