Our latest thoughts on the crypto market

• On-chain analytics suggest that short-term traders have largely been flushed out. Data such as “dormancy flow” — which tracks the average age of coins relative to market cap — suggest that the majority of coins that are sold (mostly at a loss) are young coins, with the ratio reaching a local bottom (“buy zone”). This bottoming signal has only been flashed five times before in Bitcoin’s history.
• Futures long liquidations dominance reaching historically high levels. Since December, long traders have been trying to catch the knife and have been consistently on the losing side, representing ~70% of total liquidation volume. Despite this, leverage remains high, which suggests that short traders remain aggressive and have not been punished for taking increased risk. In our view, this data suggests a scenario for a potential short squeeze.
• We have hit the rare lows of 10/100 on the Crypto Fear & Greed Index (“Extreme Fear”). Bitcoin has only reached this level four times in the past, and each time the price recovered not long after and Bitcoin made new highs.
• Funding rates have remained largely negative or neutral as price declined, indicating that long traders have finally stopped trying to “buy the dip,” and shorts are paying longs to hold their positions. As Bitocin’s price held the $40k support level, short traders were not being rewarded while their PnL was being eaten by funding fees. In our view, this may establish the conditions for a short squeeze.
• We believe macro headwinds may be largely priced in. In the crypto market today, it seems you cannot go five minutes on Twitter without hearing about “macro,” “inflation,” the Federal Reserve, or the stock market acting as a headwind for Bitcoin or other cryptocurrencies. In our view, the number of comments and posts on social media suggests we may already be past the “peak frustration” period.
• Long-term on-chain indicators show that fundamentals still look solid. Bitcoin supply shock ratio (illiquid supply / liquid supply) continues to trend up and make new all-time-highs. Whales also seem to be accumulating again after some distribution behavior in December.

On the altcoins