Willy Woo, on-chain Bitcoin analyst and writer of the Bitcoin Forecast, a market intelligence newsletter, and Rafael Schultze-Kraft, co-founder and CTO of Glassnode, discuss Bitcoin and what the on-chain metrics tell us about the price. Here to discuss is. Episode highlights:

  • what factors pushed the price of BTC down in May
  • why Elon’s Twitter account hold so much sway over the market
  • why Willy believes Bitcoin is good for renewable energy
  • who sold during the last month
  • which type of BTC investors stopped purchasing in Feb/March
  • what trends Willy and Rafael have noticed from coins moving to/from exchanges
  • their thoughts on exchange-traded products, like GBTC and Canadian ETFs
  • how derivatives trading has played a role in Bitcoin’s price
  • why stablecoins were trading above their peg in the months leading up to the Coinbase direct listing
  • how Willy values Bitcoin (specifically using NVT ratio)
  • whether the trend of corporate treasuries investing in Bitcoin will continue
  • how they expect Ethereum’s adoption of a deflationary monetary policy to impact the price of Bitcoin
  • when the market could turn bullish once again and predictions for the rest of the year

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Episode Links

Willy Woo

Rafael Schultze-Kraft

Glassnode

Willy on BTC trends:

Rafael on BTC trends:

Glassnode on BTC trends:

Episode Transcript

Laura Shin:

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time.

This is the June 8th, 2021 episode of Unchained. Next week is the five-year anniversary of Unchained. If you want to send in a question or a comment for next week’s show, which will be a mini AMA, the deadline to get your submissions in is Thursday, June 10th, at 5:00 PM ET or 2:00 PM PT. Send it via email to hello@unchainedpodcast.com and write “Anniversary” in the subject line. Also, let me know how to pronounce your name. Thanks for listening to Unchained all these years. I never imagined it would change my life as it has. I’m so grateful to all of you.

EY:

Today’s episode is sponsored by EY Blockchain. Ernst and Young is committed to supporting the integration of the world’s business ecosystems on the public Ethereum blockchain.

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Laura Shin:

Today’s topic is Bitcoin and what the on-chain metrics tell us about the price. Here to discuss are Willy Woo, an on-chain Bitcoin analyst and writer of the Bitcoin Forecast, a market intelligence newsletter, and Rafael Schultze-Kraft, co-founder and CTO of Glassnode. Welcome, Willy and Rafael.

Willy Woo:

Hey Laura, it’s great to be back.

Rafael Schultze-Kraft:

Hi, Laura. Thanks for having me. Wow, five years of the podcast, I didn’t know! Congrats.

Laura Shin:

Thank you. The market has been in the doldrums recently with Bitcoin, as of the time of this recording, which is Thursday morning Eastern, the day before the official start of the BTC Miami Conference, trading in the high $30,000, as opposed to the $64,000 that it was at in April. Bitcoin recently saw a big selloff on May 19th, which featured the largest daily candle in Bitcoin history, which showed an intraday price range of $11,500. It was also the day in which an all-time high of $4.53 billion in losses was hit. And that’s the all-time high by quite a hefty margin. So Rafael and Willy, what do you two think is the reason for this drop? Willy, how about you go first?

Willy Woo:

Obviously a lot of people have seen from the news that Elon Musk tweeted out that they were no longer taking payments to pay for Tesla sales. They cited reasons that Bitcoin was very, very fossil fuel heavy in its network. In that view, finally, there was someone who was relatively amongst technology actually validating one of these FUD points that the mainstream media have been throwing at Bitcoin, which I don’t think is actually valid. Nevertheless, it sent a shockwave of fear through the market. The price started plummeting within seconds to minutes of that tweet. The market set up at that point was already quite soft.

It was making a light recovery. It was tentative and it was starting to move upwards. And that’s also from a fundamental lens when you look at what was happening on the investment activity on the blockchain. And then when that tweet came out, it instigated severe amounts of selling, not only on derivative markets and spot markets. We actually saw a significant sell-off as coins started to flow into exchanges. So real coins got moved and they were moving from wallets that were quite young. The coins held between one to six months of age. So relatively newcomers to Bitcoin is what I can tell. And I think a lot of them saw a lot of really nice rises in Bitcoin from the $20,000 up to the $60,000 range. They probably took the opportunity to take a profit.

And so we saw this huge, huge I just call it a tidal wave of coins moving into the exchanges. Ultimately the whole derivatives market started to unwind meaning anyone who was long got liquidated. So they added further selling pressure. We had this cascade of complete unwinding and sell-off. And I think it went down to $30K or $29,000 when the final dust had cleared and it bounced up and then it was recovering. Then China announced that they were banning Bitcoin miners and reiterated their stance on no trading for their nationals. That’s a big thing cause miners are heavily located in China. That sent another wave of fear and price sold down. So we’re now in this situation where the Bitcoin is heavily discounted below fundamentals and the market is attempting a recovery. It’s going sideways now.

