Market Mayhem

Bitcoin, along with the entire crypto marketcap has experienced a sharp correction in the past week, where Bitcoin fell around 16% and the altcoins were worse off at 40-50% corrections.

What started as a global shock to the markets in the way of Iran attacking Israel through drone attacks in retaliation against its consulate killings in Damascus, soon turned investor’s sentiment upside down, as evident through the trading volumes and derivative positions. The mean funding rate for Bitcoin across major exchanges turned negative for the first time in months since October 2023.?

The geopolitical tensions were not the sole factor affecting crypto markets since last week. We can see similar bearish sentiments across miners' behavior, trading volumes, ETF flows and the news coming out of US inflation data. Let's uncover them one by one.?

Currently, miner balances are near an all-time low. This comes at the back of heavy selling from miners as they scramble to take profits ahead of the halving. Over time, miners build up a reserve of the bitcoins they receive, and oftentimes those are sold ahead of halving events to cover costs of operations and equipment as mining gets more competitive.

The halving would reduce the block reward from 6.25 BTC currently to 3.125 BTC. With over 88% of miner revenues currently coming from these rewards, it would prove to be a challenge for miners to remain in business if transaction fees do not pick up anytime soon from the current 12% levels.?

Figure 1: Bitcoin miner wallet balances

For the uninitiated, the transaction fee for a transaction is calculated in satoshis per unit of data that the transaction will consume on the network. The more data that a block carries, more the transaction fee.

Onchain activity is driven mainly by narratives that have huge impact on transaction fee revenue for miners. The mean transaction fee on the bitcoin network is currently hovering around USD 18. However, this sees a spike during times of high demand. For example, during the Inscriptions craze back in December 2023, this surged as high as USD 37.

With the current narrative around BRC-20s and Runes, the halving may catalyse a surge in users transacting onchain. Currently, the number of bitcoin Inscriptions-based transactions as a proportion of the total number of transactions on the bitcoin network is hovering around the 30% mark. This, however, would need to stay consistent and slowly increase over time if miners revenues are to remain sustainable.??

Figure 2: Inscription transactions as a proportion of all transactions on the bitcoin network?

In addition to sell pressure on bitcoin from miners, flows through the spot bitcoin ETFs too have plummeted. In fact, net flows through the spot bitcoin ETFs have been negative since last week – cumulative net outflows of over USD 128 million since 8 April. Compare this with huge positive inflows in early March when sometimes even daily inflows exceeded the USD 1 billion mark.??

Figure 3: Spot bitcoin ETF flows?

The market downturn was triggered by the geopolitical tensions in the Middle East. Even trading volumes saw a massive drop post mid-March when bitcoin began slipping from its all-time highs of USD 73K. This was further exacerbated by US inflation data coming in at 3.5% as compared to market expectations of 3.2%. This led to an overall negative sentiment in the market for risky assets.?

So this begs the question: If miners and the ETFs are dumping their bitcoin, who is buying them? The answer seems to be short-term holders who have bought the asset less than 155 days ago.

This is indicated in the sudden spike in the supply held by short-term holders since February. This is positive for the asset going into the Halving as bitcoin’s price is a key factor for miners to be able to continue operations. At the moment, 17.3% of bitcoin’s supply is with short term holders, up from 15% in mid-March.?

Figure 4: Proportion of bitcoin’s supply currently held by short-term holders?

The bitcoin halving will go through after block number of 840K and will reduce the miner block reward from 6.25 BTC to 3.125 BTC. This is a key event and positioning accordingly is key for investors.

Our research piece on the topic analyses the behaviour of miners (the primary sellers of bitcoin) around the halving, how the investment landscape has changed for bitcoin following the listing of the spot bitcoin ETFs in the US, and lastly how post-halving returns for bitcoin have been magnitudes higher than pre-halving levels. Read the entire blog here: Bitcoin Halving – What You Need To Know.??

Looking ahead, we continue to have a constructive view of the cryptocurrency landscape for this quarter. The next catalyst to look forward could be interest rate cuts once the US Fed turns dovish possibly leading to a boost in money flowing into risky assets. Until then, we see Bitcoin exhibiting strength in the short to medium term as price may be rangebound in the absence of any new catalysts.

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