The Weekly Recap: Is the Market Downturn Over?

Market Overview

September is off to a brutal start. Both stock and crypto markets have taken a severe hit. Crypto indices were down between 14-25%, sounding a loud wake-up call to “Westerosi” who are still lingering in the idle days of summer. But now, there’s a storm a-brewin’, and it seems that winter has come, though no one knows how long it will last. There are several positive signs amid the prolonged correction. The storm gradually calmed upon entering the second week of September, as the BTC market opened at $10,340 and closed at around the same price. Throughout the week, BTC price remained in a narrow range of around $600. 

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Source: Bybit 

BTC price peaked at $12,062 on September 1, before plunging to a two-month low, bordering at around $10,030. The free-falling price was exacerbated by immense selling pressure, as shown by the trade intensity chart below. A dip in trade intensity indicates that more market participants preferred to sell than buy at the time. The past two weeks had seen some of the lowest trade intensity in the bitcoin market, with the seven-day average falling well below long term averages. 

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Source: Chainalysis

The selling pressure comes primarily from the group of traders who had held BTC for less than six months and decided to take profits before any profits accumulated over past months evaporated. The surge in price on September 1 might have incited widespread fear of a correction too high, and in turn, triggered a massive price plunge that looked as if it were to spiral out of control. 

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Source: Into the Block

High weekend inflows to exchanges on September 6 alluded to the likelihood of a continued sell-off. However, the holder mentality jumped in to save the day. The urge to resist triumphed in the battle against increased selling pressure, reinforcing resistance levels that held the price steady on Monday, September 7, and for the rest of the week. 

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Source: Glassnode

ETH shared a similar narrative. Despite the escalating gas fees, ETH saw its highest weekend inflows in the last 52 weeks. A high weekend inflow suggested that both BTC and ETH market participants were spooked by the persistent sell-off  in the first week, and expected the situation to aggravate last week. On the contrary, both BTC and ETH prices remained relatively consistent.  

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Source: Glassnode

Correlations

Since mid-March 2020, the rise and fall of ETH has almost been in lockstep with BTC. The price correlation between BTC and ETH, two of the largest cryptocurrencies by market cap, rose as high as 0.9, implying a high probability that the two prices will move in the same direction. However, the short-term correlation, which remains on the high end, has been gradually, but surely trending downwards. If we take a trip down memory lane, ETH’s correlation with BTC dropped significantly before the strong bull cycle in 2017, during which ETH prices soared to $1,417. 

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Source: Coinmetrics

Despite the concurrent crash in tech stocks in early September. BTC’s correlation with S&P dropped as its correlation with gold increased, showing that market participants are more inclined to see BTC as a safe-haven asset, like gold, and less like a tech stock. 

On-Chain Activities 

Bitcoin on-chain fundamentals decreased two weeks in a row. The Network Health and Liquidity indices saw a substantial decrease of 9 points. Both took a hit due to stagnant transaction volumes on chain, and fewer new users joining the network. Market sentiment suffered a massive drop — half of the figure last month — but had since bounced back 12 points. This slight recovery suggests that fear is gradually subsiding. Coincidentally, the VIX index, also known as the Fear indicator, hit its highest level in months. 

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Source: CBOE

Derivatives Markets

The correction in early September had caused the open interest in the futures market to drop sharply, down by 28% in the first week of September and had experienced considerable inertia in terms of recovery. Institution-wise, the open interest on CME had fallen significantly from its peak on August 17, down by 54% in a span of three weeks. 

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Source: Skew

The DeFi Craze

The price drop in ETH cascaded to the DeFi space, with the total value locked in DeFi dropping from $9.6 billion to $6 billion. LINK, one of the best performing altcoins, lost 7.4% of its value on Sunday, September 13. Notwithstanding several minor setbacks and corrections, the DeFi space is poised for a comeback, as the total value has been steady increasing since September 10. 

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Source: DeFi Pulse

Mass Adoption?

On a scale of 0 to 1, with 1 being the highest rate of grassroots cryptocurrency adoption, Chainalysis presented a snippet of their research on global mass adoption of cryptocurrencies, measured between July 2019 and June 2020. The index is a testament to the inevitable global adoption of cryptocurrencies as a mainstream means of value transfer and the medium of exchange. Almost 93% of the 154 countries analyzed have some sort of ongoing cryptocurrency activities. Developing countries such Venezuela have seen robust development of grassroots-driven crypto adoption to hedge against inflation and mitigate the risk of fiat currency losing value.  

Source: Chainalysis