data taken at 9:49am 09/10/2020
Written by: Yves, Head of Trading at Wirex
This week was marked by few, but very strong, positive events and metrics for the crypto economy. The positive headlines are largely supported by both the Bitcoin (BTC) currency market and the derivatives market, signalling the strong probability of a bull run towards the $14k-20k range before December 2020 and March 2021. The positive sentiment improved considerably yesterday when a large payment software company, Square Inc., announced that it bought approximately 4,709 BTCs for $50 million. Square Inc has close to $7 billion of total assets. The investment represents 0.70% of these total assets, standing near the psychological 1% mark. This 1% mark has been used by some analysts over the years to explain their prediction for a Bitcoin price at $50,000 or $100,000. The level is making the headlines this week, again. Square Inc’s investment is a transparent vote of confidence, by a large institution, in the future of Bitcoin. The investment comes with a statement from their CFO on the firm’s commitment and its vision that started in 2019 with “Square Crypto”: “We believe that bitcoin has the potential to be a more ubiquitous currency in the future. As it grows in adoption, we intend to learn and participate in a disciplined way. For a company that is building products based on a more inclusive future, this investment is a step on that journey”.
As a result, the Bitcoin price (BTC/USD) jumped by nearly 3% over a span of three hours yesterday. The market found a new momentum even though the DeFi economy has been slowing down for the past two weeks: the number of Bitcoins and Ethereum (ETH) held in DeFi projects have respectively plateaued and decreased as reported by DeFi pulse.
The second reason for the bullish sentiment is rather unusual… Coindesk reports that Bitmex’ BTC balance dropped by nearly 30% in less than a week. The announcement by the Commodity Futures Trading Commission (CFTC) of a legal action against the founders on October 1st did obviously weigh on Bitmex’ financials. But it is also contributing significantly to a surge in the net outflow of cryptocurrencies from all exchanges.
Indeed, CryptoQuant is reporting large net outflows from cryptocurrency Exchanges on October 2nd, 5th and 7th and there is no reason to believe that more will seek the safety of a cold wallet. The net daily flow observed is the most severe in almost a year.
The net outflows are usually perceived as a bullish signal: they indicate that the number of HODLers is increasing and the supply pressure is decreasing. The supply is already structurally low as the BTC outflows from mining pools simply halved with the reward for a block production in May (the halving). CryptoQuant recorded this week 2 of the lowest 5 daily total outflows observed since June.
In the current context, the interpretation for the net outflows observed seems misguided. After all, these net outflows are naturally triggered by the legal action taken against Bitmex, and the resulting risk of holding BTCs on exchange. However, there is a difference between holding a BTC inventory in custody, or holding it on an exchange. Obviously, selling BTCs would incur the extra cost of transfer from the custodian back to this exchange. A more relevant impact is that a lower number of BTCs on all exchanges should impel analysts to reconsider the effective size of the BTC supply: the supply that is “ready to sell”. In other words, the selling pressure should reasonably be lower than expected.
Both the Bitmex event and Square Inc’s investment most likely revived the buying interest in December and March BTC Call options. Skew analytics reports that the volume of options traded on CME reached its highest level since August, almost touching the $50 million level. There were clearly more net buyers of the December and March Calls for strikes ranging from $14k to $20k.
As the US dollar is now edging lower, resuming its cyclical trend, it is tempting to take bets on the highest level that the Bitcoin price (BTC/USD) can reach before the end of the year… if it weren’t for the many surprises along the way…