Rafael Schultze-Kraft:

I second most of what Willy said. There is, from my perspective, two major driving forces here. I don’t remember when the last time I saw the market react so much to news, to actual FOD, or tweets. I think I saw this much more happening in 2017. With Elon Musk, with the news from China, mines shutting down, China banning mining, and so on and so forth. On the one hand that. What we saw on-chain is that most of those reactions were like more new market entrants — very short-term holders — that sold at losses or actually panic sold eventually.

The second thing I think is that the market was just highly over-leveraged. I think that what Willy mentioned, this cascade of, margin calls, the liquidations, investors aiming to buy the dip when in fact, the sell-off wasn’t over yet. And so it sort of like cascaded down and we saw that huge drop of over 50% down to $29K. So that combination I think is what really made all this price action happen.

Laura Shin:

I totally get that the market is not rational. And yet for the Tesla news, I mean, it’s not like a huge percentage of Bitcoin transactions were being used to buy Teslas. Tesla kept all the Bitcoin on its balance sheet, other than what it had sold previously to test liquidity in the market, which I think was just them trying to do fancy accounting tricks. So in that sense, the reaction to sell based on the news doesn’t make sense. And is it just that these are newbies and what they’re doing doesn’t make sense? Is that why that tweet had such an effect?

Willy Woo:

Yeah, I think it’s very much that case. We’ve got some new entrants that have only been holding for less than six months. And they have enjoyed a lot of price gains. Then someone comes along and validates. The Iron Man guy that has space rockets and Tesla cars says, no, no, this is, this is solid. It’s a going to be a big contributor to world carbon emissions. So it’s just that the guy saying it is very well respected. And for sure like that will, I think, well, it obviously did, change the views of people that came in recently saying, oh, maybe this is something that’s not going to work in the long run. So they emptied their bags and sold off.

Rafael Schultze-Kraft:

Yeah. I think the simple reach of if a personality like Elon Musk just is something that we hadn’t seen before. I can very well imagine that it wasn’t just the inability of many investors to see the nuances of those messages such as a) we’re not accepting these anymore because of X and Y reasons, but actually, we haven’t sold and we don’t plan to sell any of those. And other investors that I bet were betting probably on any irrational market reacting to this and saw the opportunity and then started selling that.

Laura Shin:

So here’s one area where I actually disagree with you, Willy, where you said you don’t think the environmental issue is such a problem for Bitcoin or not even just Bitcoin, but proof of work chains in general. Like, I mean, granted, I used to cover the environment as a reporter, so maybe I’m kind of tuned into that segment of the world a little bit more than the average person. And perhaps, in that regard, give them more weight than they have. But I feel like their concern is only growing because, obviously, the more time we let lapse without doing anything about it, the worse the problem will be and the harder it will be to fix. So in that regard, I actually feel like that could be quite a concern for Bitcoin going forward, but you seem to really not think it is merited.

Willy Woo:

My training is as a mechanical engineer, we study renewables. And the thing is the cost economics of renewables is still in its rollout stage. It’s very marginal. What Bitcoin does, is it makes something that’s marginal, cost-competitive. And so in some regards, you might see an old coal-powered station that’s going to be shut down, but along comes a Bitcoin miner that says we can mop up the energy and make it hang on for longer. There are so many places in the world where renewable energies is deploying. A mining set up can make that marginal deployment come about much sooner as the cost of renewable start to drop. And we’re onto this arc where renewables are becoming cheaper and cheaper. So eventually this whole infrastructure of energy that the planet’s on will eventually move to renewables. Like the age of fossil fuels is coming to an end. And so what I see is that you’ve got this tool here, that’s making things that marginal, mainly renewables, and it’s going to accelerate that. So that’s the argument. People see these smokestacks and go, oh, that’s bad, but they don’t see this increase in acceleration of renewables that’s facilitated by these new economics. That’s not to mention that the efficiency of the Bitcoin network gets better as it gets bigger per capita.

Laura Shin:

Now that China is cracking down on mining, we could see the switch to renewables for mining Bitcoin accelerate. And so that obviously would also be good. I think what you’re referencing when you talk about renewable energy generation and combining it with Bitcoin mining, are you referring to the Ark-Square paper that they put out talking about how the economics of that could make renewables stronger?

Willy Woo:

I haven’t actually read their work. I think they talk about it as maybe like in the home or something, but I’m not sure. This is just from first principles thinking as an engineer and seeing the light. I used to be a renewables geek too, so it did a lot of the calculations.

Laura Shin:

One other thing that I wanted to ask you two about who was selling at the time. Willy, I think it was tweeted or you wrote about it in the newsletter, that you also saw some institutional selling. Can you talk about that a little bit more?

Willy Woo:

I wouldn’t say institutional, I’d say technically there was whale selling — holders over a thousand Bitcoins. So that’s either very, very large holders that are personal or private or institutional. Their holdings dropped. Their holdings were dropping slightly before the crash. Normally, what we have seen in past months, is whenever the institutions or whales dropped their holdings, the next tier below, which is like 100 – 1000 Bitcoins in holdings, they would gain at almost a mirror image and they were soaking up those coins. In this case, the next tier below, what we call the dolphins and sharks, they were pretty steady.

