The Daily Dive #139 - Realized Losses And Derivatives Update

Rising Realized Losses

In today’s Daily Dive, we’re covering the state of realized losses and profit in the market and an update to derivatives markets. With bitcoin’s price falling, how much more loss can the market sustain and is there more short-term downside? 

Over the last week, we’ve seen a rising level of realized losses on-chain during the latest price drawdown. During bitcoin’s drawdowns over the last six months, realized losses over $1 billion on a 7-day moving average has been a consistent ceiling for each new sell-off. 

Back in May, realized losses hit over $2 billion, the highest level in the last five years, which was driven by serious derivatives liquidations. 

Yet as a percent of bitcoin’s market cap, the latest round of realized losses and selling are relatively small to market capitulation we’ve seen before. 

Historically, the Net Unrealized Profit/Loss Ratio (NUPL) has been a useful indicator to show when the market is in full capitulation and has bottomed. As a refresher, NUPL is calculated as (Market Cap - Realized Cap) / Market Cap. Currently the total market looks to be in a neutral state, but historically we’ve seen every rise in NUPL followed by a major capitulation period. These periods bring the market back to (and even below) the market’s cost basis. 

It’s useful to break down NUPL into short-term and long-term holder groups because it shows different states of the market. Currently, we look close to short-term holder capitulation similar to levels we saw back in July 2021. Yet, for long-term holders we’re still nowhere close to capitulation. 

The key on-chain price areas to watch are still those that make up the cost basis. Currently the market’s realized price is around $24,000 while long-term holders realized price is around $17,000. As short-term holders realize losses, short-term holders realized price has dropped to around $48,000. If we’re to get the long-term holder market capitulation we’ve seen in the past, there’s potentially more downside to come. 

At this point, as we’ve noted in The Daily Dive #137 - Bitcoin Below $40,000, bitcoin’s short-term trajectory is not based on its fundamentals but rather dependent on the macro environment - largely equities performance over the next few months. 

Latest In Derivatives Markets

Over the past couple days, bitcoin has caught a strong spot bid during ugly equities market price action, and breaking out first before equities ultimately followed.

As this has occurred, funding rates on perpetual futures flipped negative on rising open interest. In layman's terms, this means that with the bitcoin price rising, derivatives have begun to separate from price to the downside, with open interest rising. 

One can think of open interest as the aggregate amount of “bets” being placed on the bitcoin price, and when funding is decreasing with price increasing, it means that derivative traders are fading the move betting on a reversal. 

All eyes are on the Fed heading into the FOMC meeting tomorrow, with market participants waiting to see Powell’s stance on the planned 2022 rate hikes. If Powell comes out more dovish than expected, a short squeeze could be in place for bitcoin, given the large amount of short interest that has built up below these levels.