Is the crypto market facing a crisis? Let the data tell you

Text | Neicanjun

In recent months, Bitcoin has been fluctuating wildly, with fluctuations even greater than usual. In particular, since March, the cryptocurrency market has entered a plunge mode. Mainstream coins have plummeted, altcoins have plummeted... The decline is so confusing and despairing.

Bitcoin’s price has erased all of its gains in 2020 amid the coronavirus panic around the world. Earlier this month, the price of Bitcoin fell to a 10-month low but has since rebounded sharply and is currently trading around $6,500 per Bitcoin.

The darkest moment has passed, and now a number of data analyses have explored the reasons behind the March crash, especially the market reaction to Bitcoin, crypto spot and derivatives markets.

Bitcoin and cryptocurrency investors are watching closely for any signs of further volatility, with one analyst noting that a “massive increase in exchange inflows” bodes well for extreme bitcoin price volatility.

“Significant increases in exchange inflows have proven to be a good indicator of increased volatility, so we recommend keeping a close eye on inflows into exchanges,” Philip Gradwell, chief economist at Chainalysis, a New York-based bitcoin, crypto and blockchain research firm, wrote in a blog post this week.

Chainalysis research shows that in the second week of March, daily inflows to Bitcoin and cryptocurrency exchanges increased by 250% compared to the 2020 average. From March 9 to March 16, exchanges around the world received 1.1 million Bitcoins per day, 712,000 Bitcoins more than the average, and trading activity increased as Bitcoin flowed into exchanges and was sold.

Bitcoin trading is primarily driven by new bitcoins entering exchanges, rather than bitcoins already on exchanges.

“Most of the excess Bitcoin that arrived at exchanges has been sold, and the worst of the oversupply appears to be over,” Gradwell wrote, adding that due to “uncertainty surrounding the coronavirus pandemic, it is difficult to predict where the Bitcoin market will go next. We also expect professional traders to continue to drive activity rather than retail users, simply because they trade far more volume.”

In the second week of March, Bitcoin exchange inflows rose sharply.

Last month, before Bitcoin’s coronavirus-related price crash, research found that a long-awaited surge in institutional buying had fueled Bitcoin’s early 2020 rally.

At the peak of Bitcoin’s massive rally in 2017, when Bitcoin transaction deposits outpaced the Bitcoin price, Bitcoin and crypto analytics firm Glassnode recorded around 200,000 daily transaction deposits.

Deposits on Bitcoin exchanges have previously increased as Bitcoin prices rose, and deposits have fallen during bear markets. However, average deposits on Bitcoin exchanges have fallen sharply over the past six months while Bitcoin prices have risen, suggesting that Bitcoin's last rally was not driven by retail investors.

Last month, before Bitcoin’s coronavirus-related plunge, research found that Bitcoin’s early 2020 rally was driven by long-awaited buying by institutional investors.

At the height of 2017’s epic rally, when bitcoin exchange deposits outpaced the bitcoin price, bitcoin and crypto analytics firm Glassnode recorded around 200,000 exchange deposits per day.

Bitcoin exchange deposits previously increased with the growth of Bitcoin price, with deposits falling back during the bear market, however, even as Bitcoin price rose, average Bitcoin exchange deposits fell sharply over the past six months, suggesting that the last Bitcoin rally was not driven by retail investors.

A simple correlation analysis points to a rapidly increasing "positive" correlation between Bitcoin, IWM, and HYG. Notably, the strongest correlation appears to be between IWM and Bitcoin, while the strongest relative jumps are between Bitcoin and HYG. A positive correlation simply means that Bitcoin is moving in the same relative direction as IWM and HYG (when Bitcoin goes up, IWM goes up, and vice versa).

While it is worth noting that Bitcoin's correlation with USO (a great proxy for oil and commodities in general) and EFA (a proxy for international equities) has not increased significantly across the cross-section of other assets in the target multi-asset portfolio. In other words, while the sensitivity of other assets in the target multi-asset portfolio has remained more or less the same, Bitcoin appears to have a higher sensitivity. While the correlation between UUP and Bitcoin has not increased significantly, there may be a dollar effect here.

March 12 saw price spreads between exchanges widen dramatically, with prices between exchanges falling to levels not seen before 2018.

A lot of volatility is caused by feedback between crypto derivatives markets and spot prices. Large orders from whales can greatly influence and distort pricing, exacerbating volatility at these times. As shown in the figure below, derivatives markets also saw a huge difference between futures prices and mark prices on March 12 and 13.

The chart below shows how trading volumes on crypto exchanges have surged recently, indicating a solid market.

With trading volume, data usage, and Google searches for Bitcoin surging at such an important moment in market history, the cryptocurrency market is far from collapsing.

The current financial crisis once again reflects the problems faced by Bitcoin when it was born in 2008. In 2008, governments used various financial tools to reduce the impact of the financial crisis, but with little success. At the same time, this also gave Satoshi Nakomoto the idea of ​​creating an asset class that would never be diluted.

History repeated itself in 2020, and this time the global economic crisis caused by the global spread of the epidemic came even more rapidly.

But as in all times of financial crisis, cash is king, but that may prove to be short-lived.

We are seeing risk-offs across all markets moving downwards. Cryptocurrency markets have not been immune to capital flight, with a sharp drop on March 12 as the S&P and FTSE plunged.

-The S&P 500 fell 29% last month

-The FTSE 100 fell 31% last month

Gold prices fell 8% last month

-Bitcoin fell 30% last month

However, Bitcoin is still establishing itself as an asset class. As this crisis unfolds, we may begin to see signs of it acting as a less correlated store of value. This chart shows Bitcoin’s performance against major stock markets and gold over the past six weeks:

Will Bitcoin become a safe haven asset?

With the upcoming halving of Bitcoin’s supply coinciding with one of the largest experiments in money printing and central bank intervention in modern history, the conditions are ripe for Bitcoin to prove itself as a deflationary, low-correlated safe-haven asset.