Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The state of crypto – December 2022
Mads Eberhardt
Cryptocurrency Analyst
Summary: Heading into the final month of the year, the balances of Bitcoins and Ether on exchanges are at the lowest levels in years upon fear of contagion following the collapse of FTX. This may indicate less sell pressure, yet it appears that some long-term holders have lost faith in crypto. In addition, particularly more traditional traders opened Bitcoin short positions in November.
Immediately upon interacting with a blockchain, much data becomes publicly available on a public ledger. Analyzing this data may provide crypto traders and investors with helpful insight into the present state of the market. In “The state of crypto”, we take a look at the most important metrics to observe the market based on transaction and trading activity. Our main focus is the two largest cryptocurrencies Bitcoin and Ethereum, and we divide the metrics into short-term and long-term indicators. You find the report for the last month here.
Short-term
Promptly next to the shocking collapse of the crypto exchange FTX, the crypto market reacted by withdrawing funds from exchanges in fear of contagion, in case other exchanges would be insolvent too. In numbers, nearly 2% of the total Bitcoin supply and over 2% of the total Ether supply left exchanges in November alone. In fact, Ethereum approaches an all-time low in terms of supply held on exchanges. Seeing that funds have flowed away from exchanges, potential sell pressure in the short-term will be more limited now than a month ago, simply because crypto taken off exchanges is less likely to be sold.
On the other hand, there may have been a flow from some long-term holders to exchanges, as the dormant circulation for Bitcoin and Ethereum has surged. The dormant circulation counts how many Bitcoins and Ether were moved after not being moved for at least 365 days prior to that. Since the funds have not been moved for at least 365 days, these wallets are often controlled by more long-term holders. In theory, the surge in the dormant circulation can be due to the outflow from exchanges, but it is also likely due to a flow in the opposite direction, namely from long-term holders to exchanges. The latter implies that some long-term holders have sold Bitcoin and Ether, likely because of fear that FTX will lead the crypto market to a total collapse. Yet, if this is the case, these Bitcoins and Ether have largely already been sold.
In the past couple of months, there has been a clear trend that wallets with a low balance are accumulating, whereas wealthy wallets are cutting their portfolio. This trend intensified greatly in November. The intensification may mainly be due to the outflow of exchanges, yet nothing indicates that the trend has reversed, so whales have likely not collectively started accumulating.
Long-term
Once again, long-Bitcoin funds saw an inflow equal to $6.9mn into exchange-traded crypto products e.g., ETPs and mutual funds, whereas Ethereum encountered an outflow equal to $1mn. Interestingly, exchange-traded short Bitcoin products saw an inflow of $22.2mn. This indicates that particularly more traditional traders are presently short Bitcoin, as crypto-native traders often use perpetual futures and not exchange-traded products when shorting.
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