Market Wrap: Bitcoin Bullish Sentiment Fades as Selling Abates

Bitcoin drifted lower on Wednesday as traders dealt with the return of volatility. September is typically a weak month for bitcoin, with stronger gains expected in November. The current volatility has some analysts expecting further consolidation and limited upside over the near term.

Last week, the crypto fear and greed index entered “extreme greed” territory, mainly due to an extended period of low volatility, according to Arcane Research. Currently, other measures of crypto sentiment appear to be in neutral territory.

Recent regulatory action contributed to the current negative sentiment. Last week, the U.S. Securities and Exchange Commission (SEC) announced an investigation into Uniswap Labs, a decentralized crypto trading protocol.

Then, on Wednesday, Coinbase CEO Brian Armstrong stated the SEC issued a warning of its intent the U.S. crypto exchange should it launch its Lend product.

“The outsized move seems to have been triggered by regulatory fears, taking the steam out of the frenzied rally,” crypto trading firm QCP Capital wrote in a Telegram chat, referring to strong gains in alternative cryptocurrencies over the past month.

“We expect some consolidation in the market having washed out the euphoric retail leveraged longs from the last two weeks,” QCP Capital wrote.

Bitcoin’s drawdown, or the percentage decline from the April peak near $65,000, is currently around 26%. Typically, drawdowns that exceed 50% indicate the start of a bear market, similar to what happened in 2018. The sharp drawdown of about 60% in March 2020, however, was brief because the coronavirus pandemic triggered selling across all assets deemed to be risky, including cryptocurrencies.

The chart below shows a significant repair of the roughly 55% drawdown between April and July, albeit cut short during Tuesday’s sell-off. Over the long term, the current drawdown is barely noticeable so long as bitcoin is able to hold support above the 200-day moving average around $46,000.

Recoveries from 50% drawdowns tend to be choppy, with occasional sell-offs that are quickly absorbed by buying strength, similar to the 2019 and 2020 price rebounds.

Over $4 billion in bitcoin futures open interest has been cleared during the sell-off, according to data from Glassnode. “This is the most significant leverage flush-out since the sell-off in mid-May,” the firm wrote in a Telegram chat.

The rise in open interest allowed for relatively high amounts of leverage, which became vulnerable to liquidations as volatility returned.

“Binance, FTX and other exchanges recently reduced their maximum leverage from 100 times to 20 times, which has helped remove the ultra high risk trades,” crypto research firm Coin Metrics wrote in a Wednesday newsletter. “But it likely hasn’t had too much of an impact on the overall number of futures contracts being opened using leverage.”

The chart below shows the proportion of long active liquidations rising as high as 92.7% during Tuesday’s sell-off, the largest proportion since May 19.

Ether, the world’s second-largest cryptocurrency by market capitalization, is down about 9% over the past week, compared to a 5% decline in bitcoin over the same period. ETH’s recent underperformance versus BTC is stabilizing in the aftermath of Tuesday’s crypto sell-off.

The ETH/BTC ratio is holding short-term support around 0.06 after declining from the 0.08 resistance level. Buyers will likely remain active in ETH, especially if the cryptocurrency holds support above $3,000 this week.

Bitcoin’s Network to Transaction Value ratio (NVT), which measures the relationship between the price of BTC and its intrinsic value, is unusually high, according to ByteTree, a crypto asset management firm.

“When the NVT is high, the price of bitcoin is expensive relative to the network, and when low, cheap,” the firm wrote in a Wednesday blog post.

“Currently, the price of bitcoin is extended, and the past few months have (sic) seen the highest NVT readings ever recorded.” In 2018, the NVT peaked around 20 (near the current level), which preceded a bitcoin sell-off.

Most digital assets in the CoinDesk 20 ended the day higher.

Notable winners of 21:00 UTC (4:00 p.m. ET):

Notable losers: