Now That Q1 Is Over, Is the Bull Market Back?

Calendar year quarters provide an artificial breakpoint to reflect on what happened. The first quarter of 2022 didn’t really provide much by way of crypto market movement until it was basically over. Since February until this past weekend the price of bitcoin (BTC) had been range-bound between $37,500 and $42,500. Given the macro landscape, this was surprising. Russia invaded Ukraine, the Federal Reserve announced at least six rate hikes and there were lots of things happening in U.S. and European Union regulation.

It was even more surprising if we compared bitcoin’s price in that period to, well, everything else. Between Feb. 1 and March 14 the S&P 500 shed 8% and long-term (20-year) Treasurys dipped 7%. Meanwhile, bond markets were ravaged and we saw the price of commodities, like oil and nickel, spike aggressively. (Side note: The story about the London Metal Exchange and the nickel short squeeze is a must read.)

Meanwhile, bitcoin didn’t really do anything.

That was true until last week. We rolled into that weekend, March 25, with bitcoin at $44,000 and by that Monday, March 28, it had brushed up against $48,000. This gain was partially catalyzed by the Luna Foundation Guard planning to buy up to $10 billion of BTC to back its terraUSD (UST) stablecoin. The persistent bitcoin purchases by LFG has proved to be a near-term tailwind for bitcoin price. Crypto investors, who are salivating at the prospect of earning up to 19.62% interest on UST holdings using the Anchor protocol, seem to agree as LUNA, the token that powers UST, gained ~15% in the last week of the first quarter.

With the price of bitcoin finally trending up, the bitcoin options market saw open interest (OI), the U.S. dollar amount allocated to bitcoin options contracts, hit a year-high ~$9.8 billion on March 24, a day where more than $3 billion in options expired. Since then, we've seen more than $1.3 billion in options enter the market, marking a relatively quick recovery.

However, bitcoin wasn’t the only asset that the market has liked recently. In fact, the market liked ether (Ethereum’s native asset) more, with ETH gaining 23% since Feb. 1 (compared to BTC’s 18%). ETH’s price catalyst came on March 14 when Ethereum successfully “merged” on the Kiln testnet ahead of the blockchain’s eventual move to proof-of-stake. Ethereum changing its consensus mechanism to proof-of-stake has been closely watched by investors, and the successful test signaled to the market that Ethereum might actually make the transition that has been in the works since 2015.

On the topic of ether, its price compared to bitcoin’s (ETHBTC) has started to reverse. ETHBTC was on a steady climb from 0.024 to as high as 0.087 in 2021 (the unit is bitcoin per ether), but ETH’s market cap has mostly lost ground to BTC this year, dropping from 0.083 to 0.065 between Jan. 4 and March 14. Since then, ETHBTC has steadily walked up to 0.073.

From here, it is natural to look at bitcoin dominance, the measure of BTC market capitalization compared to the market capitalization of all crypto assets. In times of uncertainty, bitcoin dominance tends to gain ground, and that has come to bear so far in 2022. It has been a weird, tough year in general for the crypto market, even with the recent run-up (bitcoin lost 2% in the first quarter).

As we take a look towards the second quarter, I want to share a detailed (and esoteric) on-chain bitcoin chart Glassnode published in its most recent newsletter. The chart is titled “Bitcoin: Realized Cap HODL Waves (Coins > 1yr).”

HODL Waves are groupings of bitcoins differentiated by the amount of time those bitcoins have been held (e.g., bitcoins held for two years would be in the two- to three-year HODL Wave). If we then weigh those HODL Waves by “Realized Price,” the price at which those bitcoins last moved, we can use the result to analyze the U.S. dollar wealth held in those bitcoins. If we filter out coins less than a year old, we get an interesting visual.

If we consider that bear markets come in two phases, the first where a low proportion of wealth is held by older investors and the second where the wealth disparity recovers strongly as more coins age into the one-year band at a higher cost basis. That cost basis should stand in as a higher floor value than the previous cycle. We might be at a turning point in this bear market.

Lastly, while the past is not indicative of the future, understanding the past can help us anticipate what might happen. Looking back, we know that it sometimes snows in April on the bitcoin market. But usually bitcoin performs well in April, with an average gain of about 17% over the month. So, who knows, maybe we’ll close the book on the bear market in the next 27 days. But maybe not.