Bitcoin futures show returning optimism, but uncertainty remains the dominant theme
Has Bitcoin entered a bear market after the Black Wednesday crash?
While the sharp decline saw retail investors selling at a loss, data and trends remain positive
On May 19, the cryptocurrency market suffered its biggest sell-off since last year's COVID-driven crash. BTC dropped 33% in a single day and fell as low as 29,000 USDT at one point. If we calculate the drop from Bitcoin's all-time high of 64,847 USDT per OKEx spot price on April 14, the most well-known cryptocurrency has fallen 55% in roughly the past month. Meanwhile, ETH and other major altcoins lost more than 60% of their value before bottoming out.
Positions totaling about $8.61 billion were liquidated across derivatives exchanges on Black Wednesday, which is four times the volume of the flash crash on March 12 last year. However, this number is still below the record $9.795 billion in liquidations on April 18 this year.
Several crypto exchanges — including Coinbase, Binance and Huobi — experienced outages in the midst of the massive plunge. As a result, leveraged traders faced significant difficulty in adding collateral to their risky positions — another factor contributing to the sky-high liquidation figure. OKEx, on the other hand, had no downtime on API, and the matching engine latency reached a maximum of only about 2 milliseconds.
Four reasons for Black Wednesday's BTC sell-off
Firstly, the downward trend can be traced back to May 12, when BTC plunged 10,000 USDT, dragging ETH (which had just set an all-time high of 4,372 USDT per the OKEx spot market) down with it. On that day, Elon Musk had been tweeting about the growing environmental concerns surrounding Bitcoin's energy consumption, and his comments struck fear into the crypto market. Since then, BTC has failed to recover the 50,000 USDT mark.
While Musk's tweets — along with the announcement that Tesla would no longer accept BTC as a means of payment — could be considered a trigger, other macro factors also contributed to the sell-off. Equities declined for three consecutive days during the week, and more importantly, the United States Federal Reserve, on Black Wednesday, released the minutes of the April FOMC meeting.
Since the pandemic started last year, the Fed has prioritized fiscal stimulus packages and asset purchases to shore up the U.S. economy. However, minutes from the April meeting revealed that officials are considering policy changes in that regard as the economy begins to recover.
The minutes read: "If the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases."
In response to the Fed's signal of possible tapering on the horizon, the three major U.S. stock indexes plunged about 1% during the day, which also coincided with BTC's crash. At 10:00 am UTC, Bitcoin began to accelerate downward, dropping below 40,000 USDT. At around 1:00 pm, it lost the support at 30,000 USDT and bottomed out at the same time as the S&P 500. Meanwhile, the 10-year U.S. Treasury yield set a new daily high, moving up nearly 4 basis points to 1.6762%.
Thirdly, three self-regulatory organizations in China, which are supervised by the state, made a joint statement on Wednesday, saying: "Speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order." Although this statement merely reiterates the stance China had already taken in the past, it nevertheless added more panic to the mix.
Moreover, a meeting note from China's financial committee about a crackdown on Bitcoin mining and trading within the country came out at 2:00 pm UTC on Friday. This news sent BTC's price, which had just rebounded from Wednesday's plunge, into a nosedive once again.
The fourth, and the main factor, is over-enthusiastic leveraging by market participants. This is evident from the price action of ETH.
ETH had captured a 48% gain in April, and its bullish momentum continued in May as the price surged from 2,737 USDT to an all-time high of 4,372 USDT, as per the OKEx spot price. This massive fear of missing out, or FOMO, led traders to increase their leverage, with funding for ETH perpetual swaps consistently running around 0.1% in May.
Besides ETH, new entrants bought into meme coins such as DOGE and SHIB without much regard for the projects' fundamentals. The altcoin season was fueled by hype and drew capital away from major cryptocurrencies. As a result, Bitcoin's dominance hit 40%, a low not seen since May 2018, according to data from TradingView.
Such a one-directional price move with high leverage is not destined to last long. Once the price of a token starts to decline, it creates a snowball effect and triggers cascading liquidations. Wednesday's crash was no different than the other two major plunges so far this year, which were on Feb. 22 and April 18.
