Author： @zhi li @Macro Fang @chenchen zhang​

The current market environment presents several bullish signals for the cryptocurrency market, particularly Bitcoin.

• Part I Macro Data Increasingly Positive

The collapse of yen carry trades has led to a significant unwinding of positions, causing the market to quickly correct itself, with the TOPIX index leading a “deep V” rebound. Since Aug 5, we have seen a swift market rebound led by increasingly positive macro data. The Fed’s dovish stance, along with bi-partisan policy support for crypto, has eased market tensions.

• Part II: On-Chain Data Improving

The on-chain data for 2024 shows promising signs for Bitcoin’s market outlook. Stablecoin issuance continues to rise, indicating strong demand, while net inflows into Bitcoin spot ETFs have slowed since May, reflecting a more cautious market sentiment. Nearly half of all Bitcoin is held by long-term holders, demonstrating strong market confidence. Additionally, the on-chain holding costs of Bitcoin are higher than the current market price, suggesting potential for further growth. Despite significant volatility, investor willingness to hold Bitcoin remains robust, indicating a healthy and stable market.

Part I: Macroeconomic Turning Point

1. August: Healing from a Turbulent Month

1.1 BOJ Hike: Triggers Yen Carry Trade Un-wind

To the market’s surprise, the Bank of Japan’s July 31 decision to raise interest rates has had a significant impact. This hawkish move, combined with investor concerns about U.S. growth, has unsettled global stock and bond markets, leading to an unwinding of the carry trade.

On August 5, Japanese stocks experienced their largest single-day drop (-20%) since the 1987 Black Monday sell-offs — as investors panic sell to cover their positions. Equity markets fell sharply over several sessions due to rising recession risks and concerns that large moves in the yen would trigger broader de-risking. In the absence of any true event risk over the weekend, S&P futures dropped nearly 5%, NDX more than 6%, and the VIX surged above 60. FOMC messaging hinted at potential rate cuts in September, and while the earnings season has been mixed, it has not been particularly weak.

The high leverage in the system, especially among crypto, mega-cap names, contributed to the market’s size and volatility. Investors went from euphoria to questioning macro stability and recession risks - risk appetite dropped rapidly.

1.2 Markets Whiplash: Positive Macro Triggers Risk-On

After wiping out leveraged investors, the markets experienced a V-shaped rebound led by the TOPIX index. Positive macroeconomic releases last week fueled a resurgence of bullish investor flows across U.S. indexes, with over $16 billion added to the S&P, driving positioning to increasingly extended levels. This positive sentiment spread globally, with nearly all European and Asian indexes seeing rising notional levels, including net positive turns for the DAX and FTSE, and extended bullish levels for KOSPI and Nikkei.

2. The Fed: Speak like a Hawk, Act like a Dove

Following recent statements from Federal Reserve officials, we anticipate that the September dot plot will emphasize expectations for three rate cuts.

2.1 Fed Speaks

2.2 Macro Pivot: Rate Cuts = Super-Cycle

The minutes from the July FOMC meeting reveal that Federal Reserve officials were increasingly considering lowering interest rates even before recent weaker employment data emerged, suggesting a rate cut at the September meeting is highly likely. Chair Powell acknowledged discussions around a rate cut in July, with several officials supporting a 25 basis points cut at that time, indicating a growing inclination toward a possibly larger 50 basis points cut by September. This dovish stance is bullish for the crypto market because lower interest rates typically lead to a weaker USD, making alternative assets like cryptocurrencies more attractive.

Additionally, a looser monetary policy can increase liquidity and investor risk appetite, driving more capital into decentralized finance and digital assets. While Powell is unlikely to commit to larger cuts before the August payrolls and another CPI print, the mere consideration of such measures signals a potential shift that could favor crypto investments. Historically, markets have responded positively to rate cuts, and although stocks might initially react to the dovishness, the implications for growth and liquidity bode well for the crypto sector.