And so all of those coins that were being unloaded by the whales just had to be absorbed by the smaller buyers. They couldn’t maintain the price at that point. The interesting thing was that as this thing started to cave and the price dropped and Crypto Twitter and the world was saying Bitcoin’s going into a bear market. We don’t see 50% drops like this without like a bear market. That was completely different. That view was completely different on chain. We saw a whole lot of new entrants come in for the very first time to buy their Bitcoins. Holders of one Bitcoin or less, so $50K or $30K investment, those numbers started skyrocketing. And so smaller players came in to buy that dip. The actual user count on the network increased as this thing was selling down. It’s just that the buying power by a sea of smaller retail was not sufficient to counteract the selloff coming from whales.

Laura Shin:

And Rafael, Glassnode recently wrote a blog post also talking about a potential slowing in institutional demand. How are you determining that?

Rafael Schultze-Kraft:

What we see as one is maybe 1) the institutional products, right. The GBTC, the ETFs, have been trading at a discount for quite a bit now. They seem to recover slowly. We’ll see how that plays out within the next couple of weeks and months. But what we saw is that going into the end of 2020 and early 2021, we saw this huge unprecedented spike of number of whales in the network on-chain. That started cooling off in February, in March. That kind of shows that distribution of potential institutional, or whale buying, into smaller hands. Ultimately, this led to what Willy says. Although we see this huge entrance of new network participants, of new users coming into the network, they were simply not able to sustain the price just because of the buying power as compared to the institutional, or whale, rise that we saw at the end of last year and the beginning of this year.

Laura Shin:

You guys parse out the chain metrics in so many different ways. I know both of you have also seen some trends when it comes to the movement to and from exchanges. What are you seeing there and what does it say about where the market is headed?

Rafael Schultze-Kraft:

The trend that we started seeing since essentially a bit over a year, since Black Thursday, was this general depletion of supply on exchanges. That, of course, leads to some sort of liquidity squeeze. There’s not enough essentially to be bought up. And so this reduces, substantially, the selling pressure. We’ve seen some increased supply on exchanges that are now cooling off again. And so these coin movements really tell you a story about investor behavior on-chain and the liquidity and potential sell pressure that you see there.

It’s a bit more nuanced than people usually put it because it really depends on the exchange. We’ve seen recently, there’s sort of like the geographical difference between increasing supply on Asian exchanges, decreasing supply on US exchanges. Right. So there might be some geographical things in play as well. But generally, you can see this recent cool off that makes it seem like investors are essentially done with the sell-off.

Laura Shin:

In order to kind of paint a broader picture of the three exchanges that you were talking about that are picking up coins. They are Binance, Bitfinex, and Bittrex. Is Bittrex… I thought that was an American exchange?

Willy Woo:

I’m pretty sure it’s American, but it’s not a very large by volume exchange. The big 800 pound gorilla is Binance. That’s interesting cause I’m seeing even in the chart analysis and looking at them the way in which the price action is analyzed: the selling comes from Binance and the buying comes from Coinbase. That’s a net shift in coins. And I don’t know if it’s some intricate arbitrage thing that’s happening or whether or not that is actually the Chinese selling their coins. And like now that we’re seeing that mining ban. I don’t know what’s causing that, but it definitely looks like the west is buying and the east is divesting.

Laura Shin:

Oh, interesting. I don’t remember what the exact wording was in the blog post where it talked about that, but I feel like it hinted at people essentially trying to move their coins off-shore maybe to avoid certain regulations or something. Do you feel like it’s that it is simply that the Asian market is selling and the Western market is buying?

Willy Woo:

I’m just guessing at theories. I have no real information. I’d probably have to figure out what is really happening in the street by talking to people rather than just looking at the sheer numbers on charts.

Back to this point of the supply on these exchanges. The interesting thing for me is that we’ve been in an era with such strong institutional, high net worth buying, that on-chain has become very dominant in the first half of this year because those guys move their coins off the exchanges and put it into cold storage. But now we’re in this phase where retail is really ramping up and they’re coming into by the dip. And typically the second half of these, one year bull markets that go crazy vertical, the tail end of it is very, very dominated by retail.

I think the picture might be a little bit harder to read, mainly because there might be a lot of buying from retail — they don’t withdraw from exchanges as much as an institution would. They are quite happy to leave their coins on the Coinbase wallet. And so you’ll see, potentially, the supply on these exchanges increase and increase because they’re in long-term holdings by retail. And it looks like coins are being sold in, but in actual fact, they are in long-term hold by retail, who are just using the exchange wallets. So I think the second part of this year will be quite interesting. And I think we need to know that effect is happening.

Rafael Schultze-Kraft:

Maybe to add to this. One of the major depletions that we’ve seen is actually Coinbase. Which we all know, they have custody service also for institutionals. And actually, we’re currently doing some research on identifying some of these larger clusters on-chain that seem to be very, very closely related to the the Coinbase wallets that we see, whether it’s Coinbase Custody or something else. It’s hard to say, but at least it’s something that interacts very, very closely with them. And so as Willy says, much of that could be related to institutional buying versus retail, on the other hand, potentially more on Binance, who come in and leave their coins on exchanges in order to keep trading.

