crypto_updates
Crypto Ecosystem Updates (February 14)
Feb 21, 2022

| read

Bitcoin’s price has been bouncing around since dropping to $33,000 on January 24. So far, it hit its bull market resistance at $46,000 on the week of February 7. Markets have been nervous since then due to rising war tensions between Russia and Ukraine as well as the record-high inflation figures in the US.

The cryptocurrency market has historically been a derivative of the US stock indices like Dow Jones Industrial, S&P 500, and Nasdaq. All of those markets saw similar declines through December and January. Prices have since bounced back. However, these major indices were rejected at their major moving averages last week due to the negative news feed. 

Stock markets and cryptocurrencies need a catalyst to surge higher in the future, which could be a significant relief in political tensions, a few rate hikes by the Fed, or recoveries in consumer confidence indexes. Otherwise, an ongoing negative news feed could potentially create a new black swan event in the upcoming days, akin to the market crash in March 2020.

In the meantime, Bitcoin is fast approaching its three-day death cross, which is the crossing down of the 50 simple moving average (SMA) line by the 200 SMA line on a three-day price chart. A death cross on a three-day price chart usually suggests that a larger breakdown is coming like a capitulation event.  

The 50 and 200 three-day death cross has been happening since 2014 precisely every four years and we are approaching another one very soon. Every time we had this death cross, the price of Bitcoin fell by about 50%. This death cross is also regarded as the “Bitcoin halving dump” of Bitcoin since there is a Bitcoin halving every four years followed by a new all-time high price and then a death cross. 

In this week’s crypto ecosystem update, we analyze the likelihood of this Bitcoin death cross and a possible capitulation event in light of the outlook of Bitcoin’s on-chain activity and further technical analysis. We also review the developments with Ethereum, in addition to news and developments across the spectrum of cryptocurrency products.

 

BITCOIN ANALYSIS

Price Overview (February 14, 2022)

  • 7-day change: -7.80%
  • 7-day low: $40,126.30
  • 7-day high: $45,791.40
  • 30-day change: -1.24%
  • 30-day low: $33,023.90
  • 30-day high: $45,791.40

Network Overview

  • Blocks Mined (7-day): 1,081 blocks
  • Average Block Interval (7-day): 563.82 seconds
  • Coins Discovered (7-day):  6,756.25 BTC
  • TX Count (7-day): 1.7 million
  • TX Volume (7-day): 37 million BTC
  • Net Change in Exchange Balance (7-day): -16,553.15 BTC

On-Chain Activity:

 

1. Miners

 

  • Mining difficulty and hash

Mining difficulty measures how many hashes are needed to discover a block. It is based on fluctuations in the network’s hash power (cumulative computational power). In the Bitcoin network, blocks are discovered at an even pace of about one block per ten minutes. This figure increases as more miners come online. Competition increases as more miners join, which also increases the mining difficulty to discover a single block. On the other hand, when miners capitulate, the difficulty takes a dive as well.

Mining difficulty is currently at 26.69 trillion hashes per block with a positive 3% adjustment expected to happen on February 17. Hash reached 248 million Th/s on February 12, making a new all-time high at 15% higher than the previous high in January. 

Non-crypto groups and funds have recently been showing a substantial interest in Bitcoin mining. Among these new contributors is Intel, which is developing a BTC mining chip with an emphasis on efficiency.

In an official release, Raja Koduri, the Senior Vice President and General Manager of Accelerated Computing Systems and Graphics Group at Intel, stated:

“Today, we at Intel are declaring our intent to contribute to the development of blockchain technologies, with a roadmap of energy-efficient accelerators. Intel will engage and promote an open and secure blockchain ecosystem and will help advance this technology responsibly and sustainably.”

Koduri noted that their new chip will have over 1000x better performance per watt than the mainstream GPUs currently used in Bitcoin mining. Such advances in blockchain technology can help the Bitcoin hash and mining competitiveness surge over time. The entry of a tech giant like Intel can make a significant impact on the ecosystem. Its competitors will likely develop similar products, which further drives innovation and competition in the crypto space.

