By The Numbers: Macro Headwinds Testing Bitcoin’s Fundamentals

Despite challenging macroeconomic conditions, Bitcoin's robust fundamentals and institutional support hint at resilient market potential.

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Jun 14, 2024

Introduction

Growing concerns over the macro environment like money supply and liquidity are tilting some indicators into bearish territory. If Bitcoin's price doesn't break out soon, it may face a significant decline. Despite this, on-chain data suggests a bullish outlook with strong holder confidence and capital inflows. Price metrics reflect a market in wait, while the derivatives market shows sustained optimism. Tightening financial conditions present challenges, but Bitcoin's evolving role as a safe haven offers a silver lining. We explore strategic insights for investors looking to capitalize on Bitcoin's resilience amidst these mixed signals.

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On-Chain Mixed Results

Over the past week, Bitcoin's on-chain metrics continue to paint a bullish picture despite a slight pullback in some indicators. Several metrics like the RHODL and MVRV Z-score are once again showing consolidation over a 7-day period. These metrics have not turned bearish, remaining in the middle of the cycle progression. Just like price has appeared to be ready to break out several times and each time forcing us to wait longer, that is the same thing we are seeing in many of these metrics.

Reserve Risk, a key metric for assessing the risk/reward ratio of investing in Bitcoin, remains quite attractive at 0.00195. This means that despite $4 billion of inflows into the ETFs in the past few weeks, the price has not overheated and remains an attractive place to add capital.

The 90-Days Coin Days Destroyed metric has dropped significantly by 26.23%, underscoring increased holding behavior among network participants, as fewer older coins are being moved.

The Realized Price 30-day Change might be the most interesting On-Chain metric this week. This is a useful proxy for tracking the rate of capital inflows and outflows. A big gain reflects that even with the disappointing price action, inflows continue to accelerate.

Overall, these on-chain metrics highlight a resilient Bitcoin market in the face of macroeconomic headwinds.

Investor Insights

Attractive Entry Point: The attractive Reserve Risk level, combined with sustained capital inflows reflected by the Realized Price 30-day Change, indicates that Bitcoin remains a compelling investment despite the lack of immediate price action. This could be an optimal time to increase exposure to Bitcoin, capitalizing on the current accumulation phase before the market potentially breaks out to the upside.

Price Metrics: Hanging In There

Price metrics are deteriorating as we wait for the breakout. The 50-day MA is below the 100-day, and price is below the 100-day. At the time of writing, the price is dropping further, now under the 50-day, we’ll see where it closes the day.

The daily RSI is now in bearish territory under 50, the lowest since 3 May after the pattern low on 1 May. There is no need for daily RSI to hit oversold before a reversal. The lows on 24 Jan and 1 May did not make it to 30, but the chance for a sell off from this position is elevated.

Hash Ribbons are starting to recover, decreasing the negative spread this week, meaning hash rate is stabilizing at this price. The post halving hash ribbon inversion is typically short-lived, however, if price continues to dip here, there could be more pain coming to miners, pushing the hash ribbon recovery back several more weeks.

STH Realized Price and Weekly Bbands mid-line should act as support between $63-64,000. Below the STH Realized price the chance of weak hands selling is increased. However, this cycle has been dominated by institutional buying with retail mostly missing this bull market so far. Therefore, it’s likely breaking the STH Realized price will have less of an effect in this market.

Source: LookIntoBitcoin

Investor Insight

Strategic Accumulation at Support Levels: With the price metrics showing deterioration and the daily RSI in bearish territory, investors should look for strategic entry points around the STH Realized Price and Weekly Bollinger Bands mid-line at $63-64,000. These levels are likely to act as strong support, making them ideal for accumulating Bitcoin. Additionally, the dominance of institutional buyers suggests that the market is less prone to panic selling, providing a more stable accumulation environment.

Derivatives Market: Still Bullish

Like our general price metrics above, the derivatives market is slightly cooling but still bullish in sentiment. The numbers are changing rapidly at the time of writing. Our metrics are updated only once per day, and with the mini-dip we are experiencing today, these numbers will likely be vastly different by next week.

The Perps Funding Rate 7DMA Annualized has decreased slightly to 10.49%, down 2.46% from last week, but still significantly higher than a month ago when it was 4.19%. This decline indicates a slight reduction in leverage among long perp traders, but the elevated level suggests that bullish sentiment remains robust.

Similarly, the Futures Annualized Rolling Basis over 3 months has seen a minor decrease to 13.06%, down 0.77% from last week, yet remains well above the level from 30 days ago. This sustained high basis reflects continued bullish expectations and the continued opportunity for the cash and carry trade discussed in previous posts.

The Options 25 Delta Skew for one month has improved to -2.91%, up from -4.75% last week. This reduction in negative skew is small but indicates traders are becoming less pessimistic about downside risks. Traders are hedging their positions less aggressively, reflecting a decrease in perceived downside risk.

Investor Insights

Negative Perps Funding Rate: If the perps funding rate goes negative, that is a very strong signal that the bottom is in or very close to being in. The market penalizes shorts when the funding rate is negative, which often leads to short covering and a subsequent price increase. Historically, a negative perps funding rate has preceded significant bullish reversals, as it indicates that the selling pressure is subsiding and buyers are stepping in to take advantage of lower prices. Traders should watch for negative funding rates as a potential low risk-reward scenario. They can go long and place a stop loss relatively close to their entry.

Macro Numbers are Getting Concerning

The concerning macroeconomic indicators we have pointed to over the past several weeks are getting worse. Our measure of net liquidity (Federal Reserve Balance Sheet less the sum of both the Treasury General Account and Reserve Repo facility) is accelerating its decline, along with Other Deposits and Liabilities (narrower M2). These indicators are increasingly bearish and are serving as significant headwinds for the bitcoin price.

While in the YoY number Global M2 looks to be rising, it is down WoW and MoM. M2 has also not been a great indicator of what’s really happening to the money supply.

Central Bank Assets reached a contraction rate of 4.5% YoY this week. While this is not directly connected to money supply in my school of thought, it could be affecting liquidity of the markets negatively.

Inflation measures like CPI are also coming down. May CPI MoM was 0.0%. In a gigantic global credit bubble, recession is hyper deflationary. Therefore, we should expect prices to continue to fall on our way into recession and that is what we are seeing. PMI is also in deeper contraction territory.

Overall, these numbers are very concerning and are weighing on the bitcoin market. I’m watching how bitcoin reacts to these headwinds closely. While the default behavior of bitcoin will likely be selling off in a recession, there is the growing niche as a safe haven asset, which should be appreciated in deflation not connected to the financial system.

Investor Insight

Financial conditions are tightening significantly. This environment typically leads to increased market volatility, especially for risk assets like Bitcoin. However, we can see by the Options skew above, that traders are actually less hedge to the downside this week. Investors should brace for potential short-term turbulence and consider hedging strategies to protect their portfolios. However, this increased volatility can also present buying opportunities for those with a long-term perspective, particularly during periods of sharp market corrections.