Laura Shin:

So I do want to ask another question about institutional. Before we get to that, just to continue on this Binance thread, one of the Glassnode posts talked about how it could also be that people are moving coins to exchanges, not simply to sell, but also because they either want to rotate into ETH or they want to trade on chains like Binance Smart Chain. Do you think that that’s also influenced the selloff in the Bitcoin price and would that also account for this movement where it’s seeing of coins going on to Binance?

Rafael Schultze-Kraft:

I think so. I don’t know what the extent of that — how much influence it really has —  but we’ve seen those rotations. We often see this. This is something typical for bull markets as well, where people start moving into different altcoins, into other assets. Most recently, potentially also into Binance Smart Chain, which didn’t exist in 2017. And so I think those are things that come into play as well. Something that we’re observing closely in terms of, how does this look like now that we’ve seen this immense dip? Is it coming back into Bitcoin in order to rebalance potential portfolios again? I’m interested in what kind of effect that this has on the Bitcoin price itself as well.

Laura Shin:

And so to just wrap up this institutional conversation, I did also want to ask about GBTC. The story around that has shifted quite a bit in the last several months from what it really had been for years. Can you tell us what changes we’ve seen there and what that says about this current market?

Rafael Schultze-Kraft:

I saw this too. I was actually a bit surprised, to be honest, to see this huge flip in the last couple of months because that narrative was a big one. This was essentially the front page the institutions are here. The holdings of GBTC were going up for months. People were comparing it, saying they were scooping up more coins than actual coins were being mined. This was naturally seen as something very, very bullish. Then that changed. That change actually coincided with the introduction of the Canadian Purpose ETF.

So people were speculating whether investors might be reallocating and going into the ETF rather than GBTC. Just because of the structure of how these funds/the trust was being set up. The GBTC premium dropped and flipped actually into a discount. And, for me, this was actually going to be something that, people must be arbitraging this. So it’s just going to be a very short period of time and it will flip positive again very, very quickly. But this has now sustained for two months or so. I don’t even know for very, very long. I think much of that has to do with the structure of the trust itself.

And but I’m not too much too deep into that, so I cannot say whether this is true. It seems like it’s a one way road. You can sort of like put things into there, but it takes a lot of time to recover them. It seems like that discount has cooled off a bit. It’s still negative. But it’s going sideways. I’m super curious to see how that plays out specifically because the ETF itself is also trading at a discount currently. But maybe Willy has more, more insights on that as well.

Willy Woo:

I found it interesting that the arbitrage was not closed. We didn’t see buyers buying Bitcoin at what was over a 10% discount at one point. A 20% discount. You can either buy Bitcoins on Coinbase, or you can buy the ETF at 20% discount. I found it phenomenal. If no one could arbitrage it because of the structure of that fund, surely investors would see that opportunity and bring it back up and maybe reduce their buying on standard exchanges. But it never did. I don’t know, it was always a mystery to me. But I have seen in this dive, the discount flip or change directory, and now the premium is starting to become less negative. So that’s a positive sign.

That’s saying people are starting to buy this ETF. So there’s more demand coming from that side. But, I think, overall, that was a warning sign in hindsight. Kind of this hidden warning sign that there was market selling. The ETF holds, I think, was it like 3% of all Bitcoin supply at something like that? I’m not sure. And so like that was being sold down and it wasn’t reflected into the main market. The way that the ETF was structured is that it’s kind of like Hotel California, those Bitcoins go in and they cannot leave. So like the coins weren’t being emptied out of that trust to be sold onto the market to track Bitcoin. It just meant the premium dropped, that it was heavily discounted. It’s an interesting one, that one.

Rafael Schultze-Kraft

Willy, you seem to have very nice analogies to the music industry.

Laura Shin:

I was just to comment on the same thing. So in a moment, we’re going to talk about other areas of the market and what they say about the Bitcoin price and where it’s going. But, first, a quick word for the sponsors who make this show possible.

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Laura Shin:

Back to my conversation with Willie Woo and Rafael Schultze-Kraft. So we touched on this briefly, but we could probably talk about a little bit more, what have you seen in derivatives trading and how has that played a role in the Bitcoin price as of late?

Willy Woo:

Derivatives it really was an invention by BitMEX in 2017. And then it got to phenomenal volumes by 2018. And so when I look at the Bitcoin price, I go, oh, look at those sheer walls of fear as derivatives get unwound. And I look at the chart going back to 2018 and I see three 50% drops of sheer walls of terror and everyone screaming with blood on the streets. That is the impact of derivatives, as people get completely liquidated on these derivatives markets with their 100X leverage. I think Binance published that they do the largest volume. They published 60% do 20X or more leverage on these things. So the price volatility of Bitcoin has made market jumps upwards since derivative markets have been out in force.

A lot of people are trading these things. I don’t know, it’s a little bit like crack cocaine when you’re on a 100X leverage and it’s fun if you can make something. And now we have a generation of Bitcoin traders that are experiencing this. On the one hand, they’re learning how markets work. How you can push price around, how you can buy things, how you can liquidate other people — it’s like this full-on game. And then the other side, you get crazy kind of whips in the Bitcoin price which deter long-term investors, because the volatility, it does some pretty crazy things. It’s no different from what we just saw now with this almost 50% drop. COVID also. To put this in perspective, I think the last metric I had, I didn’t read how many people got liquidated over this last crash, but one of the unwinds from the low $60Ks, that was a derivatives unwind.

