Liquidation Flash-Crash, End of the Bull Market?
After the recovery to $52,000 from the lows of $29,000 we recently saw a crash across the market of roughly 10–20% depending on which Crypto is your cup of tea. It was not a slow bleed, rather it happened basically overnight and caught most retail traders off guard. Believe it or not, we have seen price action like this many times before in this space and undoubtedly it will happen again.
The Cause?
Could it have been the SEC cracking down on Uniswap and Coinbase? IMF getting revenge on El Salvador for adopting Bitcoin? Maybe general profit taking? More likely was over leveraged long liquidations cascading to create a violent push straight down.
Leading up to the crash, we saw spot margin borrowing peaking. Open interest was not able to keep up which sent margin longs on spot markets which created enough deleveraging power to push price lower. Over leveraged in either direction usually lands the markets in a volatile reversal eventually and that seems to be the case this time as well.
Was this reversal strong enough to end the bull market?
Let’s take a look and see what we find.
Usually when assessing where we are in the cycle, we delve into on-chain metrics which we will do but maybe the technicals have a story to tell us. From what we can tell, it is definitely a mixed bag.
Assessing from a weekly time frame, we can see that this recent correction took us right to the 21 Day Moving Average. This is typically a momentum indicator and acts as a measure of which macro trend we are in. As you can see, price action bounced off the MA(21) as a sign of support and strength. This test comes after a confirmation of support from the MA(50) in July which catapulted us to our recent highs. Bullish indeed.
The RSI topped out at 61 and has corrected slightly alongside price action. 61 is a very neutral level indicating that we are neither overbought or oversold at this point. On the bearish side, we would have liked to break above 65 and reverse the bearish trend that has formed since our bearish divergence from January. Not looking good for the bulls here.
The Stochastic RSI tells another interesting story. We have had a bearish cross on the weekly which forecasts red times ahead. The pattern in which it did this cross has us assessing this could be a bullish continuation. In times where the Stochastic quickly rises and has a cross without much time in the over bought territory, this usually leads to a few red weeks with more upside to come. When we are over extended for a longer period of time to the overbought territory, a multi month correction usually follows which is something that has already played out in our estimation. Maybe some on-chain data can help clarify further.
Bitcoin RVT Ratio
RVT ratio is a variation of the MVRV, a ratio we have covered in the past. This ratio looks into realized price compared to transaction volume. It has also been useful in tracking tops and bottoms of macro trends. We can say that price has never dipped below the 200 day avg price during a bull market. As we have done such a dip, this could be the first leg of our bear market or a false signal. With the RVT being at such a low point, this was a historically great time to purchase BTC and realize profit later.
Bitcoin NVT Signal
We wanted to bring you some charts that we haven’t covered before and here is another of them. The NVT has been very useful at predicting momentum and market cycle awareness. During the last two cycle tops, the Adjusted NVTS violently broke to the upside out of the normal range. Both tops were the only time this has happened. During this cycle we have only flirted with the top end of the normal range but never broken other than ever so briefly which has been done before but not been a top.
Something to note for the bearish case, after our top in 2018 we pushed to the bottom the the normal range of the NVTS almost instantly with a quick recovery to the top range. We are noticing similar behavior today but without the breakout of the normal range as we noted before. Another point towards a bear cycle inclination.
Bitcoin Mayer Multiple
For our last on-chain indicator, we have the Mayer Multiple which gauges the price of Bitcoin against its historical averages. The bullish case is hard to make here as well. It does not mean that we can not turn things around but we have yet to see it happen according to current price action. We are struggling to break above the 200 day average which signals bear market territory here. The Mayer Multiple also broke above its top range during our big run earlier in the year. Good news for the bulls here is that in 2013–2014, we broke this level twice and could certainly do it again this time. We never pushed below the 200 day average back then either. Of course no cycle is exactly the same and this one is no exception.
On the whole, this was a pretty indecisive take as the market is in a relatively neutral phase at the moment. There has been no push in either direction to make us take a stance on either side. Rather, we are ready for both scenarios to play out and will continue to keep you in the loop as things progress.
In the mean time, there were some absolutely massive updates in the Crypto space that have been talked about for months and months on end. This was the implementation of EIP-1559 on the Ethereum chain as well as the Arbitrum release. Let us briefly get into those.
EIP-1559
Leading up to this fabled update to the Ethereum network, transaction fees have been extremely high at certain points thus making ETH unusable for the average joe while people with deeper pockets reap the benefits.
Transactions can cost upwards of $500 for minting a coveted NFT (even more in some cases) which brings us to why this update is important:
- Transactions will be processed via an automated bidding system with a set fee amount that can fluctuate based on network congestion.
- Individuals have the ability to add a tip in order to push their transaction through but in theory this is much cheaper than current gas prices.
- Part of every transaction fee is burned, making ETH deflationary for the first time.
Despite the update being live, gas fees are still astronomical and are the highest they have ever been…
Why is this?
Contrary to popular belief, EIP-1559 is not the cause…this shift has coincided with the recent NFT mania causing gas prices to go through the roof.
Nonetheless, the burn is live and has officially turned ETH deflationary as of this week which is encouraging. The full update does not take effect until after December which we expect to have a greater reduction on gas prices regardless of any mania at the time.
Arbitrum
Arbitrum has been one of the most hyped Layer-2 scaling solutions in quite some time that directly competes with Optimism as well. Both of these scaling tools bring lower transaction fees to the Ethereum chain. Arbitrum in particular launched being integrated to most notably Uniswap, Sushiswap, and Balancer from the start while being whitelisted on 400 other dApps as well. This is a much welcomed integration to the ETH ecosystem as gas fees for transactions have continued to rise month over month.
Despite transaction not costing $.002 like on Polygon, transfers should cost around $1 and trades roughly $5 which is still fantastic compared to the multi-hundred dollar transactions ETH is currently taking. Being able to actually use this rollout is not easy for the average user as people have to integrate the Arbitrum chain to their Metamask and bridge tokens to this network before being able to utilize it on Uniswap. There is also a limited token selection for trades on Arbitrum at the moment which will be improved over time as more projects integrate their technology.
In the name of science, we attempted to use their tech on Uniswap to see what the hype was all about. Once you have loaded your DeFi wallet of choice with Arbitrum approved ETH, we found that a transaction would cost us around $6. While that is much higher than their competitor Polygon, that is bread crumbs for people that have been transaction on the Ethereum chain. It very well may be worth the extra effort to save over $100 per transaction.
The Bottom Line:
While this may not have been our most bullish assessment, it is an honest one. The market is at a point of indecision and without any clear direction. Without a confluence of indicators, we can only point to both possible scenarios and watch intently as it all plays out. We want to see a $180,000 Bitcoin as much as everyone else and even though that is still in play, it is always better to air on the side of caution. Let’s see how these next few weeks play out and what the metrics continue to tell us.
About RF Capital
RF Capital is an alternative investment firm with a special focus in the underlying infrastructure of the blockchain space. Other areas of specialization include real estate, debt/equity markets, and OTC trading.
