EMC Labs March Report: After the Big Sell-off, the Bull Market Continues

March's global financial markets were calm.

The Nasdaq and Dow Jones indices both unambiguously reached new rebound highs. The Nasdaq has now risen for five consecutive months, indicating that bullish capital is increasingly tolerant of the delayed interest rate cuts in the U.S.

There are many factors contributing to the delay in interest rate cuts.

The U.S. CPI saw a slight rebound from 3.1% to 3.2%, and the U.S. manufacturing PMI rebounded to 50.3%, indicating a shift into an expansion phase. Japan ended its eight-year negative interest rate era with its first rate hike.

The probability of a rate cut in April has significantly decreased, and the probability for May has also fallen below 50%.

U.S. Treasury Interest Scale (Chart by Bank of America)

The U.S. dollar index continued to rebound in March, rising to 104.49 by the end of the month.

Gold prices reached a historical high, and BTC prices also hit a historical high.

The accumulation of capital flowing back to the U.S. has simultaneously boosted equity and safe-haven asset markets.

Meanwhile, U.S. government spending on national debt has reached $1.1 trillion in the past 12 months, doubling since the COVID-19 pandemic. Bank of America pointed out in its report that if the U.S. government cannot cut rates by 150 basis points within the next 12 months, its interest costs will rise to $1.6 trillion. By the end of this year, interest on U.S. debt will become the largest expenditure item for the U.S. government.

This is the cost of increasing U.S. national debt issuance and the delay in interest rate cuts, and it is also one of the deeper reasons why the market bets that the U.S. government will cut rates soon.

With U.S. rate cuts, macro-financial conditions will enter a period of easing, and both equity markets and the crypto market will enter a new upward cycle.

This is the most noteworthy point for global investors and is closely related to the crypto asset market.

Currently, the market is pushing back rate cut expectations to the second half of the year. Whether in the U.S. stock market or the crypto market, some funds have begun to lock in profits and exit.

Crypto Market

In March, BTC opened at $61,179 and closed at $71,289, rising 16.53% for the month, with a volatility of 23.88%, achieving seven consecutive months of growth, and the trading volume was the highest since mid-July.

Throughout March, BTC maintained its upward trend within the "rising phase" channel. March 13 marked a mid-term trend turning point, with BTC reaching a high for this bull market on that day, after which the overall trading volume showed a downward trend. After touching the 30-day moving average and rebounding on March 20, the volume failed to reactivate, indicating a stalemate between bulls and bears. As of April 2, when this report was written, BTC had fallen for two consecutive days, with prices again testing the 30-day moving average, and the volume began to expand.

BTC's seven-month rise has matched historical records. Both long and short positions have accumulated a large amount of unrealized profits. As prices rise during the upward phase, the scale of profit-locking sell-offs has become one of the market's focal points.

The interplay between inflowing capital and BTC sell-offs has become the dominant factor influencing BTC prices in the short to medium term.

Large Sell-Offs

We understand a bull market as a phenomenon where new participants with ample funds enter the market to buy up chips, prompting existing holders to sell. For long-term BTC investors, a bull market is a time for strong sell-offs.

In this cycle, December 3, 2023, marked the highest holding point for long positions, with a total of 14,916,832 BTC held. Subsequently, as the bull market gradually kicked off, long positions began a cyclical large sell-off that occurs every four years, selling a total of 897,543 BTC by March 31.

Long Position Group Profit Taking

Starting with long positions selling off and ending with short positions absorbing, both maintain a dynamic balance.

During the upward phase, when new capital enters and controls pricing power, the main buying volume pushes prices up, achieving balance.

In the upward phase, when long positions control pricing power, the main selling volume pushes prices down, achieving balance.

An important subset of participants is the profit-taking shorts, which can also become a significant reason for pushing prices down during the upward phase.

Observing the sell-offs in March, we found that both long and short positions exhibited synchronized selling.

On February 26, both began transferring large amounts of coins to exchanges to initiate large sell-offs, reaching a transfer peak on March 12, after which the transfer volume continued to decline.

