EMC Labs April Report: Macroeconomic Financial Crisis Emerges, On-Site Funds Remain Unmoved

Author: EMC Labs

The information, opinions, and judgments regarding the market, projects, cryptocurrencies, etc., mentioned in this report are for reference only and do not constitute any investment advice.

As the U.S. and Hong Kong successively approve BTC ETFs, we cheer for the integration of DeFi and TradFi, yet we remain unaware of the profound changes occurring in the structure of the Crypto market.

Which parts of the market are changing, which parts have not yet changed, what new factors are influencing market trends, and which existing factors continue to play a significant role… These are the aspects we investors, who seek to explore market trends and industry cycles, need to understand.

Macroeconomic Finance

For BTC, which exceeds $1.2 trillion, its strong correlation with the Nasdaq index has become widely known due to the expansion of market capitalization and changes in the participant base. This makes macroeconomic conditions, financial data, and global central bank policies some of the most important factors influencing BTC price movements at many times. April was a month when these data took over BTC's trend.

The U.S. CPI data for March released in April reached 3.5%, surpassing February's 3.2%. The unexpected rebound in CPI caused market expectations for interest rate cuts in the U.S. in the first half of the year to plummet. The market had previously paid considerable attention to the pressure on U.S. government bond yields in a high-interest-rate environment; however, against the backdrop of the Federal Reserve's current core mission—to bring CPI below 2%—and the bleak prospects of achieving this, there is no doubt about the further delay of interest rate cuts. Some even began to voice that interest rate cuts this year are unlikely and that there may be another rate hike—this is not impossible; if CPI rebounds significantly, what else can the U.S. do besides raising rates?

U.S. CPI index rebounds for two consecutive months

Meanwhile, the Federal Reserve's balance sheet reduction plan continues to be firmly executed.

Federal Reserve holdings of U.S. Treasury bonds

Since initiating the balance sheet reduction in 2022, the Federal Reserve has sold off more than $1.2 trillion in U.S. Treasury bonds. This is another powerful pump in a high-interest-rate environment. This pump withdraws up to $95 billion in liquidity from the market each month (with $60 billion in U.S. Treasury bonds and up to $35 billion in agency bonds).

The pessimistic expectations and changes in response strategies triggered by the above two points have driven the U.S. dollar index to continue strengthening, ending the Nasdaq and Dow Jones indices' five consecutive gains this month. After reaching historical highs in March, both indices saw declines of 4.41% and 5.00% this month.

Correspondingly, the BTC, which completed its halving this month, also ended its seven-month rise, with a monthly drop of $10,666.80, marking a 14.96% decline. Following the breakdown of the upward channel in March, the efforts to establish a consolidation box in April seem to have failed.

Is a storm brewing, and is the tide turning?

Crypto Market

In April, BTC opened at $71,291.50 and closed at $60,622.91, down 14.96% for the month, with a volatility of 19.27%, ending a seven-month rise and experiencing the largest single-month decline since January 2023 (the recovery period of this bull market) amid shrinking trading volume.

BTC monthly trend

After the massive sell-off in March, the buying power in the BTC market encountered a significant setback and has remained weak since then. In April, it was reflected in the fact that for most of the time, it traded below the 7-day average, hitting an adjustment low of $59,573.32 on April 19.

BTC daily trend

Since February, BTC has established a bullish price ascending channel on the daily dimension (green background part in the above image). After reaching an all-time high on March 13, it began probing the lower boundary of the ascending channel. Throughout April, it attempted to establish a consolidation box between $59,000 and $73,000 (purple background part in the above image), but with the shift in macroeconomic expectations and the breakdown of U.S. stock indices, the efforts to build this consolidation box have been arduous.

Selling and Holding Firm

In the March report, we mentioned, "December 3, 2023, is the historical high point for long positions, with a total of 14,916,832 BTC held by long positions. Subsequently, as the bull market gradually started, long positions began a cyclical massive sell-off every four years, selling a total of 89,7543 BTC by March 31."

The biggest positive narrative for BTC in January—the approval of 11 spot ETFs—led long positions to sell off heavily at historical highs, resulting in a short-term saturation of new short positions and a cooling of enthusiasm.

This behavior was a response to the phase of BTC's price increase and is the reason why BTC's price stopped rising in March and entered a period of sustained consolidation. After entering April, the trend of "long to short" in the internal bull market phase was paused.

Changes in BTC positions across the market (monthly)

From the statistical data, in April, the selling volume of long positions decreased to 10,000 BTC (with March's selling volume reaching 520,000 BTC). During the price decline, short positions increased their holdings, not only absorbing the sell-off from long positions but also withdrawing tens of thousands of BTC from centralized exchange balances.

With the completion of BTC's halving this month, the miner community still maintains a "hold and do not sell" state (the overall position remains unchanged, meaning the market's sell-off scale is approximately equal to the output). Although the price decline is approaching the cost price for some miners, a massive sell-off has not occurred, and miners continue to hold approximately 1.81 million BTC steadily.

From the statistical charts of holdings across various parties, it is clear to see the pause in the trend of "long to short."

