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August market update: Are the bulls back?
August market update

AUGUST 31, 2021

August market update: Are the bulls back?

Marco Pagnini

Senior Investment Manager

Last week was a compelling week in the cryptocurrency markets, seeing most cryptos in the green with double digits gains. Current bullish movement is driven mainly by top coins such as BTC, ETH and especially ADA, which registered a +116% gain in the last 30 days, becoming top third crypto by market capitalisation (~90B$) above Binance token (BNB).

Chronologically speaking, last week was the fifth consecutive week reporting growth in the major cryptocurrencies, signalling steady growth for the whole crypto market, which now stands around $2.2 trillion in market capitalisation.

This growth is supported by major central banks’ money printing policies, a strong institutional appetite for risky assets is present and contributes to this crypto growth. While the crypto market has risen predominantly thanks to retail investors, institutional money today represents a big chunk of the market (~50% of BTC buying ratio in 2021 Q1-Q2).

This fundamental difference with tradition finance (85% of volume generated by institutions) has deep implications, one of which is that long-term market movers may comes not only by what centralised financial institutions, such as the FED or ECB, decide to do in terms of money policies or regulation restriction, but also from mass adoption news like the ones from El Salvador or Cuba.

In those countries, people use crypto to find solutions to their daily financial issues, otherwise powerless against a situation totally outside of their control (remittance, dollar tied currency, government corruption, etc. Cryptocurrencies present to them an opportunity to escape a crippling inflation rate or unlawful market manipulation of local currency and rely on something independent from the geopolitical game.

Crypto technical analysis

Bitcoin’s five-week rally comes to a pause

BTC price action, May-August 2021

During the past week, the price found support on the 20-day moving average (orange middle line inside the Bollinger Bands) and since 6th of August, trading always above the 100-day moving average (purple line) on an intra-week basis.

Bitcoin then printed a weekly close at the highs, closing at $49.2k, which added a boost to mid- to long-term momentum. The powerful move higher flashed another bullish pulse, pushing 3-day momentum above neutral and helping the weekly moving average convergence divergence (MACD) continue last week’s bullish cross higher.

Over the weekend, BTC consolidated and back-tested previous support at $48.1k and settled around a comfortable $47-49k range

Looking forward, BTC has exhausted the last leg of his bullish movement and now bulls and bears are creating lateral price movement. Will this continue for next few days, the target is the blue area: a strong technical resistance in the $55-58k range, where we can expect supply to enter the market. Vice versa, if the rising channel breaks downwards, a pullback is expected around $45k first and then $40k, which acts as strong support.

The MACD indicator also shows a reduction in volatility and trading volume, while the signal line keeps crossing the MACD, confirming a lack of clear trend.

Ethereum meets $3,350 resistance

Ethereum saw a sluggish week, but the week-end result put ETH up 1% – just like BTC. The second-largest coin bounced from support at $3,000 and pushed higher to meet the resistance at $3,350 (bearish .618 Fib) on both 23rd and 24th August.

ETH could not overcome this resistance and started to decline after BTC got rejected at the $50k mark. Initially, Ether was holding the support at the 20-day moving average at $3,180 but eventually dropped beneath this key level yesterday to reach a closing price of $3,056.

Together with the sentiment, ETH has since bounced from this support and is now trading around $3,200 zone.

ETH price action, April-August 2021

Looking ahead, the MACD indicator shows that many traders have taken some profit after the long rally therefore shrinking the price range - and consequently bollinger bands are converging towards the 20-day moving average, determining a channel restriction.

From here, expect high volatility soon, pushing the price in a second bullish leg, or a pullback towards $3,000 (.236 Fib). 

If this trend is confirmed and the bullish cycle resumes (new green histogram curve on MACD indicator) the second leg will push the price up towards $3,540 (1.618 Fib Extension) and subsequently $3,700 (1.414 Fib Extension).

ETH price action

On-chain analysis

To add more fundamental substance to our analysis, let’s take a look at the on-chain metrics for Bitcoin, the major cryptocurrency and market mover, to have a more accurate projection of the future market shape.

Exchange balances plateau

This week we have seen signals on-chain that some investors, particularly those with older UTXOs (Unspent Transaction Output), have been spending coins. This week saw a very slight uptick in BTC held on exchanges which follows a month long plateau in coin balances.