On March 12, the transfer volume of both reached a peak, and the next day BTC's price began to decline from a high of $73,835.57, dropping to a low of $60,771.14 on March 20.

After March 20, the bulls used buying power to pull BTC's price back to $71,288.90, but selling pressure continued to pour in after March 20, ultimately leading to another price collapse in the first two trading days of April.

Short Position Group Profit Taking

On March 12, the joint sell-off initiated by both long and short positions marked the first wave of large-scale sell-offs and profit locking after entering the bull market, with a total profit of up to $3 billion for both groups on that day. From February 26 to March 31, the total profit reached $63.1 billion.

Notably------

In the first half of the large sell-off from February 26 to March 12, BTC was in a buying power-dominated phase, with prices rising from $51,730.96 to $71,475.93.

In the second half of the large sell-off from March 13 to March 31 (which has not yet ended), BTC was in a selling power-dominated phase, with prices dropping from a high of $73,709.99 to a low of $60,771.74.

Although the peak of selling occurred on March 12, the daily sell-off volume for both long and short positions remained above a billion dollars until the end of the month.

EMC Labs believes that this sustained, large-scale sell-off is the fundamental reason for the decline in BTC prices from March to April. This is the first round of large sell-offs after entering the bull market, where the sellers have gained pricing power, dampening the bulls' enthusiasm and leading to a price decline while locking in a cumulative profit of $63.1 billion.

In the upward phase, whether profit-locking sell-offs lead to price declines depends on the comparative strength of the bulls and bears. In the early stages of selling, sellers only test the waters, and prices continue to rise; thus, sellers increase their sell-off scale, ultimately exhausting the bulls' ammunition, leading to a price decline. After the decline, due to price reasons, sellers begin to reduce their sell-off scale, and buying power continues to recover, pushing prices back up. The two sides continue to battle over price fluctuations until the next selling interval.

Throughout the entire upward phase, similar battles often occur multiple times. After several sell-offs, most chips enter the short position group, leading to increasing liquidity, which ultimately causes the buying power to lose in the bulls vs. bears battle, thus ending the bull market.

EMC Labs assesses that currently, the selling power is significantly diminishing but has not yet ended. Although price predictions are difficult, the first wave of large sell-offs in the bull market is nearing its end. This large-scale sell-off before the halving has cleared a significant amount of profit-taking chips, raising BTC's cost center and aiding the price increase in the next phase.

Bull Market Gradually Unfolding

One of the external factors for the initiation of this bull market is the inflow of funds resulting from the approval of BTC ETFs, while the internal factors are technological developments and the implementation of new applications.

In the February report, we mentioned that the initiation of a cycle must be fundamentally supported by industrial development. Based on this logic, we turned our attention to the data of application public chains.

In March, Ethereum completed the Cancun upgrade, effectively reducing Layer 2 gas fees and somewhat increasing Layer 1 capacity. We noted that since February, the daily active users on the Ethereum network have significantly increased, rising from around 400,000 in early February to 1.13 million by the end of March, nearly doubling. For the Ethereum community, this is a remarkable achievement and a clear signal of the bull market's initiation.

Ethereum Daily Active Addresses

In a bull market, in addition to the activity of existing users, new users will also flood into the market. We monitor this indicator through new addresses.

Ethereum Daily New Addresses

Since March, the number of new users on the Ethereum network has seen some improvement, with the 30-day user growth average continuing to rise, but it has not exceeded last year's peak. Since last year, the number of new users on the Ethereum network has shown a typical wave pattern and has not yet exhibited a pulse-like surge.

As the bull market unfolds, it will inevitably be accompanied by a continuous increase in Ethereum network users. This is something worth monitoring in the future.

Regarding Ethereum's data performance, we can understand that the bull market has just begun, primarily driven by the recovery and activity of existing users, while large-scale new users have not yet rushed in.

When we examine other application public chains, such as BNB Chain, Avalanche, and Polygon, we find that on-chain users remain dormant and have not shown the vigorous momentum expected in a bull market.

