The Pomp Podcast - #660 What REALLY Happened with the Bitcoin Crash This Week?

Episode Date: September 11, 2021

In this Episode, Pomp goes through the on-chain analytics and helps to explain the market forces that caused Bitcoin's crash this past week.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. In today's podcast, we break down the on-chain metrics from this past week. Will Clemente was busy and couldn't join us, so I went ahead and did the best I could. I hope you enjoy this episode. We'll be back at it again with Will starting next week. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment

or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. We're going to go through on-chain metrics. Young wizard, Will Clemente, not here. He had something to do. So I've got the charts and we're going to do the best we can to get through this and talk about what has happened this past week with the on-chain metrics in Bitcoin. If you want to get this, go follow Will on Twitter or go subscribe to his newsletter that is in the profile of his Twitter account. So first on Tuesday, there was a ton of liquidation in the market. It basically, we were live when it happened and the price fell from like $50,000 to $53,000 all the way down to $42,000 at one point.

And prior to that crash, we had futures open interest rising alongside an uptick in the estimated leverage ratio. And so what that basically meant was we just got super over levered. And then there was this washout. There was basically kind of a de-levering that happened in the derivatives market. And that's why that price movement down happened so quickly. And so if we look at that futures long liquidation, you can see that we were really kind of building up. And then you just got this massive liquidations. and so i think at one point it ended up being a couple billion dollars worth of liquidations that

happened across all the various exchanges you can see that that happened almost uh in step there with the price uh coming down as well so pretty clear on chain to see um uh the long liquidations happening meaning people were over levered long price falls they get liquidated and it accelerates a downward move in the price next we've got the perpetual futures open interest that was also wiped. And you can see this will basically say that, look, this is like a healthy cleansing, especially when you get a view of how investors acted throughout the event. But this futures open interest in perpetuals, again, you can see kind of a quick drop there in September on the far right of the chart, just kind of immediately just fell off a cliff. And then lastly, you can

see the futures estimated leverage ratio. You can see that we basically since July had been kind of building up slowly there. And then all of a sudden got that big wipe out or kind of that cleaning of leverage in the system. Remember, leverage is not good or bad. It's only good if it go if the price of the asset moves in the direction that you have leverage. And if the price moves against you, then it becomes very, very big liability. And so obviously, the people who had lots of leverage on and were looking for Bitcoin to go up in price ended up getting wiped out. Then we've got the funding rates. As we can see here, they were all rising prior to the sell-off, but we got the first reset to negative funding on the hourly scale since August. So you can go all the way back

there. You can see in August, we had a couple in the beginning, but pretty much that funding rate has been positive. And then we just went negative there. Again, quick recovery though, which is a pretty healthy sign. But first time that's happened since early August. And then the market absorbed about $262 million of net realized losses, the first day of net losses since August 3rd. So again, since the beginning there, you can see right there, kind of May, June, July and into early August, when the red area, that's where people were taking losses. Basically, they were selling Bitcoin or Bitcoin was trading hands at a loss from where it had been purchased. And then since August 3rd, we pretty much hadn't had any Bitcoin trading hands at a loss in a material way

on a net basis. But during that big crash, obviously some people were selling it as they got liquidated at a loss. That brings us to SOPR. If Will was here, he'd be giggling to himself right now because every time that we talk about, we've been talking about SOPR for so many months that I think people are tired of hearing us talk about it. But SOPR is a measure of the state of profit and loss that the coins trade at on any given day. And so on the top here, we have the a SOPR metric. This excludes outputs less than one hour. So it kind of filters out all the noise. And what you can see is that the SOPR keep that that number one, right, is kind of that bar there. You want to see that every time we get close to it, it bounces off and recover. So we don't want

to go sub one uh and so you can see there uh in september it basically bounced right off of uh of this one soper line uh and continues to uh recover here and so then if you start to look at some of these other ones is every time that we get any sort of bounce or retraction uh whether it's short-term holders or long-term holders on the bottom you can see that right when we get around that one there seems to be some pretty significant resistance and then it'll recover and so uh will calls out that, um, yeah, this is really like a buying opportunity. A lot of times, again, historically, um, we can look at the data. It doesn't mean that the future is predicted by the past, but every time that we get near that one Sopra tends to be a pretty good buying opportunity

because that we just bounce right off of it and head backward, uh, back upwards. Uh, and so when you start to look at the spent volume age bands, uh, you can see is we're trying to identify who is responsible for the majority of selling on any given day. Um, and you can use this spent volume age band metric. It shows the percentage of spent volume derived from each age bracket of market participants. And similar to what we see in the short term holder Sopra, we also have a large uptick in spending coming from younger cohorts. So basically people who just bought the Bitcoin, they were spending it. And most of that is because liquidation cascade mixed with some selling from younger coins. That's what caused that price drawdown to be so severe and so quick

