The recent crypto market crash, driven by reduced capital flows, selling pressure from whales and miners, and macroeconomic risks, has seen Bitcoin drop over 20% and altcoins by 32.6%. However, indicators suggest limited further downside, with opportunities for recovery through events like the Bitcoin halving, US spot Ethereum ETFs, and favourable central bank policies.
The cryptocurrency market has been on a rollercoaster ride recently, with significant declines that have left investors and analysts questioning the underlying causes. Bitcoin has experienced a sharp decline of over 20% from its recent all-time high, while altcoins have fared even worse, with an average decline of 32.6%. Several factors have contributed to this downturn, including reduced capital flows into major crypto assets, increased selling pressure from Bitcoin whales and miners, and a slew of macroeconomic risks. This article delves into the primary catalysts behind the latest market rout, examines whether we have reached the bottom, and explores the potential for recovery in the near and long term.
The Factors Behind the Crash
Declining Capital Flows
One of the primary drivers of the recent market decline has been a significant reduction in capital flows into crypto assets. Following the launch of the spot Bitcoin ETF in the US, there was a notable deceleration in on-chain flows into major crypto assets like Bitcoin and Ethereum. These flows dropped from approximately $100 billion per month in March to just $20 billion per month from April onwards. This decline in capital inflow coincided with a pause in the bull market, preventing the market from reaching new all-time highs.
The situation was further exacerbated by significant outflows from US spot Bitcoin ETFs, with seven consecutive trading days of outflows totalling $1.13 billion across all ten US issuers. This trend has placed additional selling pressure on the market, contributing to the overall decline.
Increased Selling Pressure
Large short-term investors, commonly referred to as “whales,” have also played a significant role in the recent downturn. These whales have increased their exchange transfers, leading to higher selling pressure on major Bitcoin spot exchanges. Over the past seven days, Bitcoin spot exchanges have seen net buying volumes turn negative, with a net outflow of approximately $1.2 billion. This negative net buying volume typically acts as a headwind for prices, pushing them lower.
Economic Pressure on Miners
Bitcoin miners have faced substantial economic challenges recently, further contributing to the market decline. Following the latest Bitcoin halving on April 20, mining revenues have dropped by 50% in BTC terms. This decline has forced some miners to shut down inefficient mining hardware and sell their BTC reserves to cover expenses. The Bitcoin hash rate has declined by almost 10% from its recent peak, and miners sold more than 30,000 BTC (around $2 billion) in June, reaching a 14-year low in reserves. Although the market appears to have mostly digested this level of selling, it has added to the overall selling pressure.
Shifts in Global Macro Sentiment
A significant shift in global macro sentiment has also played a crucial role in the recent crypto market crash. Traditional financial markets have started to “price out” optimistic global growth expectations. The Bloomberg US ECO Surprise Index, which tracks deviations in crucial macroeconomic data from expectations, has fallen to its lowest level since 2019. This decline reflects a broader recognition of a deteriorating macroeconomic climate.
Various indicators, such as the AUD/JPY exchange rate, U.S. cyclical versus defensive stock sectors, and the copper/gold ratio, are signalling a weaker outlook for global growth. Additionally, a surge in perceived sovereign risks in France, amid political shifts, has added to the macroeconomic uncertainty. The cost of insuring against a default by the French government through five-year Credit Default Swaps has soared to its highest point since May 2020. This has weakened the Euro and strengthened the US Dollar, which tends to be a headwind for Bitcoin and other crypto assets.
Is the Bottom In?
Wall Street wisdom suggests that the average individual investor is most bullish at market tops and most bearish at market bottoms. Overly bullish sentiment typically signals a market top, while overly bearish sentiment indicates a market bottom. In the current crypto market, several indicators suggest that we may have reached a bottom, as sentiment appears overly bearish, and “weak hands” have mostly exited the market.
Consider the following indicators:
- Crypto hedge fund’s beta to Bitcoin has declined to a four-year low.
- Global crypto ETPs have seen the second-highest weekly net outflow on record.
- Bitcoin’s long futures liquidations have spiked to the highest level since April.
- Bitcoin put-call volume ratios have increased to levels last seen during the April rout.
- The Crypto Fear & Greed Index has declined to “fear” levels.
- Short-term holder spending output profit ratio (STH-SOPR) has declined to 0.96, signalling capitulation among “weak hands.”
Given these indicators, we believe that the short-term risk/reward has become increasingly asymmetric, and further downside risks are relatively limited. The current market rout may present a good opportunity to increase exposure to Bitcoin and other crypto assets ahead of several significant events in the coming months.
Future Outlook: Opportunities for Recovery
Bitcoin Halving
The Bitcoin halving will positively impact performance starting in the summer. The halving-induced supply shock is expected to support a new equilibrium price for Bitcoin, slightly above $100,000 by the end of 2024 and around $172,000 by the end of 2025. This potential price increase suggests that the halving effect is not yet fully “priced in” by the market.
US Spot Ethereum ETFs
According to Bloomberg analysts, US spot Ethereum ETFs are scheduled to launch earlier than anticipated in early July. This development could lead to more investment flows into crypto assets. Large cryptocurrency investors, such as Pantera, have already indicated plans to invest up to $100 million in these new Ethereum products once they are released.
Potential Net Inflows into US Bitcoin ETFs
We believe that only approximately one-third of the potential net inflows into US Bitcoin ETFs have been realised. The remaining two-thirds could be substituted from traditional risky assets such as equities into these new spots Bitcoin ETFs, providing a significant boost to the market.
Central Bank Monetary Policy
Recent monetary policy actions by the SNB, ECB, and Bank of Canada indicate that the liquidity tide is turning, which could be a significant tailwind for Bitcoin and other crypto assets in the medium to long term. In the event of a projected US recession, a reversal in the Fed’s monetary policy is also likely. Leading macro indicators have recently rolled over, making a US recession more probable in the coming months.
Rising French Sovereign Risks
In the context of rising French sovereign risks, Bitcoin is often considered a viable safeguard against sovereign default. As a decentralised network free from counterparty risk and resistant to censorship, Bitcoin offers a hedge against sovereign default.
US Presidential Election
The upcoming US presidential election could be very bullish for Bitcoin and crypto assets. Former President Trump has indicated support for Bitcoin mining in the US and plans to enact more business-friendly crypto legislation. Recent opinion polls show a slight lead for Trump over incumbent President Biden, which could lead to favourable conditions for the crypto market.
The recent crypto market crash has been driven by declining capital flows into major crypto assets, increased selling pressure from Bitcoin whales and miners, and rising macroeconomic risks. However, the short-term risk/reward has become increasingly asymmetric, suggesting that further downside risks are limited. The current market conditions present a good opportunity to increase exposure to Bitcoin and other crypto assets, given the positive outlook for the medium to long term. Key events such as the Bitcoin halving, the launch of US spot Ethereum ETFs, potential net inflows into US Bitcoin ETFs, and favourable central bank monetary policies are likely to support a recovery in the crypto market.
