The Terra Collapse, BTC's Response & The Macro Bottom

On-chain metrics are a key indicator for cryptocurrency analysts to help determine macro tops & bottoms. We dive into the latest data supplied by Glassnode.com to give insights into where we are in terms of market structure, how deep this bear market can go, and a quick breakdown of the Terra ecosystem collapse.

The Luna Foundation Guard & the 80k BTC selloff

“The Luna Foundation Guard (LFG) BTC selloff saw a redistribution of 80k BTCs...”

The Terra ecosystem meltdown and the demise of its infamous stablecoin, UST, reverberated across cryptocurrency markets wiping out a $60 billion project in a matter of days. The crash bankrupted multiple investors and brought down the entire crypto market with it - over $400 billion in value was wiped out in terms of crypto market capitalization (see the below chart for reference). Terra's disastrous collapse put pressure on an already bearish crypto market pushing Altcoins and market sentiment to new lows as the market reacted brutally.

(Crypto Total Market Capitalization)

The Luna Foundation Guard (LFG) BTC selloff saw a redistribution of 80k BTCs in an attempt to save the UST peg. What seemed likely to finally push BTC under 28k support actually had a slightly opposite effect. BTC's long-term holders rallied and absorbed the LFG supply without breaking much of a sweat - amongst Bitcoin Maxis this was seen as incredibly bullish and gave further proof of the strength and liquidity on-hand in the BTC market. It's worth noting that almost 100% of the coins sold by LFG were absorbed by wallets holding less than 100 BTC. Long-term holders are the only ones left by large in the market holding the line and appear to be doubling down when BTC corrects below 30k or when sudden supply enters into circulation.

“Historically, every bear market bottom has seen a major capitulation of long-term holders, this hasn’t happened yet”

Rewind to 2020 - BTC selloffs at the beginning of the previous bull market showed a significant reduction in wallets, then followed by an explosive uptick in growth. What we are seeing now in today's bear market is that after selloffs wallet growth still continues to the upside, although the uptick is marginal (no acceleration), wallets continue to grow even now in the depths of a bear market. Looking at who is exactly buying the dips, as with the LFG selloff, it's primarily the long-term holders buying. Historically, every bear market bottom has seen a major capitulation of long-term holders... this hasn’t happened yet.

What are long-term Holders doing?

“long-term holders are becoming, by in large, price-insensitive”

The past 2 years have created a new bracket of 'Bitcoin HODLR'. There are now many holders from the 50k+ range, suggesting that long-term holders are becoming, by in large, 'price insensitive' and happy to accumulate no matter the price.

For the most part, only long-term holders remain with most retail buyers flushed out of the market and/or lacking the liquidity/motivation to re-enter. The bear market has shaken out the majority of speculators and short-term holders, as we clearly see newer wallets reducing over the last 6 months. Only the hardened HODLRs remain, with the market already witnessing a significant flush.

However, long-term holders have indeed begun selling at a loss, albeit slowly. This is a key macro bear market metric witnessed in 2012, 2015, 2018, and now in 2022 that has helped to identify a bear market bottom. Note that this process can last a very long time - up to a year or more in some cases - lending weight to the idea that this current bear market has the potential to go a lot deeper. But, long-term holder capitulation has begun, which is a 'positive' sign that we are entering the final phase of the bear market. The question remains: How long will this final phase last?

“With markets entering into a period of 'stagflation' the economic outlook is anything but certain...”

In my opinion, sub 22k would see the type of long-term holder capitulation one would expect to see to mark the bottom of the bear market - but given the change in the mindset of the long-term HODLR, becoming more and more 'price insensitive', is there any guarantee that we’ll see the same level of lows which historical logic would suggest? Perhaps not. But we also need to appreciate that previous macro bottoms were formed without the weight of a hawkish FED, declining economic growth, and high inflation. With markets entering into a period of 'stagflation' the economic outlook is anything but certain and cryptocurrencies will likely be tested to the limit.

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Reference: Glassnode, week 22, 2022

https://youtu.be/z-OTbEVg3g0