3. Federal Deficit and Market Liquidity

The growing federal deficit, combined with the Fed’s dovish stance, short-term bond issuance, and the Treasury’s bond buyback program, has alleviated market concerns. While large-scale financing plans may pressure market liquidity, increased reserves and flexible fiscal operations are expected to sustain stability. The market projects a fiscal year deficit of \(1.6 trillion, approximately 6% of GDP, with rising debt levels resulting in a \)185 billion year-over-year increase in interest expenses. Despite this, the federal debt-to-GDP ratio remains around 110%, relatively healthy among major economies. Primary dealers have accumulated record-high U.S. Treasury holdings, necessitating a reduction in leverage. This long-term pressure on the U.S. government allows the Fed to maintain a dovish stance in the short term. Quantitative indicators, such as the Chicago Fed’s NFCI, show that financial conditions have reversed all tightening pressures from previous rate hikes, ensuring ample market liquidity.

3.1 Debt Structure Adjustment: Bullish for BTC

The Treasury plans to raise \(740 billion in Q3 and \)565 billion in Q4, slightly below forecasts due to slower quantitative tightening and higher-than-expected tax revenues. While some worry about liquidity drainage, the reduction in ON RRP balances and increase in reserves suggest ample liquidity. The anticipated reduction in long-term bond issuance and lower Term Premiums will likely keep interest rates low, encouraging investment in higher-yielding assets like Bitcoin.

4. Corporate Earnings and Buybacks

4.1 Optimistic Earnings Growth

Despite the market’s heightened scrutiny of the “Magnificent 7” (M7) stocks, the overall S&P 500 performed normally during Q2 earnings season. Unlike previous quarters driven by the M7, S&P 493 earnings were a key driver of U.S. stock market gains, offsetting some of the impact of underperforming M7 reports. We anticipate double-digit earnings growth for S&P 493 in Q3 and Q4, boosting risk appetite and market sentiment, and heralding a favorable period for risk assets like the Russell 2000 and Bitcoin.

6. Election Year: Bipartisan Support for Cryptocurrency

Republicans: Trump criticizes Biden’s anti-crypto stance, including efforts to oust Bitcoin mining companies and potential tax hikes, and highlights opposition from the administration and SEC Chair Gary Gensler to the FIT21 bill for regulatory clarity. Republicans are increasingly aligning with the crypto industry, with figures like Trump accepting crypto donations and pledging support for digital asset traders.

Democrats: Democrats are increasingly embracing cryptocurrency, recognizing the importance of appealing to crypto-enthusiastic voters in a tight race. Kamala Harris plans to endorse policy initiatives that promote the growth of the cryptocurrency industry, as confirmed by her senior policy advisor, Brian Nelson. During a Bloomberg roundtable at the Democratic National Convention in Chicago, Nelson highlighted Harris’s dedication to supporting policies that enable emerging technologies to flourish. Furthermore, Harris has begun engaging with cryptocurrency executives to better understand and advocate for the industry’s advancement.

PART II: On-Chain Data

Price Dynamics: Prices are influenced by various forces, some of which may not have an immediate impact and take time to materialize. We have developed our own on-chain analysis framework, covering liquidity, holding periods, and average costs.

1. Liquidity

1.1 On-Chain Stablecoin Metrics

There is a strong correlation between the issuance of on-chain stablecoins and market trends. The supply of stablecoins has increased significantly in recent years, particularly during the rapid growth of the global cryptocurrency market from 2020 to 2021.

Entering 2024, while the growth in stablecoin issuance has slowed, it remains on an upward trajectory. Compared to the rapid expansion in previous years, the growth rate in 2024 has noticeably decelerated, with the curve flattening out. This indicates that while demand for stablecoins persists, the market is transitioning into a more mature and stable phase, moving away from the explosive growth seen in earlier periods.

Recently, after a period of slowed issuance, stablecoin supply has entered a new phase of increase, reaching new highs in this current upward cycle. Overall, the stablecoin market in 2024 remains in a growth phase, which should help bolster a sluggish market.

