Short Squeezes and Spot Demand
Bitcoin markets have seen the strongest monthly price performance since Oct-2021, fuelled by both historic spot demand, and a sequence of short squeezes. In this edition, we explore the dynamics taking place in both derivatives markets, and the spot exchanges.
The rally in digital assets has continued this week, with Bitcoin prices reaching a high of $23.9k on Sunday evening. The month of January has seen Bitcoin markets posting the best monthly price performance since Oct-2021, reaching over +43% YTD. This puts Bitcoin prices at the highest level since Aug-2022, and a +6.6% gain off the weekly lows at $22.4k.
In this edition, we will explore some of the mechanics underlying this rally within both the derivative markets, and the spot exchanges. We cover:
- The recent futures short squeeze and a return of positive futures basis, despite declining aggregate leverage relative to market size.
- The prevailing decline of spot exchange balances, despite a decreasing dominance of exchange related on-chain activity.
- The market breaking above the average withdrawal price for several market cohorts, including the class of 2019+, Binance and Coinbase customers, and Whales from the class of 2017.
Squeezing Shorts
After a long, painful, and gruelling 2022, the new year has opened with a notable reversal of the downtrend throughout January. As is often the case, such rallies are usually fuelled by some degree of short squeezes within derivative markets, and this rally is no different.
To date, there have been over $495M in short futures contracts liquidated across three waves, notably with declining scale as the rally played out.
We can see the initial short squeeze in mid-Jan took many traders by surprise, setting an all-time-low of 15% for long liquidation dominance (meaning 85% of liquidations were shorts). This is an even larger magnitude relative to the longs liquidated during the FTX implosion (75% long dominance), showing just how offside many traders were.
Across both perpetual swap, and calendar futures, the cash and carry basis is now back into positive territory, yielding 7.3% and 3.3% annualized, respectively. This comes after much of November and December saw backwardation across all futures markets, and suggests a return of positive sentiment, and perhaps with a side of speculation.
However, despite this return of a positive futures basis, the total open interest relative to the Bitcoin Market cap has been in decline since mid-Nov. The BTC denominated value of open futures contracts has fallen by 36% over this time, dropping from 650k BTC in mid-Nov, to 414k BTC today.
Note that 40% of this decline can be directly attributed to the loss of 95k BTC worth of open interest that was held at the FTX exchange.
If we compare the notional size of open futures contracts to the BTC balance on corresponding exchanges, we can gauge the relative scale of leverage within the market. Here we can see that this leverage ratio has declined from open interest equal to 40% of spot exchange balances, to just 25% over the last 75-days.
Overall, this reflects a significant net reduction in futures leverage, and a closing out of short speculative interest. It potentially also signals a reduction in short term downside hedge positions. On a relative basis, and alongside the increase in observed shift back towards on-chain self-custody (WoC 46), this also puts more emphasis onto spot markets as a key driver of the current market structure.
Inspecting Spot Exchanges
The trend of coins flowing out from spot exchanges has been a major theme since March 2020, which to this day marks the all-time-high exchange coin balance. Today, the total BTC balance held on the exchanges we track is around 2.251M BTC, representing 11.7% of the circulating supply, and a multi-year low that was last seen in Feb 2018.
The total volume of coins flowing both in and out of exchanges is currently around $625M/day in both directions (i.e. $1.25B/day total). On net, there is around $20M in net daily flows, reflecting just 1.5% of the total, and showing that exchange flows are in a remarkably even balance. This differs to Nov-Dec where exchanges saw periods of net outflows on the order of $200M to $300M per day.
The largest monthly outflow of coins in history occurred in this Nov-Dec period, hitting -200k BTC/month in outflows across all exchanges. Today, exchange net-flows have returned to neutral, reflecting a cooling down of outflows. This may signify a slow down in new demand relative to newly mobilized spending (WoC 4), now that the market has rallied over 43% year-to-date.
An Evolving Economy
On-chain transactions for Bitcoin spiked by over 50k transactions per day this week, however we cannot see a corresponding increase in exchange deposits or withdrawal counts. Exchange related transactions represent just 35% of total transaction counts at present, with this dominance remaining in a downtrend since the May 2021 market peak.
This spike in transaction counts is also visible within our Entity-Adjusted data, suggesting it is not associated with a single entity, or internal wallet management. This suggests that recent uptick in transaction activity is occurring elsewhere within the Bitcoin economy.