As you can also see in the below chart, the mean hash rate of Bitcoin has been skyrocketing since the summer 2021 lows, which indicates a healthy long-term outlook for the development of Bitcoin.

bitcoin_mean_hash_rate
  • Miner balance

Miners are currently holding around 8.70% of Bitcoin’s maximum supply, which is approximately 1,825,430 BTC.  They have been steadily accumulating since March 2021 and are within 5,000 BTC of the high level that they began distributing coins at the end of 2020. Bitcoin’s price boomed by nearly 160% from the time miners began distributing their coins until the selling pressure halted by March 2021.

 

balance_in_miner_wallets

2. Holders

  • Entity adjusted ASOL

Average spent output lifespan (ASOL) is a measure of the average age, in days, of on-chain spent transaction outputs. The baseline calculation omits spent outputs whose age is less than 1hr and entity adjusted omits “in house” transactions, or transactions that occur between the same entity. ASOL has been declining since reaching a high in January 2021. This means the age of coins being spent on-chain is increasingly younger on average. It suggests long-term hodlers are spending their coins less aggressively as the price has remained range-bound.

 

entity_adjusted_asol

  • Net Unrealized Profit/Loss

Net Unrealized Profit/Loss (NUPL) is used to measure the profits or losses for all coins sold at any moment in time. A positive NUPL indicates that investors are in profit while a negative value indicates that investors are at a loss.

NUPL is currently at 0.45 and has been bouncing around within a horizontal range which marked the bottom in summer 2021. This means that investors have been as profitable as they were back in July 2021 throughout the current downtrend.

 

net_unrealised_p/l

  • Exchange balance

The balance of bitcoins sitting on exchanges has continued to drop since March 2020. Over 600,000 bitcoins have left the exchanges during the last two years. This indicates hodler confidence and continued demand for Bitcoin.

 

bitcoin_balance_on_exchanges

 

Although Bitcoin’s on-chain activity can foreshadow its future price action, it does not give you any feedback about when that activity could be reflected in the price. It could take years for what you see on the chain now to impact the price. Until then, the price of Bitcoin could just go the other direction, leaving you at a significant loss if you take positions based on the on-chain activity only. 

If you want to keep an eye on what could happen in-between the short and long-term, you could benefit from technical analysis, which we will discuss for Bitcoin in the following section.    

 

Bitcoin Technical Analysis:

Bitcoin dropped to its 600-day simple moving average (SMA) on January 24, which constitutes a very major support level in cryptocurrency markets. The price has bounced to its 400-day SMA so far, which is another important support/resistance level and a major bull market-level during the last uptrend. 

If prices surge further, the $51,000 level will be a “make or break” point for Bitcoin. A three-day close above this level will suggest that a new bull market is on the horizon, whereas a close below $51,000 will significantly increase the likelihood of the pending death cross. Every time Bitcoin has experienced this death cross before, the price fell by 50%.  

Important support levels to watch below the current price are $39,500, $36,000, and $33,000. If Bitcoin somehow closes this month below $29,000, this would suggest another short-term doomsday because $29,000 constitutes the yearly support for Bitcoin and the next major monthly support sits all the way down at $14,000.

 

1. 3-Day death cross

Bitcoin’s three-day death cross is fast approaching. The three-day death cross is the crossing down of the 50 SMA line with the 200 SMA line on a three-day price chart. This has happened twice before in Bitcoin’s history so it is not a very based indicator (see the chart below). But the critical thing is, it has happened two years after every Bitcoin halving, so in that sense, it is regarded as the “halving dump”, which comes after a new all-time high price.

