As surely as the Earth spins on its axis, spring emerges after winter. This applies to markets as well, and few markets have suffered as brutal a winter as crypto assets. It’s not just the collapse of prices that hurt, it’s also the implosion of key components of market infrastructure, starting with the Terra ecosystem and ending with … well, that’s still to be determined.
The two threads of doom – a weakening macro environment and structural fragility – fed upon each other, with price drops unmasking faulty disclosures, risk practices and incentive constructs, which led to further price drops and further unmasking. Until they didn’t anymore. That’s the part I want to focus on here: Why prices stopped falling.
Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
In early November, as the shock of the FTX revelations tore through the ecosystem, BTC suffered what would be its last leg down, dropping to around $16,000. The bad news did not stop coming: the bankruptcy, the magnitude of the fraud, the spread of the damage, the suspension of withdrawals and subsequent bankruptcy of the industry’s “blue-chip” lender, concerns about bitcoin’s largest fund … The hits kept coming. But BTC did not fall further, when – just going by the bleakness of the narrative – in theory it should have. What happened?
It has to do with bitcoin’s multiple use cases. Many insist that the asset is only about speculation: there’s no fundamental value, price is driven by narrative and nobody uses it. This blinkered assumption even tends to come from experienced market watchers, which is an encouraging lesson for the rest of us (as in, no one understands everything, no matter how much of a household name they may be).
Those of us who have been paying attention know they are wrong: Bitcoin is not just for speculation. It is a speculative asset, sure. Trading volume picked up from local lows at the beginning of the year. Although still relatively low, volume is a consequential $13 billion daily on reputable exchanges, according to data from The Block. While we don’t know who is behind these trades, on-chain data tells us that the vast majority of BTC moved on any given day was last moved in the previous 24 hours (the light yellow-dark yellow area in the chart below). In other words, most on-chain activity is short-term churn. While some of this could be payments, we can probably assume that at least most of that is, for now, the result of speculative moves.
However, this accounts for less than half of the bitcoin in circulation. Most BTC held in addresses do not move much. Over 67% has not moved in over one year, almost 50% has not moved in over two years when so far this year most of that cohort could have sold at a profit. Even being conservative and removing all coins dormant for more than 10 years because they could be considered “lost,” over half of outstanding BTC has been stationary for over a year.
While any of these holdings could be sold at any time, and many probably will be should the BTC price continue to rise, these address owners are not pure speculators. For them, BTC is a long-term investment, a store of value, a hedge – whatever you want to call it, for them bitcoin does have utility beyond short-term speculation.
Read more: Noelle Acheson - Security Tokens and Tokenized Securities Are Not the Same Thing
A caveat against using address-based analysis: With the recent mass exit from exchange custody given the concerns about market structure, reading address tea leaves is harder than ever. For instance, the number of non-zero addresses is shooting up – but this doesn’t necessarily mean an uptick in activity, it could just be people moving coins off-exchange. In other words, these are not necessarily new users, they are just moving coins around. Or, they could be new users. We just don’t know. However, when looking at bitcoin that hasn’t moved in a while, we can be relatively confident about what we are seeing – you can’t disguise a lack of movement. If anything, the HODLer positions are probably understated – many investors may have held their BTC on exchanges up until the market drama. They are long-term holders, but on-chain they appear short-term holders.
Back to the thread … Bitcoin is a speculative asset, and a long-term investment. For some it is a payment tool, judging from the growth on the Lightning Network. Bitcoin is all of those at once, and perhaps in the future it will also be a non-fungible token (NFT) platform. Who knows? This multifaceted use case lends support. Back when bitcoin's price was at the local floor, accumulation was scooping up the sell pressure from miners and exiting speculators. That provided some price support and goes a long way toward explaining why, even amid further terrible news, the price didn’t fall further.
The below chart from Glassnode color-codes accumulation according to address size. Purple represents large holders accumulating, yellow shows that smaller participants are becoming more active. Back in November, after BTC dropped to $16,000, large holders were buying the dip. Some of this could have been for speculation. But back then sentiment was as bleak as I’ve ever seen it. Volatility moves suggested that traders were stampeding for the exits, and speculators generally found more attractive risk profiles elsewhere.
This multi-use case not only provides a strong floor support, it also explains why even experienced traditional market watchers don’t “get it.” Can you think of any other asset that has multiple use cases? Gold and real estate come to mind – art, perhaps. But these have millennia of understanding behind them, and they are rarely confused with speculative assets because their prices are not volatile. Nor are these assets particularly liquid (with the exception of gold, although it could be argued that physical bars are only liquid at certain times of the day, and certain days of the week, if they are held at a centralized depository, which introduces new vulnerabilities). It is not easy to conceive of a liquid, always-on asset that represents different things to different people. This further underlines just how “unusual” bitcoin is – it’s speculative and volatile, it is also treated by many as a long-term investment, and history has shown that this lends the asset floor support while giving it ample upside.
Read more: Noelle Acheson - Bitcoin, Markets and the Symmetry of Information
Another reason why many seasoned investment veterans don’t “get it” is what they read in the media. Sharp price moves, uncovered fraud, exploits and examples of hype make for dramatic headlines, which get clicks and keep media business models afloat. It’s easy to see how those without the time or interest to dig deeper would take that as the whole story, especially when they are used to feeling “smart.”
But bitcoin’s theoretical and demonstrated price floor is a key feature of the asset’s asymmetrical risk – at these levels, the potential upside far surpasses the potential downside, especially now that we know the floor is not $0. Truly smart investors go beyond the headlines, even when it means going outside of comfortable frameworks.
What’s more, bitcoin’s use cases are still evolving – one example is the network’s possible use as a base for NFTs, another is the potential application of smart contracts. This will not only impact the debate around “intrinsic value,” it will also add more layers to the price floor. More traditional assets, even those also poised to benefit from the return of liquidity, don’t have this evolution embedded in the asset itself.
This implicit price floor goes a long way toward explaining why BTC has rallied so strongly this week. The price floor evolution also positions the asset as an intriguing longer-term bet. The narrative is yet again shifting.