Retail investors capitulated during the crash
In just a few weeks, the market has gone from greed to fear. The recurrent all-time highs of ETH in addition to the meme-coin frenzy are reminiscent of the "euphoria" phase in a typical market cycle, which is when profits come so easily that most traders feel that they must take on leverage and begin to ignore risk-management. Wednesday's flash crash has put retail investors into the "capitulation" phase. This is reflected by the steep decline in prices and the general market sentiment reversing to fear, where holders often sell their assets for losses just to get out of a painful market.
This capitulation can be seen via the on-chain indicator SOPR — i.e., the Spent Output Profit Ratio, which is computed by comparing the realized value of an asset (at the time it was sold/moved) by the value at which it was created (bought/received) — as it reflects the general profitability or loss of market participants.
On Wednesday, the SOPR hit the lowest level since March 2020, indicating that on average, people were selling at loss, even though the crypto market had been going through a massive bull run for over a year.
Another indicator, the Net Realized Profit/Loss, which shows the net profit or loss of all moved coins, hit a record low of $2.66 billion during Wednesday's sell-off, meaning on-chain investors sold their coins in panic and realized their unrealized losses. This realized loss figure even reached twice the loss incurred during the flash crash in March 2020.
Looking at OKEx trading data, the quarterly futures premium disappeared — and once hit -2.8% before bouncing back above zero. The funding rates of perpetual swaps also reached surprisingly low levels during the flash crash. For example, funding of the USDT-margined BTC swap on OKEx went below -0.1%, which has been a rare sight over the past few months. Such extreme funding rates are usually indicative of short-term reversals.
Likewise, the Crypto Fear & Greed Index reached 11 on May 20, the lowest level since April 2020, which is interpreted to mean that market sentiment has entered into "extreme fear" territory.
On-chain data shows BTC is unlikely to have peaked
The short-term data shown above indicate that the current market has experienced a period of panic-selling, with a number of retail investors leaving the market. However, has BTC really reverted to a bear market after this 55% drop? If we consider the typical cycle — as shown below — which stage is the market currently in?
BTC S2F model remains bullish
The popular Stock-to-Flow, or S2F, ratio shows that BTC is still on the upswing despite the huge retracement, moving from the orange to yellow phase. Historically, only when this ratio enters the green zone does it indicate the market is coming to the end of a major bull run.
However, it is important to note that the current Stock-to-Flow deflection (that is, the ratio of the current price and the S2F model) has hit 0.38 — the lowest level since July 16, 2017. So, if we consider the S2F model to be valid, then BTC is still largely undervalued.
BTC has not remained overbought for long during this run
Mayer Multiple bands, an indicator that presents a visual representation of whether BTC's price is overbought or oversold, similarly shows that BTC has not spent a lot of time in the overbought zone during this bull run. In contrast, previous bull runs ended after BTC spent a few days in overbought territory.
This indicator uses the 200-day moving average as a bull/bear threshold. During the last two bull markets, three of the four major corrections came when the price was trading at about 2.5 times the moving average. It is also important to note that prices have now failed to regain the 200-day moving average for a span of five days, which is longer than any previous time a bull run resumed after falling below.
Looking at Bitcoin's dominance (when compared with the 2017–2018 cycle), we can see that the current market may have been in the first altcoin season between March and May of this year. After the first altcoin season, Bitcoin's dominance is likely to experience a major rebound, as BTC falls less in the sell-off and investors cycle back into the foremost crypto. Finally, the market is likely to enter into the second altcoin season after BTC tops out.
Based on on-chain data, price action and trading sentiment, Wednesday's pullback is still more likely to be a mid-cycle correction, although this 55% retracement is greater than any in 2017, in terms of percentage. In 2017, BTC experienced six corrections of 25% or more.
Whales accumulated during the crash
Finally, while retail investors panic-sold their coins in this recent crash, whales with a balance of over 1,000 BTC started to accumulate again. This could be evidence that the market has reentered the accumulation phase and that prices are likely to recover slowly.
To conclude, historic trends, recent price action and on-chain data all suggest that the current crash is unlikely to be a sign that a bear market is upon us. If we were to point toward a market cycle stage (as shown in the chart from earlier in this article), the chances of BTC and crypto still being in the "Mania Phase," where public sentiment is long-term bullish, are quite high.
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