Since there is a Bitcoin halving every four years, the three-day death cross has also occured precisely every four years so far:

 

3-day-death-cross

Bitcoin/U.S. Dollar price chart. Each candle in the chart represents three days. Source: Tradingview

 

Considering the direction that the 50 and 200 SMA lines are currently trending, these two lines will cross each other in June 2022. To prevent this potential death cross from happening, Bitcoin needs to climb above $51,000 before June 2022 and close above that level for several consecutive 3-day candles. Such a move will change the direction of the 50 SMA line to the upside and prevent it from crossing down the 200 SMA line.

2. Monthly MACD death cross

Another major point of concern for Bitcoin is the recent death cross in the monthly moving average convergence divergence (MACD) indicator, which happened in January 2022. Historically, a monthly MACD death cross in Bitcoin has caused the price to drop by up to 70% in the following months. 

Death crosses in larger time frames, like the monthly time frame, usually take a significant amount of time to play out. For example, it took approximately five months, in both the 2014 and 2018 monthly MACD death crosses, until Bitcoin capitulated and reached its bottom. Coincidentally, five months from the last death cross in January 2022 corresponds to the same month (June 2022) that the three-day death cross would take place if Bitcoin cannot close above $51,000 in the meantime.  

As you can see in the chart below, every time there was a monthly MACD death cross (circled in yellow in the MACD chart), the price retraced to the green line, which is the 50-month SMA. Bitcoin’s 50-month SMA is currently at $19,366, which will approximately be $24,000 by June 2022.

 

monthly_macd_bitcoin

Monthly Bitcoin/U.S. Dollar price chart with the MACD indicator

3. Monthly stochastic RSI

Stochastic RSI is a momentum indicator for Bitcoin that measures its strength. The value of the indicator can oscillate between 0 and 100. A value of 100 means that Bitcoin is extremely overbought while a value of 0 means it is extremely oversold. 

As you can see in the bottom section of the below chart, the monthly stochastic RSI almost hit a value of 0. Although this might suggest that Bitcoin is oversold, as we discussed in the previous section, larger time frame indicators take a long time to play out. If you look left on  the chart, it took almost a year for Bitcoin to gain back its stochastic RSI momentum after hitting 0. And in the meantime, prices retraced to the 50-month SMA line by dropping at least 50%.

 

stochastic_rsi_bitcoin

Monthly Bitcoin/U.S. Dollar price chart with the Stochastic RSI indicator

This suggests that Bitcoin completes its initial correction period only by the time the stochastic RSI runs out of momentum. Some bounces and relief rallies have followed, but they have failed every time and ended with a capitulation event until the stochastic RSI could gain its momentum and exceed the 20 resistance level.  

4.Correlation with S&P 500

Bitcoin’s strongest correlation is with the S&P 500 stock market index. The S&P 500 index currently struggles to stay above its 50-week SMA, which is the green line in the chart below Historically, the 200-week SMA has been the first major support level whenever the index price broke down from the 50-week SMA. This would correspond to an approximately 30% drop from the current index price if S&P 500 fails to hold the 50-week SMA support. The index price is $4,400 now and the 200-week SMA passes at 3,380.

Historically speaking again, a 30% drop in the S&P 500 index would correspond to at least a 50% crash in the price of Bitcoin.

 

correlation_with_s_p_500

Weekly S&P 500 Stock Index price chart

5.Yield for the 2-year US government bonds

Bond market yields are inversely correlated to the stock markets and thus cryptocurrencies. Therefore, US government bond yields have been surging in response to surging inflation and geopolitical tensions, but they are on the verge of hitting a major resistance level. 

If things calm down in the next several, weeks while the Fed takes action to alleviate the concerns about inflation, the resistance levels for the bond yields may hold valid and cause  rates to retrace for a while. 

Below is a yield chart for the 2-year US government bonds, the benchmark indicator for the debt markets. As you can see, the interest rate for the 2-year US government bond has skyrocketed since September 2021. 

The yields rising too much, too fast suggests that the 1.8% or 3% resistance levels (the yellow horizontal lines in the below chart) may hold in the short-term, which facilitates the positive scenario regarding Bitcoin’s future price action.

