Tax-related selling appears to have exacerbated the bitcoin market’s macro-driven weakness.
Bitcoin (BTC) has broken through critical price support to hit one-month lows as the tax season in the United States comes to an end.
The leading cryptocurrency by market value fell to $38,577 (R566 k) during the Asian hours, a level last seen on March 15. According to analytics firm IntoTheBlock, $40,000 (R590 k) was critical support because significant buying activity has occurred around that level in the past. The latest drop brings the cryptocurrency’s loss to more than 17% since testing the waters above $48,000 (R 706k) three weeks ago.
Tax-related selling and a hazy macro-environment appear to have contributed to the weakness. The deadline for submitting 2021 tax returns or requesting an extension to file and pay the tax is Monday, April 18, 2022.
“Tax-related selling has definitely played a role in recent weeks,” said Jeff Anderson, CIO of quantitative trading firm and liquidity provider Folkvang Trading in a Telegram chat. “However, it’s difficult to say how much of the weakness is due to the approaching tax deadline.”
“People were positioned for an end of tax selling Monday,” Anderson added, “and the [continued rise] in yields has scuppered that.”
According to data from the charting platform TradingView, the 10-year Treasury yield in the United States rose to 2.88 percent early Monday, the highest level since December 2018. The nominal and real or inflation-adjusted yields on US bonds have been soaring in recent weeks, owing to high inflation and the Federal Reserve’s (Fed) plans for rapid rate hikes. As a result, risk assets, such as technology stocks and cryptocurrencies, have been under pressure.
According to George Liu, head of derivatives at Babel Finance, the strengthening correlation between bitcoin and stocks could be the more significant reason for the drop below $40,000 (R590 k).
“The tax issue has already been known and anticipated in the markets,” Liu said, “so we don’t see it as a decisive factor for the current price drop.” “In essence, the short-term correlation between bitcoin and US stocks has reached a new high.”
Amber Group, a crypto services provider, expressed a similar sentiment, stating that “a lot has to do with the poor macro conditions… look at equities and Nasdaq [tech-heavy index] and the rise in real yields.”
According to institutional bitcoin broker NYDIG, the rolling 90-day correlation between bitcoin and the Nasdaq Composite recently surpassed 0.6.
Who is selling?
According to blockchain data, the selling pressure is most likely coming from short-term traders with large holdings.
“Checking on the overall bitcoin network movement from spent output age band USD and spent output value band USD, it appears that the cohort most active during the price change seen a few hours ago was mostly 0-week aged coins + UTXO volume in 1M+ USD ( R14.7 m+),” said Chan Chung, head of marketing at Korea-based analytics firm CryptoQuant, in a Telegram chat.
The spent output age band is a collection of all spent outputs that flowed into exchange wallets within a given time period. As Chung stated, most 0-1 week old coins were in trade on Monday, implying that the selling pressure was most likely from short-term traders.
Furthermore, the spent output value band, which depicts the distribution of all spent outputs based on their value, reveals that the majority of the coins that entered exchanges early today were from the 10-100 BTC, 100 BTC, and 1,000 BTC cohorts.
However, the data is subject to different interpretations; given the limitations of blockchain metrics. A whale’s stack can be stored in multiple addresses for years. “Whales may have split their wallet yesterday, giving the appearance of a one-day UTXO; however, it could have been aged for more than three years,” Chung noted.
Derivative market flows are bearish.
As evidenced by rising put-call skews, which measure the cost of puts relative to calls, derivative traders appear to be positioning for a prolonged decline in bitcoin.
According to Liu of Babel, open interest in the cash-margined perpetual futures market is rising in tandem with demand for downside hedging. In other words, traders appear to be anticipating a decline.
This could be the case because funding rates, or the cost of holding long or short positions in the perpetual futures market, have turned negative.
“Selling pressure resurfaced in the perpetual market as bid transactions exceeded the ask side,” said Glassnode’s Uncharted newsletter on April 17. “The number of perpetual contracts with negative funding rates grew, adding to the downward pressure.”
A negative funding rate indicates that traders believe the market is falling and are willing to pay a premium to shorten it.