View of Bluefin Whales: After storage

A loose liquidity environment and new narrative outbreaks are the main determinants of the bull market after the Bitcoin halving.

A higher interest rate environment may last longer than expected, but it won't end the bull run. The performance of non-BTC cryptos may remain weak for a long time before interest rates drop significantly.

Bitcoin Compensation: An Old “Meme”?

Bitcoin's halving seems to be one of the oldest “known events” in the crypto market. Since 2012, investors seem to have believed that the Bitcoin halving event would reduce the supply of BTC and increase its price, leading to a bull market in the crypto market.

However, price changes are never determined by “supply” alone. “Supply” affects prices, and so does “demand”. Luxury homes often have surprisingly high asking prices; But if there are no bidders, sellers must make offers to close quickly. During periods when investors are relatively cautious, many luxury homes sell for half price or less.

The same is true for financial markets. “Lack” is always relative; In the early 1980s, the price of silver once reached $48, and in 2011 it reached that level again. Although many analysts say, “If the price goes down and the supply of silver goes down, the silver mine will go bankrupt and it will bring a series of serious problems.” Consequences”, the price of silver did not stay high for long.

Silver price movements since 1970. Source: TradingView

Similar views are not common in the crypto market. Many investors believe that after BTC production is halved, mining profits in BTC will decrease significantly. If the price of BTC drops significantly, miners will have to choose to shut down their mining machines, and the decrease in hash rate will make the Bitcoin network safer, which is somewhat similar to the view of silver investors.

However, the above views do not seem correct.

In the year In 2022, the price of BTC decreased by about 80% compared to the peak in 2021, but the hash rate did not decrease significantly, instead it maintained an upward trend – which makes the Bitcoin network sufficiently secure. Although the hash rate is much higher than in 2017, there have been no significant security problems on the Bitcoin network.

Changes in Bitcoin hash rate since 2017. Source: The Block

In addition, the difficulty of mining BTC has changed with the market environment. When the market environment is very heavy, the mining problem is reduced, which allows the surviving miners to continue their work. However, BTC is not offered indefinitely and will be mined at some point in the future. How do miners protect the Bitcoin network this time?

Changes in the Bitcoin mining problem since 2014. Source: CoinWarz

Transaction fees seem to be one of the answers. If we only think about securing the Bitcoin network, an “astronomical” hash rate is not a necessary condition. Maybe many miners quit because of “poor returns”, but the hash rate and transaction fee income have finally reached a balance.

Considering that the active level of the Bitcoin network has been relatively stable since 2018, and that the BTC store of value will further enhance this stability, “fee-only” miners may become the leading force in the future. Protecting the Bitcoin Network.

In fact, in April 2024, BTC miners' fee income was short of mining income. Therefore, regardless of the price of BTC, as long as the user base of the Bitcoin network remains at a certain level, BTC miners can still earn high profits and be incentivized to maintain the network.

Changes in Bitcoin mining revenues since 2017. Source: The Block

Transactions on the Bitcoin network since May 1, 2024. Source: Block

In conclusion, in the early stages of the development of the Bitcoin network, the halving of BTC had a significant impact on the price. Still, the impact on the current level of development is greatly reduced. Even after several halvings in the future, it will be difficult for BTC miners to earn block rewards, and income from sources such as transaction fees will ensure the security of the Bitcoin network by ensuring the continued operation of at least some BTC miners. Additionally, as the liquidity of USD obtained through BTC gradually accumulates, attacks on the Bitcoin network will also become “economically unfeasible”.

Halving sounds like an ancient “crito meme”. So, what are the main factors that affect the price of BTC? Let's return to the macro level and review the background and key events of the macro environment before and after each halving from 2017 to now.

In the year In 2017, a year after the second half, the crypto market was in a low interest rate environment. ICOs (Initial Coin Offerings) emerged at this time, and the amount of financing in the crypto market expanded rapidly. In the year In 2021, a year after the third quarter, the Federal Reserve has kept interest rates at 0% for an extended period as necessary to combat Covid-19. Huge institutions began to invest in the crypto market, and the rise of narratives such as DeFi Summer, NFTs and GameFi pushed the crypto market into a “total bull market”.

