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Crypto News Updates

The Importance of Accurate On-Chain Data

Errors in the reporting of bitcoin’s on-chain data can drastically affect the volatility and price of the market.

Bitcoin market manipulation still exists:

The importance of on-chain analytics and blockchain data providers is rising in importance right alongside bitcoin’s price and overall adoption. However, with this increase of importance comes an increase of responsibility. Tens of thousands of traders now use popular on-chain data providers such as Glassnode, CryptoQuant and Coinmetrics. These traders are making instant reactions/decisions based on this data, trying to gain an edge over others. This incentive structure to be the first to act on the data creates a dangerous precedent for the influence of bad data on the market. These actions based on bad data can have serious outcomes for bitcoin’s price. Let’s take a look at a recent example from just two weeks ago.

On March 14, 2021, an alert was sent out to over 28,000 traders subscribed to CryptoQuant’s telegram alert service saying $1 billion of bitcoin was transferred onto Gemini’s exchange, presumably to be sold. Within a minute, this immediately triggered a sell-off from traders, ultimately leading to a cascade of long liquidations totaling 14,396 BTC, or roughly $850,000,000. This was ultimately the catalyst for a massive drop in price and the several day consolidation that followed.

Image via Glassnode

It turned out that the transfer was actually Blockfi transferring bitcoin into Gemini’s custody solution service, making the transaction actually bullish. This is a classic example of how misinformation can be the catalyst for a market dump. When funding levels go up and traders become increasingly bullish, more leverage naturally moves into the market.

You can think of this like a game of Jenga where you’re stacking pieces higher without a strong foundation. As the Jenga tower is built higher, it takes increasingly less of a push to collapse the entire thing. This is the same way leverage works in the bitcoin market. The more bullish speculative traders become, the more leverage is in the market, ultimately making it more fragile. A catalyst such as the bad data CryptoQuant put out is all that’s needed to initiate a cascade of liquidations. As one trader hits their stop loss, they have to sell (or liquidate) which pushes the price even further down, causing the next trader to hit their stop loss. This is what I am referring to as a “cascade of liquidations.”

I strongly encourage data providers to be warier of the information they are putting out, as, at the end of the day, they are manually labeling these wallet addresses. One mistake can cause the loss of massive sums of money. With this being said, I encourage traders to look at multiple data providers to get the most accurate picture of what’s going on in the market. Hopefully, as we move closer to hyperbitcoinization, new data providers will come about. This is ultimately bullish for the ecosystem and a net positive for traders, as information confirmed across 10 data providers is much more likely to be accurate than reported by just one. I also encourage the data providers that do exist currently to be more cautious and hesitant to put out information publicly without being absolutely sure that the data is accurate. Although a great deal of respect is due to these providers and the value that they are bringing to the space, we must keep them in check to get the most accurate information possible. After all, the mantra of Bitcoin is don’t trust; verify, and billions are on the line here.

This is a guest post by William Clemente III. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

How Will The $6 Billion Of Bitcoin Options Expiring Tomorrow Affect Price?

A new record of bitcoin options expiring this week will doubtlessly have an effect on the BTC price in the near and short term.

After another week of bitcoin price volatility, including a new all-time high, a new record of options expiring on March 26 could play a key role in price action and the continuation of this volatility moving into the coming days.

Options are a contract for the right to purchase or sell an asset at a specific price. According to data analytics company Bybt, there are over 100,000 BTC — the equivalent of $5,574,000,000 (given the bitcoin price of $55,740 at the time of this writing) — of options set to expire this Friday, March 26, across numerous major exchanges. This will make for an interesting trading session leading into the weekend.

This level of options expiring will set a new record, breaking the $4 billion mark set in late January of this year. The bitcoin price on January 31 closed at just over $33,000, meaning that bitcoin has appreciated almost 100 percent since the previous record of options expired.

Options-open interest for bitcoin has soared this year, more than doubling since the end of last year, up from about $5 billion to now nearing $14 billion. In options, there are calls (bets that price will rise) and there are puts (bets that price will fall). In aggregate, the market is leaning bullish, with a current call-to-put ratio at 1.11. Anything above one is bullish, meaning at a ratio of 1.18, the market is leaning 11 percent in favor of more upside to come.