Bitcoin markets have seen the strongest monthly price performance since Oct-2021, fuelled by both historic spot demand, and a sequence of short squeezes. In this edition, we explore the dynamics taking place in both derivatives markets, and the spot exchanges.
The rally in digital assets has continued this week, with Bitcoin prices reaching a high of $23.9k on Sunday evening. The month of January has seen Bitcoin markets posting the best monthly price performance since Oct-2021, reaching over +43% YTD. This puts Bitcoin prices at the highest level since Aug-2022, and a +6.6% gain off the weekly lows at $22.4k.
In this edition, we will explore some of the mechanics underlying this rally within both the derivative markets, and the spot exchanges. We cover:
- The recent futures short squeeze and a return of positive futures basis, despite declining aggregate leverage relative to market size.
- The prevailing decline of spot exchange balances, despite a decreasing dominance of exchange related on-chain activity.
- The market breaking above the average withdrawal price for several market cohorts, including the class of 2019+, Binance and Coinbase customers, and Whales from the class of 2017.
Squeezing Shorts
After a long, painful, and gruelling 2022, the new year has opened with a notable reversal of the downtrend throughout January. As is often the case, such rallies are usually fuelled by some degree of short squeezes within derivative markets, and this rally is no different.
To date, there have been over $495M in short futures contracts liquidated across three waves, notably with declining scale as the rally played out.
We can see the initial short squeeze in mid-Jan took many traders by surprise, setting an all-time-low of 15% for long liquidation dominance (meaning 85% of liquidations were shorts). This is an even larger magnitude relative to the longs liquidated during the FTX implosion (75% long dominance), showing just how offside many traders were.
Across both perpetual swap, and calendar futures, the cash and carry basis is now back into positive territory, yielding 7.3% and 3.3% annualized, respectively. This comes after much of November and December saw backwardation across all futures markets, and suggests a return of positive sentiment, and perhaps with a side of speculation.
However, despite this return of a positive futures basis, the total open interest relative to the Bitcoin Market cap has been in decline since mid-Nov. The BTC denominated value of open futures contracts has fallen by 36% over this time, dropping from 650k BTC in mid-Nov, to 414k BTC today.
Note that 40% of this decline can be directly attributed to the loss of 95k BTC worth of open interest that was held at the FTX exchange.
If we compare the notional size of open futures contracts to the BTC balance on corresponding exchanges, we can gauge the relative scale of leverage within the market. Here we can see that this leverage ratio has declined from open interest equal to 40% of spot exchange balances, to just 25% over the last 75-days.
Overall, this reflects a significant net reduction in futures leverage, and a closing out of short speculative interest. It potentially also signals a reduction in short term downside hedge positions. On a relative basis, and alongside the increase in observed shift back towards on-chain self-custody (WoC 46), this also puts more emphasis onto spot markets as a key driver of the current market structure.
Inspecting Spot Exchanges
The trend of coins flowing out from spot exchanges has been a major theme since March 2020, which to this day marks the all-time-high exchange coin balance. Today, the total BTC balance held on the exchanges we track is around 2.251M BTC, representing 11.7% of the circulating supply, and a multi-year low that was last seen in Feb 2018.
The total volume of coins flowing both in and out of exchanges is currently around $625M/day in both directions (i.e. $1.25B/day total). On net, there is around $20M in net daily flows, reflecting just 1.5% of the total, and showing that exchange flows are in a remarkably even balance. This differs to Nov-Dec where exchanges saw periods of net outflows on the order of $200M to $300M per day.
The largest monthly outflow of coins in history occurred in this Nov-Dec period, hitting -200k BTC/month in outflows across all exchanges. Today, exchange net-flows have returned to neutral, reflecting a cooling down of outflows. This may signify a slow down in new demand relative to newly mobilized spending (WoC 4), now that the market has rallied over 43% year-to-date.
An Evolving Economy
On-chain transactions for Bitcoin spiked by over 50k transactions per day this week, however we cannot see a corresponding increase in exchange deposits or withdrawal counts. Exchange related transactions represent just 35% of total transaction counts at present, with this dominance remaining in a downtrend since the May 2021 market peak.
This spike in transaction counts is also visible within our Entity-Adjusted data, suggesting it is not associated with a single entity, or internal wallet management. This suggests that recent uptick in transaction activity is occurring elsewhere within the Bitcoin economy.
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