More than 2 billion dollars worth of Bitcoin sold off, should retail investors follow or hold on? - ChainCatcher

Author: 10x Research

Compilation: Wenser, Odaily Star Daily

Editor’s note: 10X Research, a well-known investment research institution, has once again expressed its latest views on the Bitcoin market. Combining the recent Bitcoin ETF, miners, listed mining companies, and early Bitcoin holders selling off, 10X Research has provided a price forecast for the next phase of the market, and whether it can reach the expected level may determine the subsequent direction of the market. Odaily Star Daily will translate and compile this article for readers’ reference.

The four-year cycle and supply-circulation model are key tools for price prediction.

As the basis for the estimated price of Bitcoin, the quadrennial predictive parabolic cycle pattern is crucial, and it is also the basis for 95% of cryptocurrencies. However, this pattern is often exaggerated, implying an infinite rise in the value of Bitcoin. Another key tool is the “supply-circulation model,” which predicts the infinite value of Bitcoin by emphasizing the reduction of supply.

As usual, most experts this year still predict that the price of Bitcoin will reach new highs, with forecasts ranging from $100,000 to $150,000, or even higher.

Technological innovation and human psychology (especially the interaction of greed and fear) are two key catalysts for the cyclical market of cryptocurrencies. Nonetheless, the market is essentially a momentum game - most participants actively drive prices higher and maintain consistently bullish positions. This self-fulfilling prophecy emphasizes the necessity of decisively seizing the upward momentum when opportunities arise. At the same time, this phenomenon also indicates that there may be more cycles in the future.

The practical value of Bitcoin and its valuation based on cash flow should be addressed in the discussion. Unlike other assets, if valued based on the cost curve of production, Bitcoin is similar to gold. Over time, buying Bitcoin becomes more complex psychologically because buying one Bitcoin at a high price (such as $70,000) may seem less attractive than buying one billion coins of a cryptocurrency for $100. Meme coins exploit this psychology, and listed companies achieve the same goal through stock splits.

Bitcoin (purple) compared to the fund flow index (white) chart

Three major groups sell Bitcoin, arbitrage opportunities for hedge funds may have disappeared

Despite the current market structure not being entirely bullish, we speculated three weeks ago based on the view that ‘after reaching a historical high, there is usually a parabolic rise’ that Bitcoin would attempt to break through the $70,000 price level; and when the breakout fails, risk management becomes crucial. At that time, we estimated that low inflation data would be a catalyst for the rise in Bitcoin prices, and indeed it was, but Bitcoin faced a large amount of selling.

First, contrary to the positive buying of Bitcoin ETF brought by the previous inflation changes, Bitcoin ETF has sold off $1 billion in assets in the past eight trading days.

Secondly, the over-the-counter sales of Bitcoin miners have risen to the highest daily trading volume since March, with sales exceeding 3,200 Bitcoins in a single day. Listed mining companies occupy 3% of the market share, but sold a net 8,000 Bitcoins in May (June data has not been released yet, but the sales of miners have significantly increased). The Bitcoin reserves of miners have decreased from $12.9 billion on June 5th to $11.8 billion now.

Finally, another group of sellers is the early holders of Bitcoin, and their selling amount is 12 billion dollars.

All three seem to be satisfied with selling Bitcoin at a price of over $70,000.

We estimate that the average entry price of the Bitcoin ETF is between $60,000 and $61,000. A return to this level could trigger a wave of liquidation. When Bitcoin dropped to $56,500 on May 2, BlackRock issued a statement saying that ‘sovereign wealth funds and pension funds are about to enter the market.’ This to some extent prevented further decline in Bitcoin, but now BlackRock states that 80% of the purchases of their Bitcoin ETF IBIT come from retail investors rather than institutions (source: this report).

Currently, the price level of $61,000 is consistent with the 21-week moving average, which has been a good risk management indicator for buying (when the Bitcoin price is above the 21-week moving average) or selling in previous cycles. We estimate that 30% of the $14.5 billion Bitcoin ETF comes from hedge funds seeking arbitrage opportunities, and the ETF liquidation over the past eight trading days suggests that these funds may not continue arbitrage trading (going long on the ETF and shorting CME futures) as the arbitrage opportunity has disappeared near the futures expiration date (June 28th).