 

us_government_bonds

The 2-year US government bond yield chart 

If the yield for the 2-year US government bond retraces, this would be good news for Bitcoin and other cryptocurrencies, because it would likely trigger the expected catalyst that would push Bitcoin to the $51,000 resistance level. 

Following that, if the 2-year yield can keep ranging below the 2-3% resistance levels, Bitcoin could hold the $51,000 level as support and start a new bull market in the upcoming months.   

 

ETHEREUM ANALYSIS

 

Price Overview

  • Last 7-day change: -6.60%
  • 7-day low: $2,840.23
  • 7-day high: $3,280.00
  • Last 30-day change: -11.97%
  • 30-day low: $2,160.19
  • 30-day high: $3,390.17

 

Network Overview

  • ETH Burned (7-day): 39,759.29 ETH
  • TX Count (7-day): 7.9 million
  • TX Volume (7-day): 12.5 million ETH
  • ETH Moved in/out of Smart Contracts (7-day): -328,572 ETH
  • Net Change in Exchange Balance (7-day): + 132,421.251 ETH

 

On-Chain Activity:

ETH has been moving into smart contracts at an accelerated pace at the start of the year, while its circulating supply expands gradually. This indicates that ETH is being used to an extent that far outpaces its rate of issuance. Ethereum had a negative supply change at points throughout January. The burning mechanism installed by EIP-1559 allows this to happen. The fees paid by users are removed from the circulating supply (burned) as a result of the improvement; more ETH is burned as more ETH is spent on network fees.

The disparity between the use of ETH in smart contracts and its issuance highlights that the recent dip is mostly being ignored by users. Nearly half a million ETH have been deposited in contracts even as its price is down over 20% since January 1. This is a positive indication that the dip isn’t a greater trend in a capitulation where users abandon the network entirely.

 

supply_in_smart_contracts

Ethereum Technical Analysis

Ethereum’s price action has historically been correlated to that of Bitcoin. Throughout the history of cryptocurrencies, Bitcoin managed to drag Ethereum and other altcoins along with itself, either to the upside or to the downside. The reason for this synchronized price action was that funds entering and exiting the cryptocurrency market initially flowed into Bitcoin, which then moved in and out of Ethereum and other altcoins. Due to that, Bitcoin should not be on a downtrend for the Ethereum price to have an uptrend. 

In addition, during periods of uncertainty, more funds are scared to flow into Ethereum and other altcoins and as a result, Ethereum’s price action becomes correlated with that of Bitcoin. For example, any minor drops in Bitcoin are enough to drag down Ethereum alongside it.

Since the cryptocurrency market is in limbo nowadays, it would be wise to suggest that Ethereum’s price action is firmly coupled with that of Bitcoin.

In that sense, Bitcoin first needs to rise above its recent $46,000 local top and move to the make-or-break $51,000 resistance so that Ethereum can move above $4,000. So going forward, it is Bitcoin that needs to start a new bull market first and Ethereum will eventually follow suit.  

 

CRYPTO INDUSTRY UPDATES

Regulatory Developments:

  • The IRS will not consider miners or stakers  to be brokers

The Internal Revenue Service’s (IRS) recent decision, following a lawsuit against it, is a positive development regarding the taxation of crypto assets. Joshua and Jessica Jarrett filed a lawsuit against IRS in May 2021, after they were taxed on their staking rewards on the Tezos blockchain. The couple requested a refund for $3,293 of income tax paid for the minting of 8,876 Tezos (XTZ) tokens. 

The IRS offered a refund on the taxes paid for those staking rewards. The court filings that were made public on February 3, 2022, indicate a bench trial in March 2023, unless the case is settled after the discovery process in mid-March of this year.

