Bitfinex Alpha | Selling Pressure Priced in but News-Driven Agenda Dominates Sentiment

In the last issue of Bitfinex Alpha, we suggested that the fall to $53,000 for Bitcoin, could be a local bottom based on on-chain and order flow metrics. As price rebounded over 13 percent from the lows, closing the week up 8.76 percent. BTC has now retested the 125-day range low of $60,200, a critical level it broke through on July 3rd after news of selling by the German government.

However, the weekend recovery does not necessarily mean that the downturn is over. Indeed weekend driven mini-rallies have been common over the past few months, which have then been followed by a retracement during the week. We are therefore watching closely how the start of this week plays out before drawing any firm conclusions about the market’s possible future trajectory.

One positive driver is that the near constant sell-pressure from Long-Term Holders (LTHs) appears to have subsided, with LTH supply stabilising at around 14.8 million Bitcoins, from 16.2 million Bitcoins in January. This stabilisation indicates a reduction in selling pressure, a dynamic that is supported by the LTH Spent Output Profit Ratio metric, which  shows a decrease in profit-taking aggressiveness. 

Indeed, with LTH supply stabilising, the focus is inevitably shifting to Short-Term Holders, whose supply has notably increased since January and remained consistent at around 4.8 million BTC. This influx of STH supply is largely due to new investors entering the market via ETFs and attempting to buy the dip during the last correction.

However, the current downward price movement has pushed over 2.8 million Bitcoins held by STHs into unrealised net losses. This scenario places considerable pressure on these recent investors to decide whether to hold and wait for a potential recovery or to sell their assets at less favourable prices. Despite the current bearish trends and supply pressures from entities like Mt. Gox creditors, the market may be nearing a point of equilibrium. 

The weekend’s upward movement suggests potential for a short-term recovery, but the market remains sensitive to news and external influences. Monitoring how STHs manage their holdings and the market’s reaction at the start of the week will be critical in determining the short-term direction of BTC prices.

In the meantime, the US economic landscape exhibits a mix of promising trends and ongoing challenges. Notably, consumer prices decreased for the first time in four years, primarily driven by lower gasoline prices and a deceleration in rent increases. This shift has bolstered the perspective that disinflation is becoming a sustained trend within the US economy, potentially paving the way for the Federal Reserve to lower interest rates in September.

Even though producer prices experienced a modest rise in June, largely attributed to increased service costs, the components driving the rise are historically volatile, and the Producer Price Index calculation does not account for falling shelter costs—a significant factor in the fall in consumer prices.

Similarly, the Small Business Optimism Index also rose, recording the highest reading of the year so far, however, the index remains below its historical average of 98, a benchmark it has failed to meet for 30 consecutive months. Inflation remains the dominant concern for small businesses, which continue to navigate these uncertainties while keeping a close watch on economic developments and the Fed’s forthcoming decisions.

Further signs of stress in the US economy is the surge in consumer borrowing to a three month high, as of May. This is being predominantly driven by a rise in credit card balances, pushing consumer debt to record levels. Given that much of this debt carries high interest rates, the persistence of elevated rates will heighten financial strain on households, potentially curbing future consumer spending and, consequently, slowing economic growth.

In recent developments within the crypto industry, Germany’s selling of Bitcoin appears to be over, while the US Securities and Exchange Commission (SEC) has also concluded its investigations into Hiro Systems and Paxful. 

However, US lawmakers’ attempts to override President Biden’s veto of a measure designed to overturn the SEC’s Staff Accounting Bulletin (SAB) 121 fell short of the required two-thirds majority in the House. SAB 121 mandates that banks must list crypto holdings as liabilities, effectively barring them from offering digital asset custody services. 

Have a good trading week!

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