BTC holdings across various parties

Looking at the changes in holdings data over the past 11 years, we can see that a similar phenomenon of long positions pausing their sell-off occurred in the middle of the bull market in 2016. This often indicates that as prices sharply decline, the long position holders who believe in the continuation of the bull market choose to hold back, waiting for the market to restore supply-demand balance before resuming their sell-off.

Regardless, the halt of long positions' sell-off and their shift to holding firm is a significant event that occurred in the market in April, indicating at least that the cyclical sell-off of long positions is not the direct cause of the price decline in April.

Sell-off scale of long and short positions and CEX accumulation statistics (daily)

From the data on the transfer of BTC from long and short positions to exchanges, the inflow scale in April continued to decline compared to March, with little change in the stock of centralized exchanges and a slight outflow.

Capital Flow

Capital is a crucial factor determining market trends. After observing the internal structure of the market, we continue to examine the inflow and outflow of capital.

Changes in the supply of major stablecoins (chart by EMC Labs)

By analyzing the stablecoin issuance data, EMC Labs found that in April, the funds entering the market through stablecoins reached $7 billion, with USDT at $6.1 billion and USDC at $900 million. According to eMerge Engine, BTC entered the recovery phase of this cycle in 2023, achieving its first net inflow in October, and stablecoins have been in a state of issuance since then, with April's inflow scale ranking second at $7 billion.

Scale of major stablecoin issuance

As of April 30, the total issuance of stablecoins has grown to around $149 billion, increasing by about $30 billion since the low point, yet still not reaching the peak of the last cycle.

Furthermore, examining the stock of stablecoins in centralized exchanges, it remains at a high level. However, these funds do not seem eager to convert into purchasing power. Notably, the newly accumulated stablecoins in centralized exchanges are primarily USDT, while USDC used in the U.S. has seen virtually no new accumulation.

On the BTC ETF channel side, the inflow and outflow of funds show a clear trend of chasing highs and cutting losses, with continuous outflows since the price stopped rising in mid-March.

Statistics of inflow and outflow for 11 BTC ETFs (chart by SosoValue)

Based on its capital characteristics and scale, we believe that the funds in the BTC ETF channel are neither the main reason for the decline in BTC prices nor capable of independently reversing the situation.

Supply Pressure and Cycle

All things rise and fall, and cycles never cease.

Long and short positions and overall market floating profit and loss ratio

In a bull market, there will always be sharp adjustments. These adjustments objectively serve to clear floating positions.

One noteworthy indicator is the short position MVRV (floating profit and loss ratio). During the recovery and rising phases, as prices increase, holders accumulate more floating profits. At this point, the market needs to utilize declines to clear out those short positions that entered the market not long ago and the long positions that have accumulated sufficient profits. Historically, this clearing often requires prices to drop to a point where the MVRV value of the short position group approaches 1 to stop. Since last year, this clearing has occurred twice, in June and from August to October. The lowest in January fell to 1.03, and this cleaning has reached 1.02 as of April 30 (on May 1, MVRV dropped to 0.98). Notably, historically, after BTC prices undergo such severe tests, they often experience significant increases.

Another alarming speculation is that this cycle is a preemptive run, having reached new highs before the halving, and the peak of the current bull market has passed. One piece of evidence for this is the VDD destruction indicator.

BTC VDD destruction data

The VDD destruction indicator not only considers value realization but also takes into account the holding factors of long and short positions in the realized value, thus possessing significant reference value.

The speculation of reaching a peak is closer to the last bull market (2021). Based on this data, another speculation is that the bull market is halfway through, and if another large-scale VDD destruction occurs (similar to 2013) or two (similar to 2017), the bull market will come to an end.

A major interference factor in this round of VDD data is the redemption of Grayscale Trust holdings converted into GBTC. This interference data can also affect the judgment of long positions' sell-off scale.

Conclusion

Combining multi-dimensional judgments of fundamentals, capital flow, policy, market cycles, and industry cycles, EMC Labs believes that the decline of BTC in April is a result of the price surge over the past seven months followed by significant sell-offs from some investors, leading to a weak balance between buyers and sellers. New incoming funds are choosing to observe cautiously, while traders who base their trades on macroeconomic data and technical indicators dominate the market, resulting in a correction magnitude comparable to previous bull market pullbacks.

From the inflow scale of stablecoins (the second highest since last year), it can be seen that market bullish sentiment has not extinguished. The current adjustment is due to macroeconomic and financial data exceeding expectations, leading incoming funds to hold back. Thus, macroeconomic data, especially the Federal Reserve's stance on interest rate cuts and changes in core economic data such as non-farm employment rates, will dominate the attitude of market funds in the near future, thereby determining BTC's price trend.

Currently, on-chain activity for Bitcoin has significantly decreased, nearing bear market levels, with user activity shifting to Solana and Ethereum, keeping user data for these two networks in an upward trend. Worryingly, the market currently expects interest rate cuts to be delayed until after September. Therefore, in the next four months, what information will market funds and short positions use to make trading decisions? The current balance is very fragile, and the decisions of both sides could break the balance, driving the market to move sharply either upward or downward.

BTC price trends after each halving

If upward, it is highly likely to initiate the second phase of the bull market, ushering in an AltCoin Season.

If downward, the confidence of holders may collapse, leading to a chain reaction of sell-offs, and already halved AltCoins may break down again.

This is a very low probability but the worst-case scenario.