In summary, a loose liquidity environment and a new narrative are the two main drivers of the crypto bull market, but not a halving.

So what happens after the fourth half of this year? Based on the above story, it is not difficult to guess.

In the year In 2025, one year after the fourth quarter, the Fed will gradually cut interest rates (albeit slowly). BTC spot ETFs have reached a certain level, and narratives like DePin, RWA and alternative chains could be the engine of a new round of “full bull market”.

BTC: Long term service

The macro-environment does not look optimistic for BTC: the relatively optimistic interest rate cut prospects at the beginning of 2024 have disappeared. With inflation data continuing to beat expectations, the Fed has chosen carefully to keep interest rates high and improve the liquidity environment. In the interbank market, traders expect that the price reduction will be about 4 times from 2024 to 2025, each reduction will not exceed 25 bps. The above will undoubtedly slow down the rate of return of the currencies, and as a result the momentum of the bull market will also slow down.

A SOFR adjustment rate that directly reflects interbank financing costs. Source: CME Group

However, this doesn't seem to mean the end of the bull market – at least initial traders still have a positive medium and long-term outlook.

In the futures market, the annual implied future rate of BTC remains above 7%, which means that investing in BTC is still profitable compared to the risk-free rate, and the BTC risk premium is still above 340 bps. In the options market, although bearish sentiment dominates the month's options, bullish sentiment in the distant months has not been affected and has remained relatively stable in recent weeks.

BTC 3 month annual basis. Source: Velodata

Changes in BTC 25delta skew in the last 30 days. Source: Amberdata Derivatives

Based on the recent gamma distribution, a positive gamma around $60k will have a significant positive effect on the price of BTC. As the expiration date approaches, the “attractive power” that comes from market makers' hedging behavior gradually increases. If the price continues to decline, market makers will provide some support to the price of BTC.

BTC Recent Gamma Distribution. Source: Amberdata Derivatives

In addition, recent volatility data shows that traders expect the 7-day volatility of BTC price to not exceed 7.5% and the 30-day volatility to not exceed 16%. Therefore, even if the worst case scenario happens, the probability of BTC price falling below $50k is still relatively low, the probability of staying around $60k is relatively high. But there is no doubt that the arrival of a full bull market could be delayed further due to the macro environment. Now may be the time to try to be a “long-term contender”: hold BTC and wait for interest rate cuts because the macro environment will finally improve in the next 12-15 months.

Bitcoin ATM boxplots. Source: Amberdata Derivatives

Non-BTC: Sleeping.

For non-BTC cryptos, investor expectations are becoming more conservative as the bull market fades, given their position at the risk-asset end. Taking ETH as an example, only options expiring in December 2024 and March 2025 reflect a certain bullishness, coinciding with the path of interest rate cuts. The above scenario indicates that investors will invest more in non-BTC cryptos only when the macro environment improves.

Changes in ETH 25delta skew in the last 30 days. Source: Amberdata Derivatives

The latest gamma distribution also confirms the above view. In the absence of upside expectations, investors choose to sell more options, which continuously increases the positive gamma scale accumulated by market makers. In the absence of significant positive news (such as spot ETH ETF approval), it is difficult for ETH to break through the new gamma peak at $3,300 due to the lack of liquidity support.

Latest ETH gamma distribution. Source: Amberdata Derivatives

Of course, whales seem to be reducing their non-BTC holdings. The number of addresses holding more than 100 ETH continued to decline in April; In contrast, the number of addresses holding more than 10 BTC remained stable in April. Even baby whales have noticed the change in the macro environment: they prefer to hold BTC and may be able to sell ETH.

As of May 1, 2024, the number of addresses with BTC is higher than 10. Source: Glassnode

As of May 1, 2024, the number of addresses with ETH is higher than 100. Source: Glassnode

Considering the number of young whales, selling non-BTC cryptos seems to have had a wide impact. The market share of altcoins fell below 19.5%, while the market share of ETH remained relatively low last year. Since most non-BTC cryptos have performed well in a “slow bull market” and have relatively high risks, investment in non-BTC cryptos should still be cautious until the macro environment improves. Altcoin warriors, wait for better luck.

Changes in cryptos' market shares in the last 30 days. Source: Coinmarketcap