It happened when I think the miners tripped over the power cord in China and the hash rate dropped on the network. People sold off. The derivatives went into a cascade of liquidations and it was 1 million traders that got liquidated. There only about 150 million holders of Bitcoin in the world. And 1 million of them trading derivatives. That’s like a generation that is learning how to trade markets. I think this is a new thing. This is a new phenomenon. When we look back on the history books, this will be a generation learning how to trade.

Laura Shin:

Rafael, do you want to add anything or we can talk about stablecoins. There’s quite a lot to cover when it comes to stablecoins. I did see that one of the Glassnode posts also talked about how in the months leading up to the Coinbase direct listing, demand for stablecoins was so high that Tether, USDC, and DAI all traded above the peg for a month. So why is that? Can you explain?

Rafael Schultze-Kraft:

Yeah, I think people might have just been looking for liquidity to exit. The price of a stablecoin, even if it’s pegged to the dollar, is susceptible to market forces. If there’s huge demand for those, potentially for people because they’re wanting to exit and to move into those coins. We saw that the peg USDT, USDC, and DAI was for over a month, just slightly above the dollar peg.

Laura Shin:

Can you break this down for me? Because I don’t know if I fully understand. Obviously, the Coinbase direct listing, in the traditional stock market, that’s like a totally separate financial system. And then you’re saying people might want to exit their crypto’s? I don’t feel like I really understand the connection.

Rafael Schultze-Kraft:

That’s one of the interpretations of what we saw. It was rather constant over a period of a month just before the dip. Looking at those pegs and how they deviate from the actual underlying value is something that essentially by chance we saw. We’re currently looking a bit more into doing some more systematic analysis on how that really changes over time. And if that actually means anything at all or what it does. We just saw it across multiple stablecoins over that period.

Laura Shin:

What would the trade be? It’s that they may be themselves don’t own Coinbase stock? Or is it for the people that do? I didn’t get who it was. Was it that people who have Coinbase stock or the people who don’t?

Rafael Schultze-Kraft:

That’s speculative. I couldn’t say right. It’s something that is… I wouldn’t go as far as to bring in that interpretation. I’m leaning more towards, the sole, data driven observation of what that peg and what that price says. I wouldn’t want to go ahead of myself there too much. That’s one part of what we’ve seen with respect to stablecoins. The other thing is the supply has increased quite a bit. We’ve seen this actually accelerating during this drop as well.

What this means is essentially that we believe that there’s a lot of gun powder out there that that can be used essentially in these markets to buy up Bitcoin and essentially increase the price. So one of the metrics that we look at is stablecoin supply ratio that essentially compares the supply of stablecoins to Bitcoin. Actually, Willy had really had a very nice modification of that, adjusting for the downtrend over the last couple of months. And that actually shows that we’re historically at the low end of it, which could indicate that there is, comparing it historically, looking at this as an oscillator, where there is a lot of dry powder to start moving into Bitcoin again.

Laura Shin:

So people are essentially buying a lot of stablecoins, kind of waiting for a kind of a type of bottom in the market to deploy?

Willy Woo:

Yeah. Cause if you’re selling out of your Bitcoin, Ethereum, and whatever crypto you have, you’re going to sell to US dollars. You’ve got a choice: you can either sell to US dollars and withdraw it to your bank or the other choices is to sell it to a stablecoin and keep it in digital form. That has the advantage of you can just move it straight back into crypto very quickly and effectively.

So what we’ve seen is a lot of the value go out of crypto and into stablecoins, sitting there on the sidelines, just ready to float back in once the picture of price action starts to move bullish. It’s a good picture. Like if it was bearish, I would say people would want to exit their stablecoins and move it to stocks or something, like gold or something traditional where you wire the money out. We’re in these historic kind of all time highs of stablecoins when, once you, you, you take out the skew in the picture. It’s very positive for the longer term price that we’re kind of in regions where we’re overextended and overselling. That’s my interpretation of the data. We’ve got a lot of upside and the downside is quite limited at this stage.

Laura Shin:

Let’s talk about some of the metrics that show that. Willy, obviously you’re well known for that NVT ratio, why don’t you remind the listeners how you define that and tell us what it’s currently indicating?

Willy Woo:

Okay. Most people are familiar with price earnings ratio in stocks. Bitcoin doesn’t really have… it’s not a company, it doesn’t have earnings. What it does have is it’s a pure store of value network. So what it does have is volumes of Bitcoin moving between investors. You can measure the value moving between investors as how active the networker is as an investment network. And you can run a ratio to its network value, the market cap. That’s essentially NVT ratio. It’s the price of earnings for Bitcoin. It’s a fundamental equation. You can pull it down on first principles and you can show that price earnings of Bitcoin, which is NVT, multiplied by the volume — that oscillates your evaluation for Bitcoin.

