Bitcoin on-chain deep dive: BTC falls below the global electrical cost


A chorus of recession calls

Fed officials have been barred from speaking ahead of next week’s federal funds announcement; investors have been left thinking about the US rate cuts for 2023 and 2024. While the December 2023 federal funds rate futures are priced at 4.5%, December 2024 is currently priced at 3.5 %; this week there was an aggressive rate cut.

price cuts
Fed Funds Rate 2023/2Fed (Source: TradingView)

Jerome Powell and the Fed’s main objective is to control inflation and tighten fiscal conditions; However, since mid-October, financial conditions have eased as bond yields declined, credit spreads narrowed and inverted to multi-decade levels, while stocks rallied. The spread between the ten-year and two-year yield closed at a new width of -84bp.

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US10-US02Y: (Source: TradingView)

Worse-than-expected PPI data was reported on December 9, and the real test for the treasury market will follow next week’s CPI report. Depending on the CPI results, the fed funds rate hike could change, which currently sees a 75% chance of a 50bp rate hike taking the fed funds rate to 4.25-4.50%.

fed
Fed Funds Rate: (Source: CME FedWatch Tool)

Bitcoin mining difficulty and hash rate continue

Bitcoin difficulty adjusted 7.32% on the morning of December 6, the largest negative adjustment since July 2021, which saw an adjustment of more than 20% due to China banning Bitcoin last summer as a result of the disconnection of the miners and the hash rate falling to 84EH/s.

A drop in mining difficulty will bring relief to miners, however this relief might be short-lived as the hash rate is already starting to climb to levels around 250EH/s.

Since China’s ban last summer, the mining difficulty and hash rate have increased a total of 3 times, showing that Bitcoin’s long-term security has never been stronger.

Difficulty
Bitcoin Adjustment: (Source: Glassnode)
Hash Rate
Hash rate: (Source: Glassnode)

Bitcoin falls below the global electricity cost

A model created by Charles Edwards (Capriole Investments) on the Bitcoin electricity and production cost model to identify how much it costs to produce one Bitcoin.

This model has provided a great floor for the Bitcoin price during bear markets, and only four periods in Bitcoin’s history has the price dipped below Bitcoin’s global electricity cost.

The most recent time bitcoin price it fell through the covid era model, and now, during the FTX crash, the price was below Bitcoin’s global electric cost for most of November, about $16.9K, and has fallen back below it.

production cosy
Bitcoin Electricity Cost Model: (Source: Capriole Investments)

A similar model coined by Hans Hague modeled the idea of ​​the difficulty regression model. By creating a log-log regression model for difficulty and market capitalization, this model calculates the total cost of producing one bitcoin.

The cost of producing one Bitcoin is currently $18,872, higher than the current price of Bitcoin. The Bitcoin price fell below the regression model during the FTX crash on November 15 and for the first time since the 2019-20 bear market, a zone of deep value for Bitcoin.

regression model
Difficulty regression model: (Source: Glassnode)

Bear Market Accumulation

The Accumulation Trend Score is an indicator that reflects the relative size of entities actively accumulating on-chain coins in terms of their BTC holdings. The Accumulation Trend Score scale represents both the size of the entity’s balance (their Participation Score) and the number of new coins they have bought/sold in the last month (their Balance Change Score).

An accumulation trend score closer to 1 indicates that, overall, the largest features (or a large part of the network) are accumulating, and a value closer to 0 indicates that they are being distributed or not accumulating. . This provides information about the size of the market participants’ balance and their accumulation behavior over the last month.

Highlighted below are cases where a Bitcoin capitulation has occurred while Bitcoin investors are piling in, the FTX collapse which sent Bitcoin to $15.5k, has seen the same amount of accumulation that surged during the moon collapsescovid and the 2018 bear market background.

ats
Accumulation Trend Score: (Source: Glassnode)

The accumulation trend score by cohort is broken down by each cohort to show levels of accumulation and distribution throughout 2022, currently in a significant period of accumulation across all cohorts for more than a month that never happened in 2022. Investors see the value.

ATS1
Accumulation Trend Score by Cohort: (Source: Glassnode)

Futures open interest, leverage and volatility decreased

Due to the macro climate and general sentiment, a lot of risk has been removed from the market, which is evident in Bitcoin derivatives.

Bitcoin open interest on Binance is now back to July levels. Futures open interest is the total funds allocated in open futures contracts. More than 35,000 BTC have been unrolled since December 5, the equivalent of $595 million; this is approximately a 30% OI decrease.

Open Interest
Futures Open Interest: (Source: TradingView)

The less leverage there is in the system, the better; this can be quantified using the futures estimated leverage ratio (ELR). The ELR is defined as the ratio between the open interest on futures contracts and the balance of the corresponding exchange. The ELR has dropped from its peak of 0.41 to 0.3; however, at the beginning of 2022, it was at a level of 0.2 and, still, a lot of leverage is generated in the ecosystem.

leverage 1
Estimated Leverage Ratio: (Source: Glassnode)

Implied volatility is the expectation of market volatility. Given the price of an option, we can solve for the expected volatility of the underlying asset. Formally, the implied volatility (IV) is the range of one standard deviation of the expected movement of the price of an asset during a year.

Viewing At-The-Money (ATM) IV over time provides a normalized view of volatility expectations that will often rise and fall with realized volatility and market sentiment. This metric shows the ATM implied volatility for option contracts expiring one week from today.

Similar to the Luna crash in June, Bitcoin’s implied volatility had turned back down after the FTX implosionyear-to-date lows.

volatility
ATM Options Implied Volatility: (Source: Glassnode)

A huge supply of stablecoins waiting on the sidelines could trigger a bull run

The Stablecoin Supply Ratio (SSR) is the ratio between the supply of Bitcoin and the supply of stablecoins denoted in BTC, or: Bitcoin Market Cap / Stablecoin Market Cap. We use the following stablecoins for supply: USDT, TUSD, USDC, USDP, GUSD, DAI, SAI, and BUSD.

When the SSR is low, the current supply of stablecoins has more “buying power” to buy BTC. It is a proxy of the bid/ask mechanics between BTC and USD.

The ratio currently stands at 2.34, the lowest since 2018, while the SSR had a ratio of 6 in January 2022. The ratio is trending lower as stablecoin purchasing power continues to rise.

stables
Stablecoin Supply Ratio: (Source: Glassnode)

While the net position change in equities purchasing power supports this, this chart shows the buying power of the 30-day stablecoin in equities. It considers the 30-day change in the major stablecoin supplies on exchanges (USDT, USDC, BUSD, and DAI) and subtracts the USD-denominated 30-day change in BTC and ETH flows.

Positive values ​​indicate more significant or increasing USD volume of stablecoins flowing to exchanges relative to BTC + ETH over the last 30 days. Overall, it suggests more stablecoin-denominated purchasing power available on exchanges relative to the top two assets.

Over the past two years, stablecoin purchasing power has only increased by more than seven billion stablecoin purchasing power, trending to highs last seen since the beginning of the year.

stablecoin
Stablecoin Exchange Purchasing Power Net Position Change: (Source: Glassnode)