Put options seem to be targeting the $40,000 range and the $47,500 range, while call options expiring on Friday are eyeing the $60,000 range.

 If the past is any indication of what is to come, this should entail some short-term volatility, but ultimately more upside in the coming weeks following expiry.

This is a guest post by William Clemente III. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

Will Oracle Buy Bitcoin?

Bitcoiners have speculated that computer technology corporation Oracle will announce a major bitcoin allocation. If it doesn’t, it should.

Following Tesla’s $1.5 billion purchase of bitcoin, Bitcoiners are patiently waiting for the next big-name institution to allocate their treasury to BTC.

One of the most likely candidates is the computer software company, Oracle (Ticker: ORCL). According to its latest 10-Q report, Oracle currently sits on a massive $43.06 billion in cash and short-term investments, with $37.24 billion in cash only. It faces the same issue that every other corporation sitting on a large pile of cash does: As Michael Saylor would say, Oracle’s treasury is a melting ice cube, eroding away from the incredible rate of monetary supply expansion that has occurred over the last 12 months.

Looking at M2 money stock, there has been roughly $4 trillion added to supply since early 2020:

However, every company faces this issue, so why have many been speculating that Oracle will be the next to take an allocation?

Larry Elison, the executive chairman and CTO of Oracle, is known to be extremely competitive. In addition, he is a member of Tesla’s board. This means that he either was in support of the decision for Tesla to purchase $1.5 billion of BTC, or at least was in the room to hear the arguments made to convince the majority of the board to go through with the decision. Given that Oracle creates computer software company products, its board and executive team are likely to be technologically savvy; therefore increasing the likelihood that they would understand why Bitcoin is so valuable as an inflation hedge asset.

Oracle reported its earnings recently and it did not disclose that it had made a BTC treasury allocation. But if it were to do so soon, this would have an immense effect on the price, and due to game theory, the speed at which corporations move to take their own respective positions in bitcoin would also be affected as well.

It is interesting to note that the price has been increasing steadily over the last 24 hours. This could be completely coincidental, but there’s a possibility that market participants are speculating, or have insider knowledge of, a major announcement. In the days prior to Tesla’s announcement of its $1.5 billion purchase, there was a steady increase in price, possibly from insider knowledge of the ensuing announcement.

Regardless, on February 8, when it did make the announcement, biitcoin had a $7,500 daily candle, a roughly 20 percent increase. A similar increase in percentage terms would push Bitcoin’s price up to roughly $68,000.

Source

 Of course, this is all speculation, but something to keep in mind. Moving forward, it may seem attractive for other Fortune 500 companies to take a large position, announce it and instantly see price appreciation from the announcement.

This is a guest post by William Clemente III. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

When You Run The Numbers, Bitcoin Will Compress Quadrillions Of Dollars In Monetary Energy

When you run the numbers, it’s clear that quadrillions of dollars will be compressed into 21 million bitcoin. What comes next, nobody knows.

The Bitcoin black hole has absorbed $1 trillion of monetary energy in only 12 years. As the legacy financial system nears the event horizon, BTC’s gravitational pull grows stronger. Quadrillions of dollars of monetary energy will soon be compressed into 21 million bitcoin — the singularity. What comes out on the other side of the wormhole, nobody knows.

Many Bitcoiners believe this will take place, but have you actually run the numbers? It is impossible to know exactly how this will unfold, but by running some of the numbers we can get a better understanding of how dramatic this event will be. The math in this article is truly mind boggling.

To begin, it is important to understand that over 88 percent of all bitcoin that will ever exist have already been put out into supply. Through subsidy halvings, the flow of new coins being introduced into circulation via mining is cut in half every four years. The most recent supply halving was in May 2020, and will occur again sometime in 2024. With that being said, those roughly 18.6 million coins (that have already been created) have absorbed $1 trillion of monetary energy. Many of these coins have either been lost or moved into cold storage, never to resurface. As demand for bitcoin exponentially increases, the entire legacy financial system will need to be condensed into the remainder of coins that are available to be bought.