Just like you might say this company has a 4X multiplier from its price of earnings, this category of company. And so you can go, okay, let’s see what earnings it does. The valuation is four times. So that’s essentially what you can do with NVT. NVT is that pure ratio, like a price earnings. You can multiply it by the volume and the long-standing volume, like the median, and you can map it back to the price domain. And so it gives us a very nice kind of trace of where the value should be based on the investment volume going through the network between individual investors. Currently that’s at $55,000. Even though we were not long ago in the low $30,000s. It’s in an historic band of undervaluation. And I notice PlanB’s pretty well-known stock to flow ratio and other fundamentals based on the scarcity dynamics of the network, that’s currently at $65,000. So those two are pretty much in the higher agreement of between $55,000 to $65,000. And also if you look at how far the prices currently deviated from that metric, it’s also in a band where it’s all time undervaluation when you look back on the history.

Laura Shin:

Something that confuses me a little is if we’re at this moment where Bitcoin is quite well undervalued historically, and yet at the same time, we’re at this moment where there’s this huge amount sitting in stablecoins, then why aren’t we starting to see kind of the beginnings of a more bullish market? Or maybe we are and I’m just not aware that that’s what you’re thinking.

Willy Woo:

Yeah. I actually think that we’re in a post-capitulation, re-accumulation of coins. So many whales dumped out and it’ll take a bit of time for those coins to be re-accumulated. I think once the price action starts to tip properly bullish, so maybe a little bit of sideways and the price action sets to look good, I think a lot of those stablecoins will come back in. All these metrics are telling me we’re very overextended in the sell down. Historically when we are below these fundamentals, the recovery is quite quick. The only times where the recovery is slow tends to be when the price was way above fundamentals, and it’s taken a long time for the price to come back down and recover. A lot of this is telling me the time to recovery is going to be faster than like maybe what we saw in 2019, when it took months after that $6,000 to $3,000 drop. And I think it will be a lot like the COVID crash in 2020. We dropped below fundamentals there, and we recovered in the matter of about eight weeks, I think.

Laura Shin:

Yeah, this actually reminds me of something I wanted to touch on at the very beginning. One thing that surprised me was that neither of you mentioned that the May 19th sell off was kind of like right around the time that taxes were due here in the US. I did wonder, cause I did see other people saying that could be a contributing factor, do you guys both think that that could have been as well?

Rafael Schultze-Kraft

I actually don’t know too much about tax behavior in the US. I’m not a resident there. People often point to that when Spring is here, that it does have an effect. Always when we see those dips around that period, on a yearly basis, essentially, it’s being pointed out as one potential factor for the corrections, for the dips and for those price drops. From my perspective, though, this year, Black Thursday last year, they definitely go beyond that. I think there are more obvious factors that led to those more extreme corrections then usually happen. But overall, it seems like there is some effect due to tax season in the US on the price. From my perspective, I wouldn’t overestimate too much. But it’s probably plays some role.

Laura Shin:

Yeah. I’m just realizing I asked to non-Americans, this question..

Willy Woo:

That is a thing. Walk away in May.

Laura Shin:

Yeah, no, but it’s normally in April. It was only pushed because of the pandemic one month. Cause it’s normally April 15 and this year it was May 17th. I can’t remember why, but it’s something to do with COVID.

Willy Woo:

I’m looking at the chart and it doesn’t seem to backtrace to that. A lot of times in April, it’s climbing quite rapidly in the Bitcoin price history. I’m not sure. Even now, I think we’re in the era where a lot of people are choosing to not sell their Bitcoins to pay down taxes because that encourages even more taxes. They might just collateralize it and get a BlockFi loan. More leverage in the system, but I noticed that people are doing that rather than to incur a tax event on capital gains with their bitcoins.

Laura Shin:

Yeah. Yeah. And I was going to say it could be a bunch of the DeFi yield farmers, but since there isn’t a huge overlap with the Bitcoin community, it may not be the case. All right. One other of your favorite metrics, Willy, is SOPR. I actually don’t know what that exactly stands for. I know how you define it, but can you give us the definition and explain what it is that says about the market now?

Willy Woo:

Sure. This is a metric called it SOPR (Spin Output Profit Ratio). Essentially, let’s say we’ll pick a day and I’ll get someone to count every coin that passes between investors. Let’s say the ideal case is investors, Glassnode actually does it for investors. And you go, all right, those coins have moved. Because the blockchain tells you when those coins arrived in that wallet, you know the price that the seller sold those coins for. Now you know today that this is the price they sold it for. So you can get a profit on there. That guy sold for maybe $50,000 of profit for those coins.

And that person sold at a loss because they bought at a higher price. And so you kind of do a ratio of the profit that is transacted during that day and you get this chart. Typically, what you see is this chart, in a bull market, the price runs up higher and higher and higher. So anyone who’s transacting coins is obviously moving coins that are now at vast profit. And so once the price starts to tip, like the people who are now selling the coins and some of them are selling at a loss because it’s now possible to sell at a loss because it’s coming down in price from the price they bought earlier when it was higher. And generally what you see is as it goes down more and more, people sell cause they’re taking the profit that they’ve got on the table while it’s still in hand.