1.2 ETFs

From the beginning of the year to early March, cumulative net inflows rose rapidly, indicating strong demand for Bitcoin spot ETFs. However, over time, especially after May, the inflow of funds decreased, and cumulative net inflows began to stabilize around $20 billion, failing to regain the previous growth momentum. While there were occasional large inflows, the overall net inflow has declined since May, accompanied by some net outflows. This further confirms a shift in market sentiment from active buying to a more cautious and wait-and-see approach, with the effectiveness of “spot ETFs” in attracting new funds waning.

2. HODL Waves

2.1 BTC: Realized Cap HODL Waves

This metric is used to analyze the holding time and maturity of Bitcoin in the market.The chart shows the proportion of Bitcoin held for more than 6 months. As of August 20, 47.097% of Bitcoin has been held for over 6 months, indicating that nearly half of the Bitcoin in circulation is in the hands of long-term holders. In the previous two bull markets, this figure was below 20% at market peaks.

This suggests that a significant portion of Bitcoin remains with long-term holders despite price fluctuations, showing that many investors prefer to hold rather than sell.

2.2 Trend Accumulation Score

The market is currently oscillating between selling and holding, with a return to a holding cycle.This chart illustrates the “Trend Accumulation Score” for different Bitcoin holding groups over time. The bluer the color, the more holders are inclined to hold or buy; the redder, the more inclined they are to sell.After a period of selling pressure, both large and small holders are now more inclined to hold their Bitcoin.

2.3 Bitcoin: Long/Short-Term Holder Supply Ratio

This chart shows the ratio of supply held by long-term holders (LTH) versus short-term holders (STH) over time.It’s important to note that the boundary between long-term and short-term holders is 155 days, with a 10-day buffer period.The current LTH/STH supply ratio is 4.8604, with a clear upward trend, rising 13% compared to the 30-day average (as shown by the green bar chart).

3. Holding Costs

3.1 Bitcoin: Realized Price-to-Liveliness Ratio

• Blue Line: Realized Price: This represents the average holding price of all Bitcoin on-chain, based on transfer data.

• Orange Line: Realized Price-to-Liveliness Ratio (RPLR): This combines the realized price with Bitcoin holding behavior. It adjusts the realized price by comparing Bitcoin’s “liveliness” (i.e., the time Bitcoin is held or spent) to estimate the holding cost for active addresses.

As of August 11, the on-chain holding cost is \(31.3k, while the active address holding cost is \)51.3k. The current market prices are above these cost levels.

3.2 Bitcoin: Pi Cycle Top Indicator

This indicator is composed of the 350DMA*2 and 111DMA, where the 350DMA refers to the 350-day moving average, calculating the average closing price over the past 350 days.Historically, during every bull market, the 111DMA crosses above the 350DMA*2, signaling a market top. Currently, these two moving averages still have some distance between them:

• 350DMAx2: $102,579

• 111DMA: $63,742

3.3 Market Cap BTC Dominance

The BTC.D index has been steadily rising during this cycle. In previous bull markets, Bitcoin liquidity typically overflows in the latter stages, but currently, there hasn’t been a significant inflow of Bitcoin into Altcoins.

4. BTC to 100K: Stay Strong, Stay Long

Despite the challenging and volatile market environment, long-term Bitcoin holders remain steadfast, with evidence suggesting they are accumulating more. Compared to previous cycles, these investors now hold a greater proportion of Bitcoin network wealth, demonstrating patience and confidence in future price increases. Even during significant price corrections, these investors have not panic-sold, highlighting the resilience of their conviction. Additionally, the stablecoin supply remains ample, and although external capital inflows have slowed, current prices are still above on-chain average holding costs, indicating a healthy holding structure. Bitcoin’s liquidity is poised for overflow, even though the Altcoin season hasn’t arrived yet. Given these factors, we remain bullish on Bitcoin’s market outlook and expect it to reach 100K this cycle.