According to Glassnode, there are roughly 2.4 million coins currently up for sale on exchanges.

The entire global financial system will need to be condensed into those coins, in addition to the final 2.4 million coins to be created over time between now and the year 2140.

Source

There is roughly $2.1 quadrillion of monetary energy in the world, a number that is drastically increasing. If hyperbitcoinization were to occur right now, this $2.1 quadrillion must be compressed into the 2.4 million bitcoin left on exchanges. Quadrillions are massive numbers that no one can reasonably wrap their head around, so let’s break this down to some smaller examples:

Disclosure: These numbers change as price rises, but the price at the time of this writing, used for these calculations, was $57,000.

The S&P 500 is currently capitalized at $31.6 trillion or, in bitcoin terms, 554,385,964 BTC!

The entire fixed-income market is currently capitalized at roughly $129 trillion or, in bitcoin terms, 2,263,157,000 BTC!

The entire global real estate market is estimated to be worth $380 trillion or, in bitcoin terms, 6.6 billion BTC.

In total, between just the S&P 500, fixed-income and real estate markets, they are all capitalized at a whopping 9.354 billion BTC. As mentioned, there are only 2.4 million bitcoin left to be bought on exchanges.

Phrased another way, 9.354 billion-bitcoin-worth of monetary energy must be compressed into the mere 2.4 million bitcoin up for sale.

If Apple was to step in right now and put merely 5 percent of its cash ($9.55 billion) into bitcoin, it would buy up over 14 percent of supply on exchanges at current prices. In other words, it would gobble up Coinbase’s current order books from now to $100,000 bitcoin prices, 18 times over!

If Microsoft was to step in and put merely 5 percent of its cash ($7 billion) on hand into bitcoin, it would buy up 122,000 bitcoin — far more than MicroStrategy’s holdings, which consist of its entire balance sheet and convertible debt issuances. Once the big boys step in, it is a whole other ball game.

This black hole effect will also be accelerated by the increase of “risk-free” yields that can be generated by arbitraging the difference between spot/future bitcoin prices (also known as cash/carry). These spreads will only widen as bitcoin’s price and volatility increase. For a more detailed explanation on this concept, please reference my previous article, titled “Contango and Overcollateralization.”

As a rule of thumb, equity returns equal price-to-earning ratios (PEs) divided by one. If these free/open market bitcoin yields (that are a byproduct of hyperbitcoinization) blow out to 20 percent, that would mean equity PEs would need to drop from more than 34 to substantially below five to account for risk premium. This would equate to a 75 percent to 80 percent stock market correction.

The process of hyperbitcoinization will be a mind-melting event. Of course, no one can be fully mentally prepared for. To illustrate the scarcity of one bitcoin, dividing all of the global land by 21 million would mean that one bitcoin would be equivalent to 6,000 acres of land. The spending power that just one bitcoin will hold is incredible and cannot be understated.

This is a guest post by William Clemente III. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

On-Chain Update: Bullish Indicators Despite Price Dips

Despite the recent bitcoin sell off, there are several very bullish on-chain indicators showing HODLers are accumulating through this dip.

At the time of this writing, bitcoin’s price is in the midst of a consolidation that has lasted almost two weeks, currently sitting at $47,200.

One of the most important data points that can be used to generally call bottoms of corrections is the spent output profit ratio (SOPR) metric. This measures profit-taking, with 1.00 essentially marking the break-even point. In bitcoin bull markets, SOPR rarely dips below 1.00 and if it does, this can indicate a very attractive opportunity for buyers. Most recently, SOPR bottomed out above 1.00. This indicates that recent buyers aren’t panic selling and are viewing this consolidation as just another higher low in the parabolic price run that bitcoin has been on; a very bullish indication.

This same concept can be illustrated by looking at the number of accumulation addresses on-chain. Despite the recent price decrease, there has been a massive run-up in new accumulation addresses.

Another bullish indication of accumulation: There has been a massive increase in illiquid supply. This indicates HODLers have been adding to their positions despite the recent sell-off.

