Bitcoin chain deep dive: BTC falls below global electricity value


Decline is calling the chorus

Fed officials barred from speaking ahead of next week’s federal funds announcement; investors began to think about the reduction of US interest rates for 2023 and 2024. While December 2023 Fed funds rate futures are priced at 4.5%, December 2024 is currently priced at 3.5%; an aggressive rate cut took place this week.

Fed funds rate 2023/2Fed (Source: TradingView)

Jerome Powell and the Fed’s primary goal is to control inflation and tighten fiscal conditions; but since mid-October, financial conditions have eased as bond yields fell, credit spreads tightened and stocks rose to multi-decade levels. The spread between ten- and two-year yields closed to a new -84bps.

US10-US02Y: (Source: TradingView)

December 9th saw worse than expected PPI data, the real test for the treasury market will follow next week’s CPI report. Depending on CPI results, the Fed funds rate hike could change, which currently sees a 75% chance of a 50bps rate hike, bringing the Fed funds rate to 4.25-4.50%.

Fed funds rate: (Source: CME FedWatch Tool)

Bitcoin mining difficulty and hash rate continues

Bitcoin difficulty corrected 7.32% in the morning on December 6, the largest negative adjustment since July 2021. This is a correction of more than 20% due to China’s ban on Bitcoin last summer, which caused miners to go offline and the hash rate to drop to 84EH/s. .

The decrease in mining difficulty will see a relief on the faces of miners, but this relief may be short-lived as the hash rate is already starting to climb to levels around 250EH/s.

Since the Chinese ban last summer, the mining difficulty and hash rate have only increased by 3 times, indicating that the long-term security of Bitcoin has never been stronger.

Bitcoin regulation: (Source: Glassnode)
Hash Rate: (Source: Glassnode)

Bitcoin falls below the value of global electricity

A model created by Charles Edwards (Capriole Investments) in the Bitcoin electricity and production cost model to determine how much it costs to produce one bitcoin.

This pattern created a great foundation for the price of bitcoin during bear markets, and in only four periods in Bitcoin’s history has the price fallen below the global Bitcoin electricity value.

The last time the Bitcoin price fell through the pattern, and now during the FTX collapse, the price was below global Bitcoin electricity costs for most of November, around $16.9K, and fell back below that again.

Bitcoin electricity cost model: (Source: Capriole Investments)

A similar model developed by Hans Hague modeled the idea of ​​the difficulty regression model. By creating a log-log regression model with difficulty and market value, this model calculates the total cost to produce one bitcoin.

The cost of producing one bitcoin is currently $18,872, which is higher than the current Bitcoin price. Bitcoin price broke below the regression pattern during the FTX crash on November 15th and for the first time since the 2019-20 bear market – a deep value zone for Bitcoin.

Difficulty Regression Model: (Source: Glassnode)

Bear market rally

The Hoarding Trend Score is an indicator of the relative size of businesses that are actively hoarding coins on-chain in BTC. The Accumulation Trend Price scale reflects both the size of an entity’s balance sheet (their participation score) and the amount of new coins they have acquired/sold over the past month (their balance sheet change score).

An Aggregation Trend Score near 1 indicates that collectively larger objects (or a larger portion of the network) are aggregated, while a value near 0 indicates that they are distributed or not aggregated. It provides information about market participants’ balance sheet size and their accumulation behavior over the past month.

Highlighted below are the instances where Bitcoin capitulation occurred during the Bitcoin investor rally, the FTX crash that sent Bitcoin down to $15.5k, the Luna crash, covid, and the same amount of rallying that occurred during the 2018 bear bottom. market.

Cumulative Trend Score: (Source: Glassnode)

The accrual trend score by cohort has a breakdown by each cohort to show levels of accrual and distribution during 2022, during a period of significant accrual from all cohorts in a single month in 2022, which is currently unprecedented. Investors see value.

Aggregate Trend Score by Cohort: (Source: Glassnode)

Futures open interest, leverage and volatility decreased

Due to the macro climate and general sentiment, many of the risks seen in Bitcoin derivatives have been removed from the market.

Bitcoin open interest on Binance is now back to July levels. Futures open interest is the total amount allocated in open futures contracts. Since December 5, 35,000 BTC have been mined, which is equivalent to $595 million; that’s about a 30% OI reduction.

Futures Open Interest: (Source: TradingView)

The less leverage in the system, the better; this can be measured by the Futures Estimated Leverage Ratio (ELR). ELR is defined as the ratio of open interest in futures contracts and the balance of the respective exchange. ELR reduced from a peak of 0.41 to 0.3; however, at the beginning of 2022 it was at 0.2 and still building a lot of leverage in the ecosystem.

Estimated Leverage Ratio: (Source: Glassnode)

Expected volatility is the market’s expectation of volatility. Given the price of the option, we can solve for the expected volatility of the underlying asset. Formally, implied volatility (IV) is the range of one standard deviation of the expected movement of an asset’s price over a period of one year.

Looking at At-The-Money (ATM) IV over time gives a normalized view of realized volatility and volatility expectations, which will often rise and fall with market sentiment. This metric shows implied volatility at ATM for option contracts expiring one week from today.

Similar to the Luna collapse in June, bitcoin volatility implied a return to year lows following the FTX explosion.

Options ATM implied volatility: (Source: Glassnode)

A large supply of stablecoins waiting on the sidelines could trigger a bull run

Stablecoin Supply Ratio (SSR) is the ratio between the supply of Bitcoin and the supply of stablecoins expressed in BTC, or: Bitcoin Market cap / Stablecoin Market cap. We use the following stablecoins for supply: USDT, TUSD, USDC, USDP, GUSD, DAI, SAI and BUSD.

When SSR is low, the available stablecoin supply has more “purchasing power” to buy BTC. It is a proxy for supply/demand mechanics between BTC and USD.

The ratio is currently at 2.34, the lowest since 2018, while the SSR stood at 6 in January 2022. As Stabilcoin purchasing power continues to rise, the rate decreases.

Stablecoin Supply Rate: (Source: Glassnode)

While the stock buying power net position change supports this, this chart shows the 30-day stablecoin buying momentum on the exchanges. It looks at the 30-day change in major stablecoin supplies on exchanges (USDT, USDC, BUSD, and DAI) and outputs the 30-day change in USD-denominated BTC and ETH flows.

Positive values ​​indicate more significant or increasing USD volume of stablecoins flowing into exchanges compared to BTC + ETH over the past 30 days. This generally offers more stablecoin-denominated purchasing power available on exchanges than the two underlying assets.

Over the past two years, stablecoin purchasing power has increased by more than seven billion purchasing power for stablecoins alone, continuing to the highest levels seen since the beginning of the year.

Stablecoin Exchange Purchasing Power Net Position Change: (Source: Glassnode)



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