Bitcoin (white) compared with its 21-week moving average (purple) chart

The existence of arbitrage opportunities is because the high interest rates allow exchanges to sell futures at a premium, and most cryptocurrency traders tend to be bullish (buyers), which pushes up the cost of capital. The average annualized funding interest rate for Bitcoin in 2024 is 16%, while in the past few days, this number has been only 8-9%. Therefore, this single-digit funding interest rate may not be able to sustain the arbitrage game, leading to continuous outflows from Bitcoin ETFs. This is another aspect of the arbitrage signal effect explained in articles such as March 8 (the first cautious statement since Bitcoin reached $40,000) and April 5.

Our market structure analysis breaks down the components of liquidity, so sometimes we provide cautious views that may contradict potential bullish (parabolic) narratives. In fact, despite the significant slowdown in Bitcoin ETF inflows since March 12th (when CPI data rose rapidly), the sharp decline in altcoin trading volume, and the subsequent decrease in funding rates, the price of Bitcoin has still fluctuated within a 15% wide range over the past three months.

Since April 21st (Bitcoin halving completed), the amount of stablecoin minting has slowed significantly. These factors (Bitcoin ETF inflows and stablecoin minting suspension, fall in altcoin and funding interest rates) have raised concerns about Bitcoin’s price falling to $52,000-55,000, a difference of only about 3% from the actual market performance (Bitcoin’s lowest price dropped to $56,500).

On May 15th, after the release of lower CPI data, the inflow of funds into Bitcoin ETF reached 3.8 billion US dollars in the next 20 days. If the growth continues, we expect the lower CPI data to drive a market rebound, and we expect the CPI data to be below 3.0% later this year. In July 2019, the Federal Reserve cut interest rates due to declining inflation and weak economic growth, causing Bitcoin to plummet by as much as 30%, so the reason for the interest rate cut is very important.

However, due to the decreased appeal of arbitrage (funding rate), the purchase volume of this Bitcoin ETF failed to achieve growth. When the Securities and Exchange Commission (SEC) hinted at the possible approval of Ethereum ETF on May 20, with the increase of futures positions, the market structure improved significantly. In about three weeks, the market purchased $4.4 billion worth of Ethereum futures positions (an increase of 50%) and $3 billion worth of Bitcoin futures. Combined with the CPI data on May 15, this effectively improved the market structure and helped Bitcoin’s price rise to $70,000, prompting early holders, miners, and ETF to actively choose to sell their Bitcoin holdings.

Key Points: Can we hold onto 61000 and 65000?

Trading has always been a ‘risk-reward game.’ As we pointed out on June 3rd, if the price of Bitcoin fails to reach a new all-time high in June, excessive ETH futures positions will face associated risks. Since May 23rd, when the U.S. Securities and Exchange Commission (SEC) approved the 19b-4 document (the S-1 document is still under review), leveraged futures traders have been the main, if not the only, buyers. Their capital inflows have pushed Bitcoin back to the top of the range, combined with lower CPI data, the risk/reward ratio favors a break through in Bitcoin.

Lower inflation data, U.S. elections, and the rebound of U.S. stocks are the support for the later rise in Bitcoin prices this year in the non-encrypted market. However, without more stablecoin minting, inflow of Bitcoin ETF funds, and an increase in futures leverage or the emergence of other liquidity (market structure) indicators, Bitcoin longs may miss the pump opportunity.

Each time the price attempts to break through and fails, or Bitcoin trading returns to the historical high of the previous cycle (with $68,300 as the dividing line), we need to redefine a level for risk management of the position.

In previous multiple cycles, the 21-week moving average of $61,000 has to some extent avoided a larger pullback.

Another key level is $65,000, which is the midpoint of the price range during the consolidation period of the past three months, possibly indicating the formation of a larger cycle top.

We will not blindly believe baseless statements, but trust more in the information reflected by data. From the perspective of the number of market participants (including early holders, Bitcoin ETF buyers, miners, stablecoin issuers, and other roles), the current market situation is worrisome as there has not been a significant increase.

Therefore, everyone needs to determine their own risk tolerance. Only by combining risk management and data analysis can traders stay in the game. Just as a veteran trader told us 15 years ago, ‘The market opens every day,’ which means we will always have the next opportunity, the next cycle.

Bitcoin (white) compared with its monthly Stochastic Oscillator (purple) chart