Similarly, this can be illustrated by looking at liquid supply as well. Looking at the chart below, you can clearly see a massive decline in liquid supply:

Other Interesting Data Points

One of the most intriguing on-chain metrics that I have an eye on measures the net position of Bitcoin miners. For the first time in months, we have begun to see miners net-long bitcoin, indicating that they are no longer selling, but rather accumulating. Even the Marathon CEO stated in a recent tweet: “Marathon has held Bitcoin we mine and will continue to do so, barring any unforeseen consequences. We also purchased $150m of Bitcoin on 1/25/2021 that is now worth $277m.” On-chain data suggests that it is far from the only mining operation that is thinking this way.

A final interesting chart to look at is from the Grayscale Bitcoin Trust Premium. For the first time throughout this entire bull run, the premium has dipped negative, now -11.92 percent, compared to spot bitcoin. Why has the premium turned negative? It’s impossible to say for sure, but it may have something to do with the availability or exchange-traded funds (ETFs) such as Canada’s Purpose Bitcoin ETF. This ETF now holds over 10,000 BTC.

In addition, this could possibly suggest institutional buyers/high-net-worth individuals are understanding the importance of taking possession of their own private keys.

This is a guest post by William Clemente III. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

Contango And Over Collateralization

Over the last few weeks, the concept of contango has been making the rounds on Bitcoin Twitter. But what is it and why is it important?

Over the last couple of weeks, the concept of “contango” — the situation where a futures price of a commodity is higher than the spot price, made popular among Bitcoiners by Preston Pysh and Plan B — has been discussed (and meme’d) throughout the Bitcoin community, particularly on Twitter. But what actually is contango? Why is it important? And how does it affect the price of bitcoin?

The goal of this piece is to provide you with the answers to these questions, in layman’s terms, in addition to explaining how contango accelerates the supply suffocation that is already naturally taking place due to Bitcoin’s programmatic, four-year supply halving.

(In the chart below, note the sharper-than-normal slope downward in the number of bitcoin of exchanges. In addition to better education/institutional custody of coins, contango is likely playing a part in this.)

What Is Causing Bitcoin Contango?

Before getting into what contango is, I would like to illustrate the macro backdrop of why this phenomenon is able to take place. It is first important to understand that asset prices are inversely correlated to risk-free yields, higher yields equal lower equity valuations (and vice versa). As risk-free, fixed-income instruments (U.S. Treasury bonds) sell-off, yields rise; as they are bought, yields are driven down. In a free and open market, this effect reaches equilibrium as yields rise/lower in correspondence to what the free market agrees upon.

However, this is not the case any longer with U.S. Treasury bonds. Due to decades of poor monetary policy decision making, particularly since 2008, the entire financial system is extremely fragile. The U.S. Federal Reserve is now manipulating fixed-income yields directly by buying its own treasury bonds. By buying treasuries, thus pinning the yields used in financial valuations down, this creates manipulated growth in legacy asset markets, such as the stock market. Following the decoupling of the U.S. dollar from gold in 1971, the Fed began to use the tool of manipulating yields to create the illusion of growth.

(This can be illustrated in the chart below, showing the 10-Year treasury bond in particular.)

If the Federal Reserve were to stop buying treasuries and pinning their yields down, the free market would blow them out, thus causing the collapse of asset prices. Therefore, the Fed has no other choice but to continue buying treasuries to keep the system afloat. Similar to a spring, at this point, the whole system has been coiled so tightly that the unpinning of risk-free yields would cause havoc in markets.

The New Bitcoin “Risk-Free” Yield

In the bitcoin market, futures are trading at a substantial premium to spot market price. Why these futures are trading at a premium is currently unknown, as there is no storage cost; which is the reason commodity futures traditionally trade at a premium. There are two likely explanations for the premium: the ease of access to leverage through futures markets, or that certain entities are unable to get exposure to bitcoin price appreciation via spots, so they have to buy at a premium through futures markets. I suspect that the premium is more likely caused by the former. Although the exact reason behind why these spreads exist isn’t fully understood, they do exist and are there to be captured.

(The chart below illustrates the dramatic increase in futures open interest.)