This is this profit taking coming. SOPR goes down and down and down and down until it hits the 1.0 line, which is like on average, the coins that are moving between investors in the market are no longer carrying any profit. Typically, in a bull market, no one wants to sell a loss. So the selling stops and the price bounces up. SOPR is a nice chart that tells us when the profit taking ends. When it hits the 1.0, there’s a high chance the market will no longer sell at a loss if we’re in a bull market. And so, yeah, SOPR in a nutshell.

Laura Shin:

All right, so we’re running out of time. So I want to touch on a few things before we wrap up. One is obviously a huge trend in Bitcoin over the last like nine months has been corporate treasury buying Bitcoin. And after this winter’s Bitcoin for Corporations event that MicroStrategy held, I kind of expected we would start to see, after some time period, another steady drumbeat of corporate news about Bitcoin being added to treasuries. It’s actually kind of died down a bit. And I wondered if you’re seeing any evidence on chain or even just hearing from the industry, where that’s going. Is that a trend that has kind of died out? Or is it just something that takes awhile, because we’re talking about corporate treasuries here, or where do you think that is headed?

Rafael Schultze-Kraft:

So, from my perspective, it’s something that will continue. The thing is that, what you hear is obviously publicly traded companies and only those that started those processes very early on to get Bitcoin on their balance sheets. We have to remember that those are processes that take quite some time, right? It’s not, hey, let’s buy and then that’s it. And so now that the infrastructure is essentially there, that wasn’t simply there a couple of years ago, and for sure not during the last bull run, this is now possible for those. What we heard, so far, are those that really started just setting up their Bitcoin strategies very early on.

From what we saw on-chain, this might have cooled off a bit, at least when you look at large whale entities on chain. I mean, of course they’re not always mapped one-to-one. Many of those are not holding their coins and in self custody, but use services for that. But I think that we’ll hear much, much more of those in the upcoming months. I think so because I believe that you’re probably risking a lot if you don’t have a proper Bitcoin strategy nowadays. And also, because what we hear out there are the publicly traded companies.

At Glassnode, like you wouldn’t believe what conversations we’re having a times. There are hedge funds, there are family offices, there are big high net worth individuals, there are a lot of big private folks that are looking into this. And if those are, you can imagine how many others are. So I think there’s a lot of things going on behind closed doors. From my perspective, it’s just a matter of time until these start popping up more and more and announcing their holdings.

Willy Woo:

I agree, it’s a timing thing. I believe Michael Saylor said that it took MicroStrategy six months to get prepared to actually deploy into Bitcoin. And they were very fast. Most companies would take nine months or even longer. I kind of started the clock ticking from when that conference kicked off and said, well, let’s go six to nine months, probably nine months. That’s going to be very, very interesting. If those guys really do deploy and it is going to be in that timeframe, we’re looking at a fourth quarter of this year of buying from large ticket sizes, which is typically what we kind of expect. That’s the time where the bull market starts to wane. The momentum starts to die out around there. But if those guys come in, I’m thinking that’s going to make a very interesting fourth quarter because most of the models predict, or are guessing, that like past cycles, we might top out near the fourth quarter. So it’s interesting timing if this money starts coming in all around then.

Laura Shin:

Yeah, we’ll have to see. So one other kind of wild card is that I did notice in some of the recent analyses, Glassnode has referenced holders rotating into ETH as I mentioned before. As I’m sure you’re well aware, Ethereum is going to be instituting probably the biggest change to its monetary policy ever. It’s one that many people believe will make ETH deflationary, which, is my personal perspective, but I feel this is the first time where bitcoin and ether kind of will compete in that regard. Even though there has been a narrative that they’re competitive or whatever, to my mind, they’re kind of just different things. If you really understand what you’re doing with your money, then when you put your money in one versus the other, it’s for different reasons, that’s my perspective. I’m sure many people don’t actually really do the research to understand on that level. But anyway. Given this change to ETH’s monetary policy, how do you expect that that will impact the price of Bitcoin going forward now that they will compete in this kind of deflationary sense?

Willy Woo:

I think in terms of a store of value… I think Ethereum has been competing for a long time. And now, even as early as 2017, it was very young back then, but now we’ve had maybe getting on six years of price action history. We’ve seen a lot of the kind of properties you’d want to see in a store of value asset develop inside the Ethereum network. Even though it’s a smart contracts network and we have DeFi running on it, I think a lot of the value that is accrued to Ethereum is really people wanting to hold it, locking that up.

It certainly does impact the valuation metrics if you’re going to reduce the inflation significantly. I think that’s what I’ll say is that it is developing those monetary effects. And I have seen that it is becoming a choice for corporate treasuries, where previously the conversation was just Bitcoin.

Laura Shin:

And is that because of this change?

Willy Woo:

I would not know. For me, looking at this as an analyst, I go well, actually, if you look at, if you look at the sharpe ratio, the risk adjusted return on this network, it’s very similar to Bitcoin. And I think that the traditional world is very, very comfortable with diversifying and having baskets rather than all in one.