Only one public chain has far surpassed Ethereum's performance, which is the resplendent and rapidly growing Solana.

Looking at the user growth statistics for Solana, we can see a very perfect pulse-like growth trend. In 2023, its new users and prices have steadily increased, with the growth curve's slope beginning to steepen in mid-November, rising from around 300,000 daily new users to about 1.6 million by mid-January, more than quadrupling. After two declines in new users in late January and late February, the entire month of March saw explosive growth, with nearly doubling growth over the 30 days from the beginning to the end of the month.

This strong performance has led Solana's metrics, including daily new users, daily active users, and daily gas consumption, to surpass the previous bull market and set new historical highs.

This large-scale adoption is the fundamental support for SOL's price surge, leading among mainstream cryptocurrencies.

Solana Daily New Addresses

Observing Solana's daily active addresses, the trend remains consistent with new addresses.

Solana Daily Active User Addresses

The heterogeneous Solana is regarded as the new carrier for DePin and the supporting public chain for the USDC payment narrative.

However, we must recognize that this adoption is still far from fully realized. Currently, the main use case of the Solana network is the issuance and speculation of MEME coins. Phenomenal MEME coins like Bonk, BOME, and WIF have emerged, with daily trading volumes reaching over $100 million. Many MEME coins, which are born and die within a week, continue to attract speculators, resulting in over 1,000 new MEME coins being created daily.

Although Solana is making remarkable innovations in areas such as DePin, DEX, Staking, Oracle, and RWA, this current wave of large-scale adoption in Solana remains speculative on MEME coins, reminiscent of the Ethereum ICO frenzy in 2017.

This is concerning.

Capital Flow

Stablecoin Supply Trends (EMC Labs Statistics)

In previous reports, EMC Labs has repeatedly pointed out that the trend shift of stablecoins from outflow to inflow in October 2023 is cyclical. This trend is a major external factor for the initiation of the bull market and will not terminate in the short term due to its cyclical nature.

Throughout March, stablecoin channels saw a total inflow of $8.9 billion, setting a monthly inflow record for this cycle. This inflow is the fundamental support for BTC prices reaching historical highs this month and is also one of the buyers absorbing BTC sell-offs.

The circulation scale of stablecoins has not yet reached the peak of the previous bull market, and the subsequent inflow scale and rate need to be closely monitored.

Since the U.S. approved 11 BTC ETFs in January this year, the funds from this channel have also become one of the important factors influencing the market.

Data shows that during this round of large sell-off adjustments, BTC ETFs did not experience large-scale outflows, with only slight outflows recorded from March 18 to March 22.

Statistics of Inflows and Outflows for 11 BTC ETFs (SosoValue)

Based on the analysis of inflows and outflows for BTC ETFs, we judge that the funds in this channel only made a short-term reduction in positions, with a scale of around $10 billion. This amount is small compared to the $63.1 billion in locked profits, and therefore is not the fundamental reason for this round of adjustments.

The funds in the BTC ETF channel continue to flow in, which is one of the important supports for the subsequent recovery and new highs in BTC prices.

Conclusion

In this report, we analyzed the phenomenon of long-term investors and short-term profit-takers initiating the first round of large sell-offs after BTC prices broke new highs.

This round of sell-offs helped sellers lock in $61 billion in profits, leading to a decline of about 17% in BTC prices.

Based on market structure, we assess that this sell-off is a normal phenomenon during the market's upward phase; based on the inflow of stablecoins and ETF channels and the adoption of application chains, we predict that there will be fluctuations in the future, but this round of crypto bull market is unfolding in an orderly manner. For long-term investors, it is advisable to actively go long while remaining cautious.

EMC Labs was founded in April 2023 by cryptocurrency asset investors and data scientists. It focuses on blockchain industry research and investments in the crypto secondary market, with industry foresight, insights, and data mining as its core competencies, aiming to participate in the thriving blockchain industry through research and investment, promoting the benefits of blockchain and crypto assets for humanity.