This article comes from MediumThis article comes from
, the original author: Arthur Hayes, compiled by Odaily translator Katie Koo.
We will analyze the bottoming situation of Bitcoin from three types of transactions: centralized lending institutions, Bitcoin mining companies, and ordinary speculators, and explain why these three types of transactions have no more Bitcoin to sell, and why in the recent In the FTX/Alameda storm, we may have hit the low point of the cycle. Finally, I will describe how I plan to buy the bottom.
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Centralized Lending Company
Centralized lending firms (CELs) typically go bust because they either lent money to entities that couldn’t repay them, or there was a maturity mismatch in their lending books. A maturity mismatch occurs because lenders use these deposits to make long-term loans, but lenders receive deposits that can be withdrawn by depositors at short notice. If depositors wanted their money back, or demanded higher interest rates due to changing market conditions, then CEL (without other infusions of funds) would become insolvent and would soon go bankrupt.
They will try to raise funds to improve the situation before CEL becomes insolvent or bankrupt. The first thing they want to do is recover all the loans they can. This mainly affects those who borrow money from them in the short term.
Imagine that you are an exchange that borrows money from Celsius, but within a week, Celsius demands that the funds be returned, and you must do so. As an exchange, being asked to pay back money in a bull market is not a big deal. There are plenty of other CELs that will lend you funds so you don't have to liquidate existing positions. But when the bull market fades and there is a credit crunch across the market, all CELs typically call in their loans at the same time. With nowhere to turn for additional credit, exchanges were forced to liquidate positions to meet funding needs. They will liquidate their most liquid assets first (i.e. BTC and ETH) and hope their portfolios don't contain too many illiquid crapcoins.After CEL has recovered as much of its short-term loans as possible, it will begin liquidating the collateral backing its loans.In crypto markets, prior to the recent implosion, the largest mortgage category was loans secured by bitcoin and bitcoin miners.
Therefore, once market conditions start to deteriorate, CEL will start selling Bitcoin, which is the most commonly used asset to collateralize loans and is also the most liquid cryptocurrency. They also turn to the miners they borrowed money from, asking them to pay in Bitcoin or their mining machines. But if these CELs do not use cheap electricity to operate data centers, then the mining machines are as "useless" as SBF's bookkeeping skills (ironic FTX bookkeeping confusion).
So, despite the ongoing credit crunch, we're seeing massive Bitcoin selling hitting financial institutions:
CEL tried to avoid bankruptcy by selling Bitcoin as collateral;
Exchanges see their loans being called and have to liquidate positions.
This is why the price of Bitcoin plummeted before CEL went bankrupt. This is a big move. And the second drop was driven by a fear that companies once considered "indestructible" would suddenly liquidate assets. It's often just a smaller move, as any company at risk of bankruptcy is already busy liquidating bitcoin in order to survive the crash.
The Binance BTC/BUSD trading volume chart above shows a surge in volume during the two credit crashes in 2022. It was during this time that all these once legendary companies disappeared.
As CEL goes from solvency to insolvency to bankruptcy, other players in the ecosystem are also affected:
Exchanges that have borrowed short-term funds from CEL and found their loans repossessed;
Bitcoin miners that have borrowed typical fiat assets on their balance sheets collateralized by Bitcoin, future Bitcoin and/or Bitcoin mining machines.Alameda and 3AC, two of the largest manipulated crypto-financial firms, have grown to massive size because of cheap borrowing. In Alameda's case, they "borrowed" funds from FTX clients. In 3AC’s case, they tricked credulous CELs into lending them funds with little to no collateral. In both cases, lenders argued that the companies were engaging in "seamless" arbitrage deals that shielded the companies from changes in the market.
However, we now know that these companies are just a bunch of "long addicted" speculators. The only difference between them and retail investors is that they have billions of dollars at their disposal.
CEL and all the big trading firms have sold most of their bitcoins. Now all that’s left are illiquid junk coins, private stakes in crypto companies, and locked-up pre-sale tokens. What the bankruptcy court ultimately does with these assets has nothing to do with the development of the crypto bear market. These entities have little to no excess bitcoin to sell. Next, let's look at the case of Bitcoin miners.
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bitcoin mining company
Priced and sold in fiat currency, electricity is a critical part of any bitcoin mining operation. So if a mining company wants to expand, they either need to borrow in fiat or sell bitcoin on their balance sheet for fiat to pay for electricity. Most miners want to avoid selling Bitcoin at all costs. So they take out fiat loans against the bitcoin on their balance sheet (bitcoins that have not yet been mined) or bitcoin mining machines.
As the price of bitcoin rises, lenders will lend more fiat to miners. Miners are profitable and have hard assets to borrow. However, the continued quality of loans is directly related to the price level of Bitcoin. If the price of bitcoin falls rapidly, the loan will exceed the minimum margin level before the miner earns enough revenue to repay the loan. If this happens, the lender will step in and liquidate the miner's collateral.
As far as we can tell, this is due to the sharp decline in asset prices, especially in the crypto bear market, combined with rising energy prices, squeezing miners across the industry. Iris Energy faces claims from creditors for defaulting on a $103 million equipment loan. In September, Compute North went under Chapter 11 for the first time, and other large companies including Argo Blockchain (ARBK) appear to be teetering on the edge of solvency.
The chart provides a sense of how these waves of crypto credit crunch are affecting miners, and how they are responding.