To arbitrage and capture the difference between spot and futures prices, a financial entity can simultaneously go long/short, giving them a yield that is essentially risk- ree. For example, an August CME futures contract is priced at $54,105, while the current spot price on Coinbase is $50,905. By simultaneously buying spot for $50,905 and going short via futures, a financial entity can pocket the $3,205, or 6 percent return, over five months, given they hold these positions until the August expiry. On an annualized basis, this is a 14.4 percent yield, nearly risk-free; dramatically higher than the current one-year U.S. Treasury bond, which yields .08 percent. In addition, as the bitcoin price appreciates and becomes more volatile, there will be even fatter spreads to arbitrage through this method.

Over Collateralization

We have discussed the method by which one could arbitrage the spreads in bitcoin spots/futures, but now I’d like to illustrate how the increasing popularity of this trade will accelerate the supply suffocation already naturally occurring via Bitcoin’s programmatic, four-year halving cycle.

The accelerant is over-collateralization, which is unique to bitcoin lending/borrowing markets. For physically-settled futures contracts, an entity must borrow BTC from a lending platform such as BlockFi in order to sell bitcoin short and take on the long/short trade described in the paragraph above. Due to bitcoin’s volatility, these bitcoin lending platforms require that the borrower must post twice whatever they are borrowing in collateral to BlockFi, or in other words, the loan-to-value (LTV) ratio of a loan is 50 percent.

For example, if I were to borrow $50 to sell bitcoin short, I would need to post $100-worth of collateral to the lending platform. To reduce counterparty risk, BlockFi then takes that collateral posted and turns it into bitcoin to be held in escrow until the borrower pays back the loan. Given the 50 percent LTV we mentioned above, this means that there are two bitcoin being locked in escrow for every one bitcoin that would naturally be removed from supply.

As spreads increase and the arbitrage opportunity becomes more attractive, this effect will accelerate, causing increasing amounts of bitcoin to be locked up. It will be extremely interesting to see how this plays out, as there has never been a mature derivatives market and lending/borrowing market in previous bitcoin bull cycles. This effect could be the catalyst for bitcoin to reach escape velocity. Taking a look at futures volume/open interest in comparison to balance on exchanges, the two seem to have an inverse correlation, possibly illustrating growing interest in the opportunity to capture yield spreads and the over-collateralization of borrowed coins required for the trade.

(The charts below represent futures volume, futures open interest, and balance on exchanges.)

Asset Price Revaluations And The Endgame Of Contango

As touched on at the beginning of this article, asset prices are inversely correlated to risk-free yields. As of right now, the average price-to-earnings (PE) Ratio for the S&P 500 is just above 34. This may seem astronomical, but in comparison to current treasury yields, it makes sense. As a rule of thumb, equity returns should equal a PE ratio of one. The expected return on an equity with a PE ratio of 34 would be 2.94 percent, which is still far more attractive than ten-year treasuries that currently yield 1.47 percent.

However, if the market begins to recognize the growing yields that exist in the bitcoin market as the new risk-free rate used to determine valuations, there could be a dramatic repricing of assets. For example, if bitcoin yields were to blow out to 20 percent, PE ratios would need to be well below five in order for risk-on equities to offer a more attractive return than that 20 percent risk-free rate. If the average price-to-earnings ratios were to drop from 34 to five, that would be an 85.29 percent stock market correction. In addition, there is also the $128 trillion yield-deprived, fixed-income market to consider as well.

These new bitcoin risk-free yields that aren’t possible in the current manipulated, fixed-income market could be the catalyst to release the pressure built up in the monetary “spring” that has been coiling up for decades, with nowhere for that monetary energy to flow until now, into these free and open bitcoin markets.

To conclude, with these new “risk-free” bitcoin yields attracting increasingly more of the $128 trillion of monetary energy from fixed income, financial instruments denominated in an eroding currency (USD), that the rest of the business world stops using to conduct economic calculation, would be dramatically impaired. Eventually, post-hyperbitcoinization, it would be attractive to rotate bitcoin back into equities and other assets, once their valuations are more attractive in comparison to the returns that the arbitrage yields offer.

This is a guest post by William Clemente III. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Source: Bitcoin magazine