The Jarretts seek to escalate their case further by attempting to cement their claim into the IRS tax code. The couple claims that cryptocurrencies generated in proof-of-stake (PoS) networks are taxpayer-created property and should not be taxed as long as they are not sold nor exchanged. The filings explicitly stated:

“The federal income tax law does not permit the taxation of tokens created through a staking enterprise. Like a baker who bakes a cake using ingredients and an oven or a writer who writes a book using Microsoft Word and a computer, Mr. Jarrett created property. Like the baker or the writer, Mr. Jarrett will realize taxable income when he first sells or exchanges the new property he created, but the federal income tax law does not permit the taxation of the Jarrett’s simply because Mr. Jarrett created new property.”

It is important to note that the settlement offer in Jarrett’s case is not a binding precedent. Due to this, the outcome of the lawsuit will likely be a bright sign for crypto taxation laws in the future.

 

CRYPTOCURRENCY PRODUCT UPDATES

  • Layer 1 Blockchains

Terra signs a $40M deal with Washington Nationals

Terra has announced a sponsorship agreement with Major League Baseball’s Washington Nationals. The sponsorship deal is valued at $40 million which is sourced from Terra community members and investors.

The deal also includes creating digital collectibles for the team’s social platforms and adding Terra logos inside the Nationals Park.

 

  • Layer 2 Blockchains

Polygon raises $450M from Sequoia Capital India, Galaxy, and SoftBank

Polygon, the major layer 2 scaling solution on the Ethereum blockchain, raised a record $450 million in a funding round led by Sequoia Capital India. 40 venture capital firms participated in the funding round, they included SoftBank, Michael Novogratz’s Galaxy Digital, and Tiger Global as well as Kevin O’Leary of ABC’s “Shark Tank”.

Polygon will use the funding to build Web 3 applications, including Polygon PoS, Polygon Edge, and Polygon Avail, which are similar to Amazon Web Services. The company will additionally invest in zero-knowledge technology with the proceeds.

Polygon raised the funds through a private sale of its native MATIC tokens, which surged after the funding was announced in the media. 

The fundraising is the project’s first financing round since its establishment in 2017.

 

  • NFT/Metaverse

McDonald’s to open metaverse restaurants 

McDonald’s revealed plans to open food delivery services inside the metaverse. The American fast-food chain filed ten trademark applications, which include a virtual restaurant that features actual and virtual goods with plans to offer home delivery.

Gucci enters The Sandbox metaverse

The luxury clothing brand announced that it bought an undisclosed amount of virtual land on The Sandbox. Gucci plans to create themed experiences on The Sandbox which include items like Gucci-themed non-fungible tokens (NFT) and vintage bags.

In addition to a fashion-focused metaverse space, Gucci also will be releasing fashion items for Sandbox players to purchase and wear in the game’s virtual reality.

 

Zynga to enter the NFT game space

The mobile gaming giant, Zynga is planning to launch its first NFT games. The company also plans several acquisitions in the Web 3 game-publishing industry.

Zynga became popular with Facebook-based social games like Farmville. 

 

  • DeFi

  • Wormhole exploited for 93,750 ETH

Wormhole, the largest cross-chain bridge on Solana, was exploited for 120,000 ETH. A bridge is a network infrastructure that allows assets to be transferred from one chain to another. Bridges use wrapped tokens to make these transfers. “Guardians” are a decentralized mechanism that verifies that the wrapped tokens have been locked in a smart contract. The bridge then mints an equivalent amount of those tokens on the destination chain once the verification is complete. An unvalidated component of the Wormhole bridge allowed the attacker to generate fake guardian signatures to mint 120,000 ETH on the platform. Hackers were able to get away with 93,750 ETH.

 

Disclaimer: Information provided by CEX.IO is not intended to be, nor should it be construed as financial, tax or legal advice. The risk of loss in trading or holding digital assets can be substantial. You should carefully consider whether interacting with, holding, or trading digital assets is suitable for you in light of the risk involved and your financial condition. You should take into consideration your level of experience and seek independent advice if necessary regarding your specific circumstances. CEX.IO is not engaged in the offer, sale, or trading of securities. Please refer to the Terms of Use for more details.