Rafael Schultze-Kraft

I’m more on the side of those are not competing networks. I’m not quite sure if this will really grab so much of Bitcoin. I think Bitcoin is still, regarding its history, regarding its simplicity, or regarding this very static monetary policy that has been established now for 12 years, it’s still something that, from my perspective, and where I believe serious money at this stage is probably more inclined to deploy. Ethereum has just made other choices. This change is experimental. We’ll have to see how much and what it actually does to it.

It goes in that direction. It points towards doing something similar and then making the assets deflationary. I view it as something on the side and not competing and you know grabbing capital off Bitcoin at this stage at least. And we have to observe how this actually plays out and what it does with the ecosystem. I think a lot of interest comes from the fact that there’s just so much development happening in this ecosystem. So many things being built on top of it, and so much more things that you can actually do now, holding Ethereum in those decentralized protocols, then you can in Bitcoin. And that makes it very interesting for many investors, I believe.

Laura Shin:

Yeah. When Mark Cuban came on my show, he felt like because of the number of things that one can do with Ethereum, then that might be the coin that more people end up holding, which is kind of interesting. That, for me, was a fresh idea. All right. So for you, what are you looking for to determine when we’ll flip back to a bull market? Or do you think we already are?  And going forward, why don’t we say August and then end of year, what would be your price predictions for those two moments in time?

Rafael Schultze-Kraft

Well, I’m actually very careful with price predictions as everyone is probably. My answers to this are usually a bit more fuzzy. I think we haven’t exited a bull market at this stage from an on-chain perspective, from a structural perspective. There’s little that points to that. As of now, I still believe that this is a correction — a big one — within the bull market, but we’re still on track. Seems to be looking a bit like the 2013 double top, if you will, if you take the $65K as the first top, and now this correction is a bit longer. I don’t know if I’m as optimistic as Willie is with how fast we’ll go back up.

At this stage, I feel that the downside risk right now is very, very small, but I still wouldn’t be very surprised if we get another burst of pain and another kind of shake out before we start properly regaining the bull market trend essentially over the next couple weeks and months. Structurally, I think we’re on track. As long as the data doesn’t tell me anything else, I remain bullish and we’ll see where we end up towards the end of the year.

Laura Shin:

Willy? What about you?

Willy Woo:

The structure is not bearish. If this is a bear market, it’s the weirdest bear market I have ever seen. And if it keeps dropping from here, it’s like what’s wrong with this network? Is it broken? We’re severely oversold. There’s people joining. We haven’t even dropped from a high mania phase which has been very consistent for bear markets. They end with a bull market pop, and then we have to revisit fundamentals. Yet we were already at fundamentals when this thing sold off. So I think that we’ll rebound relatively soonish. And I don’t think it’s going to be multi, multi months longer than two months. But anything can happen in these markets. I think we’ll climb back up. I’m pretty confident that there is nothing in the data that shows me this is serious. The most bearish thing I can find on the network is that capital was moved out of the network in terms of realized cap, which is a good metric on how much was stored there. And so that’s dipped quite a bit, and I haven’t seen that before in the middle of the bull market. So there was some significant selloffs.

Laura Shin:

Can you remind listeners what realized cap means?

Willy Woo:

It’s a sum of all the coins sitting in wallets at the price that investors paid for those coins. So that’s dropped. That means that people sold higher up and now realized cap is no longer capturing a higher value of those extra high coins. And this is one of the things that typically rises very easily and very seldom does it drop. And it has dropped at a level which is consistent of a start of a bear market. But once again, that does not agree with some much more telling metrics, like the number of new entities that we’re seeing on the network and the number of users coming on board. Some of the companies that I have the data on. Customers are coming in. New users are coming in. That’s a bull market. It’s just a matter of when those coins will be reabsorbed and bought and held.

Laura Shin:

So if you were going to give your August and end of year price predictions, what would those be?

Willy Woo:

Oh, August is tough. I have a model which is just a moving average of the market cap and you tweak it a little. It captures all the tops in history. It probably won’t catch this one because everyone’s looking at it now. But that was prior to this crash — that was starting to look like it was winding up to $300K, $400K even $500,000 near the end of this year. Now it’s starting to reduce its trajectory. It looks like it’ll comfortably reach $200K. I might reach $300K, but we have to see how that develops. So, once again, I’m just naming this model. I’m just reading what it’s pointing at. But it keeps changing. So I’m safe there, right?

Laura Shin:

We’ll have to see what happens at that time and circle back. So thank you both so much for coming on Unchained. Where can people learn more about each of you and your work?

Willy Woo:

Okay. I’m on Twitter @woonomic. You can read my tweets there. I usually put my analysis on there. If you want a bit of a deeper view into the market, I do have a newsletter that you can subscribe to. That’s linked from my Twitter account (@woonomic).

Rafael Schultze-Kraft

Yeah. I’m @n3ocortex on Twitter. Otherwise my company is Glassnode, @glassnode on Twitter, and glassnode.com for data charts and a newsletter.

Laura Shin:

Perfect. Well, thank you both so much for coming on Unchained.

Willy Woo:

Thanks very much, Laura. Really enjoyed it.

Rafael Schultze-Kraft

It was a pleasure. Thank you

Laura Shin:

Thanks so much for joining us today. To learn more about Willy and Rafael, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss and Mark Murdock. Thanks for listening.