The graph below, from Glassnode, shows the 30-day net change in Bitcoin held by miners.
As we have seen, since the first credit crisis this summer, miners have been net selling a lot of Bitcoin. They had to do this to pay off their huge statutory debts in a timely manner. If they have no debt, they still have to pay the electricity bill, but because the price of bitcoin is lower, they have to sell more bitcoin to keep the facility running.
While we don’t know if the maximum net sell-off has been reached, we can see that miners are behaving in line with our expectations in this case.
Some of these miners were not successful in avoiding the risk, or they had to downsize their operations. This is evident in changes in hash rate. I use the hash rate to calculate a rolling 30-day average. Then use this rolling average to look at the 30-day change. Because the hash rate is quite volatile, some smoothing is needed.
Overall, the hash rate is trending upwards over time. But in some periods, the 30-day growth is negative. Hashrate dropped right after the summer crash, most recently due to the FTX/Alameda fallout. This reaffirms our theory that miners will scale down operations when there is no more credit available to pay electricity bills.
Some high-cost miners had to stop operations because they defaulted on their loans. Any lending institution that puts the mining machine as collateral may not be able to directly profit from the mining machine, so the lender must sell these machines in the secondary market, and this "realization" process takes time, which will also cause the hash rate to fluctuate over a period of time. drop in time.Imagine you loan out USD to mortgage your mining rig, and the miner who borrowed money from you tries to sell bitcoins to get more fiat to pay back your loan, but ends up being unable to do so because the profit margin drops. The miners then defaulted on their loans and surrendered their mining rigs, which are now worth almost 80% less than when the loans were taken out, as repayment. We can guess,
The most frenetic lending points were near the top of the market, and these manipulative lenders "buy the top and sell the bottom" every time.
Now that CEL has a large number of mining rigs that they cannot easily sell and operate, they could try to sell them and recover some money, but not nearly enough, as new rigs are trading at 80% less than they were a year ago. They can't run a mine because they lack a data center with cheap electricity. This is why the hash rate disappears because there is no way to restart the machine.Looking to the future,
If the majority of mining loans have been cancelled, and there is no new capital to lend to miners, then we can expect miners to sell most of the block rewards they earn.
I believe the forced selling of Bitcoin by CEL and miners is over. Considering that almost all major CELs have stopped withdrawals (insolvency or bankruptcy), there are no more miner loans or collateral to liquidate.
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common speculator
The Bitcoin/USD perpetual contract is the most traded of all crypto instruments. The number of open long and short contracts - known as open interest (OI) - tells us how speculative the market is. The higher the degree of speculation, the more leverage is used. As we all know, when the price changes rapidly, it leads to a lot of liquidation. In this case, OI’s all-time high coincided with Bitcoin’s all-time high.
As the market falls, margin longs are liquidated or liquidate losing positions, which also causes OI to fall.
Looking at the OI sum across all major crypto derivatives centralized exchanges, we can see that OI’s local low also coincides with Bitcoin’s drop below $16,000 on Monday, November 14th. Now, OI has returned to the level it has been in since early 2021.
Will OI fall further as we enter the sideways, non-volatile part of the bear market? definitely will. But the rate of change in OI will slow down, meaning periods of chaotic trading characterized by large liquidations (especially long-term liquidations) are less likely to occur.
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what i don't understand
I don't know if $15,900 is the bottom for this cycle. However, I am sure this is due to forced selling brought on by the credit crunch.I think the U.S. Treasury market will be out of whack sometime in 2023 as the Fed tightens monetary policy. At that point, I expect the Fed to turn on the money printing presses and Bitcoin and all other risk assets will soar.
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what i knowI like to get closer to 5% by investing in US Treasuries with maturities shorter than 12 months. So, I'm looking to gain while I wait for the crypto bulls to return.
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How would I "buy the bottom"?
My ideal cryptoasset has to be beta of Bitcoin (trend yield asset), at least beta of Ethereum. These are reserve assets for cryptocurrencies, and if they are going up, my assets should be going up by at least the same amount. The asset has to generate a yield, which is certainly much higher than the 5% I can get on a 6-month or 12-month T-bill.
I have to have some super strong assets like GMX and LOOKS in my portfolio. I won't explain in this article why I would speculatively buy or sell my Treasuries in a sideways bear market in the coming months. But if you’re looking for assets that can both participate in the rally and earn income while you wait for the bull market to return, fire up a site like cryptoasset analysis tool TokenTerminal and see which protocols are generating real income. Then research which protocols have attractive token economics. Some may earn a lot, but it is difficult for token holders to withdraw their share of the income into their own wallets. Some protocols pay most of their revenue directly to token holders.
DeFi was hit hard in the two down waves of the 2022 crypto credit crisis. Investors are throwing out good projects as well as bad ones as they rush to raise fiat to pay back loans. As a result, many of these projects have very poor price-to-earnings ratios.
If I can earn 5% on treasury bonds, I should be earning at least 4x, or 20%, when I buy these tokens. A 20% annual return means I should only invest in projects with price-to-earnings (P/F) ratios of 5x or less. Everyone has different expectations, it's just my personal preference.
I could buy bitcoin or ethereum, but neither of these cryptocurrencies would bring me enough. If I don't make enough gains, I expect the price to rise significantly in fiat terms when the market turns.
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