After the significant net inflow of around 140k BTC to exchanges in May, July saw around 110k BTC in net outflows, largely reversing that trend. However throughout August, exchange balances stalled at around 2.5M BTC (~13% of circulating supply).

BTC balance on exchanges

The Exchange Net Flow metric shows that last week saw overall net inflows to exchanges as some traders and investors appear to be taking profits, and capitalising on market strength. It is worth noting that the magnitude of inflow is not dissimilar to that seen through the Dec 2020 to April 2021 bull market period and is reasonably expected behaviour.

Long-term holder accumulation

In what continues to be an amazing divergence, on-chain activity has still not responded to positive price action.

Despite that, the overall supply dynamics remain extraordinarily bullish, where most metrics signaling a steady accumulation curve. This week, the supply held by long-term holders (LTHs) has reached an all-time-high or 12.69M BTC, surpassing the previous peak of October 2020.

Through the first two quarters of the 2021 bull market, LTHs distributed approximately 1.75M BTC, which ultimately created oversupply and triggered May’s all-time high. Following that, investors dramatically slowed down their spending, and the coins that were accumulated in late 2020 and early 2021 have consistently matured across the ~155-day threshold for classification as 'Long-Term Holders'.

The return of LTH supply to its all-time high has taken just 100 days, which goes to show just how significant the accumulation was in the early phase of this bull market. The fact this trend has yet to slow down also demonstrates that significantly more coin volume is getting older than younger (meaning that fewer existing holders are selling). This adds further weight to the argument that the old-hand spending observed this week is likely of low coin volume, and strategic de-risking, rather than a loss of conviction and a mass exit.

BTC supply held by LTHs

On-chain participation

For some weeks now, data has shown that most address buckets are accumulating coins, buying the Bitcoin dip in June, effectively bouncing it back from the $30k level. 

At the same time, whales continue to accumulate pretty strongly. So in terms of market sentiment we could say that everyone seems confident that prices should go higher from there.

This trend is evident in the accumulation trends shown in the chart below. The red areas of the chart demonstrate when all groups of holders (from small fish to whales) were accumulating Bitcoin, while the blue areas are when only the smaller fish were accumulating Bitcoin. Historically, more whales have accumulated in the lead up to bull runs, and the chart is currently transitioning towards red.

BTC accumulation trends

Final thoughts on on-chain activity

Whilst the divergence between price and on-chain activity is historically abnormal for a full-scale bull market, it is not an uncommon signature for the pre-bull, and pre-supply-squeeze dynamic. These periods often accompany the end of bear market accumulation where the investors who remain, are the strong hands, those with the highest conviction.

Supply dynamics seem to suggest an extremely robust underlying demand is present, and this should continue to be quite constructive for prices if the trend continues. Aggressive spending of older coins would be a key invalidation signal to watch out for.

Where to from here?

BTC and ETH price action the past week has been very impressive, though there are a number of factors that could lead crypto market to experience more volatility in the short term, such as possible regulations coming from the US, El Salvador’s historic BTC law going into effect and the possibility that Bitcoin’s hashrate could return to its all-time highs with Chinese miners speeding up their migration to alternate locales and US miners expanding their capacity.

Another major market mover will happen next Friday, when US Non-Farm Payroll (NFP) will be released and a disappointing figure may delay the FED decision to taper its asset purchase program and help boost risk appetite for assets like Bitcoin and all other cryptocurrencies.

In more global news, Cuba will be the next country to authorise and regulate cryptocurrencies like Bitcoin, where a resolution published in the Official Gazette said the country's Central Bank will set rules for such currencies and determine how to license providers of related services within Cuba. The Cuban resolution, which will come into force on September 15, regulates "the use of certain virtual assets in commercial transactions, as well as the licensing of providers" of these services in "operations related to financial, exchange and collection or payment activities" in or from Cuban territory.

The popularity of cryptocurrencies has grown among the technologically savvy in Cuba as it has become harder to use dollars, in part because of toughened embargo rules imposed under former President Donald Trump.

Going forward, a possible upcoming global scenario may see a risk-off sentiment in global equities and a rising dollar threatening crypto assets. Although there is a definitive chance to see this trend coming in the next 12 months, we already experienced something similar in this  latest cycle, yet major cryptocurrencies managed to push higher, outperforming the broader markets, which indicates strength.

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