when it happened. And so if we then go and we look at the market structure, we can look at something like the supply shock ratios. We continue to look at this and it continues to say the exact same thing. On the right here, you can see the green bands where back in April and into May, it was red, right? We were going down. The supply shock ratio was screaming on chain, telling us, hey, this is not healthy. This is actually bad, likely to lead to a price decrease. What you can see is starting in July, in August, and then again, now in September, we continue to have that supply shock ratios move upwards. And you can see that it's highlighted there in green, what that basically is telling us is that it is likely to lead to a supply shock, which usually leads to a

price increase, which is pretty significant. Exchanges are down another about one point two billion dollars this week, meaning that exchange it people buying Bitcoin and moving it off of the exchanges. And it's reflected by this exchange shock supply ratio. And we then look at the whales. Whales continue to increase their holdings again this past week. This metric that we've got here takes into account all entities with over a thousand Bitcoin. And then it filters out any entities that are on chain, such as Grayscale, ETFs, QBTC, et cetera, and also all exchanges. So it's basically non-exchanges, non-financial products that have more than a thousand Bitcoin. And so in total, whales added about $2 billion to their wallets over this past week. So literally

$2 billion worth of Bitcoin was bought up by people who already had at least $1,000 Bitcoin in their wallet. And so whales continue to buy very, very aggressively, especially when price crashes. They're just gobbling up all that cheap Bitcoin. And so it's really easy to get concerned by short-term moves, but Will basically states it's important to remember the broader picture is highly bullish. They have a long-term holder supply shock ratio, and you can compare that coins held by the long-term holders to the short-term holders. And what you see is that the ratio is now approaching a zone that has historically caused a supply shock effect in the market caused by long-term investors locking up substantial portions of Bitcoin. Again, we've

been talking about this for weeks now, but it's continuing to play out. Over the next few months, the metric will have reached the upper bound of this SS range if its trajectory continues. The amount of supply in nominal Bitcoin terms continues to reach all-time highs, increasing by about $3.82 billion this week. So this isn't solely long-term holders buying coins this week. A lot of it is short-term holders aging past the 155-day threshold that then makes them long-term holders, but also long-term holders are buying as well. And so it's very clear here. You can see that whenever we have gotten up into kind of that green area, there usually is pretty significant price movement that follows shortly. And so you

can see all the way back to July of 15. We then got that massive 2017 bull run. We then saw in January, the kind of the second half of 2018 into 19 in the bottom of the bear market, we then got a price run. And then again, in kind of the middle of 2020, again, we started to see that supply shock ratio entering into the green zone. We then got a big price movement up. Again, past doesn't predict the future, but we just now are entering into this green area. Now it would not be surprising to see a massive move upward because the supply shock ratio kicks off kind of rocket fuel for Bitcoin. And then lastly, as we have the miners, if we take a peek at what they're doing, the hash continues to come back on the network very aggressively. It's showing no signs of

slowing down as more competition for the same block reward comes online. The minor revenue in Bitcoin per hash has dropped. Obviously, more people competing for the same reward. Each person makes less. But when denominating it in U.S. dollar terms, their revenue looks very strong. And it's because the Bitcoin price continues to increase. And so miners are making less Bitcoin, but more in dollar terms because the price of Bitcoin goes up. And so miners continue to sell off, although nothing substantial. They've sold an additional 467 Bitcoin this week, according to Glassnode. So basically, in summary, the way that this works is there's Bitcoin that's sitting out there in circulation. Whales bought about $2 billion worth of Bitcoin. The exchanges

had about $1.8 billion, almost $2 billion of Bitcoin that was purchased and then taken off of the exchange. We continue to see the hoarding of Bitcoin, which is increasing that supply shock ratio. As Bitcoin circulating supply becomes more and more illiquid, when new demand shows up to the market, there's less and less Bitcoin for them to buy. As demand increases and the supply of an asset is being more constricted, the price has to go up to accommodate everyone. Now, that's predicated on the fact that people keep buying Bitcoin and holding an illiquid and strong long term hands. And it's also predicated on the fact that demand will continue to increase for Bitcoin. So as long as those two things happen, which are basically increases and continuations of

the trends that are already underway, it is likely to lead to a very, very fun second half of the year. Things could change. Do not take this as investment advice. But watching the on-chain metrics is fascinating because it basically gives us insight into what potentially could be happening in the future.