EMC Labs August Report: September Rate Cut, Adjusting May+ BTC Will Redefine the Trend

Author: 0xWeilan

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

The cryptocurrency market after March 2024 seems to be passively devolving into a second-rate performance themed around "waiting." All the actors, creators, and producers seem to have forgotten the plot, scenes, and original themes, merely stretching their necks to wait for some "audience" to enter, and whether a hurricane will strike tonight.

From mid-March to the end of August, more than five months have passed, and the price of BTC has repeatedly fluctuated in the "new high consolidation zone." During this period, the global market experienced repeated inflation and downturns, ambiguous and clear expectations of U.S. interest rate cuts, uncertain speculations about whether the economy would have a soft or hard landing, and severe market fluctuations caused by trend changes prompting different investors to adjust their positions.

Against this backdrop, some BTC investors in the crypto market conducted their first major sell-off to lock in profits, draining liquidity. This period was interspersed with speculative short selling, panic selling, and position adjustments between Altcoins and BTC triggered by changes in market sentiment and risk appetite.

This is the essence of the market movements we observed during this period.

After five and a half months of turbulence, the crypto market has entered a low period. Spot liquidity has significantly decreased, leverage has been cleared, rebounds are weak, and rebound prices are gradually declining. Investors are listless, and pessimistic sentiments loom over the crypto market.

This is a result of market movements and an internal resistance for the next phase. However, in our view, the greater resistance lies outside the market—uncertainty in macro finance, concerns over a hard landing for the U.S. economy, and unclear trends in the U.S. equity market.

Internally, the crypto market has entered the tail end of a clearing phase, with market capitalization and the distribution of long and short positions entering a state of accumulation, preparing for an upward movement. However, the funds in the market are relatively weak, lacking the confidence and ability to make independent decisions.

URPD: 2.91 million+ chips flow into the "new high consolidation zone"

The market has been in continuous turbulence for more than eight months. When we cast our gaze on-chain, we can directly face the orderly results of chaotic movements.

Bitcoin Network URPD (3.13)

The URPD indicator is used to describe the statistical analysis of all unspent BTC in terms of price, effectively providing insights into the final results of chip distribution. The above chart shows the BTC distribution structure when Bitcoin reached its historical high on March 13, during which 3.086 million chips accumulated in the "new high consolidation zone" (between $53,000 and $74,000). By the closing price on August 31, the chips in this range reached 6.002 million, meaning that at least 2.916 million+ BTC were wagered in this range over the past five months.

BTC URPD (8.31)

In terms of time, from mid-October last year when BTC started its breakout to March 13 when it reached its historical high, the upward movement took more than five months. Now, the "new high consolidation zone" has also been in a sideways consolidation for more than five months, with a highest price of $72,777 and a lowest price of $49,050, experiencing more than seven fluctuations. This fluctuation resulted in an exchange of 2.916 million+ chips (the actual data is much higher, as centralized exchange trading data is not fully reflected on-chain), significantly draining market liquidity.

BTC Realized Market Cap

By observing the "realized market cap" compiled based on purchase cost, we can see that since the market entered the new high consolidation zone in March, although the price has not achieved further upward movement, the realized market cap has continued to grow. This indicates that a large amount of cheap chips has been repriced during this period. BTC, when repriced upward under specific conditions, can serve as both support and pressure.

Therefore, we maintain a neutral stance on the distribution of URPD. There are indeed enough chips that have exchanged hands, and sufficient funds are optimistic about the future market. However, the nature of these funds is unknown, and whether they will provide support or pressure to the market in the future still needs to be observed.

Long and Short Positions: Major Sell-Off and Re-Cooling

We view the market cycle as a large turnover between long-term investors and short-term investors over time, during which each exchanges between BTC and USD.

Long and Short Position Statistics (Weekly)

BTC started its rally in mid-October, and the large-scale reduction of long positions began in December. After reaching a peak in February and March, which pushed the market to a new high, it initiated adjustments, gradually shaping the "new high consolidation zone."

Starting in May, the reduction of long positions significantly decreased, and this group began to increase their holdings again. In the recently concluded July and August, the increase accelerated significantly, with this group adding 630,000 BTC from the lowest point to August 31. The reduction mainly came from short positions and miners' sell-offs.

In our June report, we noted that every bull market would undergo two major sell-offs, with the second major sell-off completely draining market funds, thereby destroying the bull market. What occurred in the past few months was merely the first wave of sell-offs. This wave of sell-offs has lasted for more than five months and is nearing its end, as can be clearly seen from the on-chain distribution results.

BTC HODL Waves

HODL Waves show that new coins in March have rapidly decreased, indicating a significant decline in speculative activity, while newly minted coins from March to June are also accelerating downward (which are also an important component of the chips in the new high consolidation zone). Most of these BTC holders entered the market after the ETF approvals and are considered "single-cycle long positions." This means that most of the BTC they hold will turn into long positions, as evidenced by the 470,000 increase in long positions in August. In the foreseeable future, long positions will continue to grow rapidly.

The cooling of the BTC holding structure is a result of BTC transitioning from short to long positions during the "new high adjustment period." This shift will significantly reduce market liquidity. A decrease in liquidity, when funds are scarce, often drives BTC prices further down, while in times of ample funds, it will push prices upward.

Therefore, we can conclude that after more than five months of turbulence, with the market internally well-prepared, the price trend will mainly be determined by the direction of fund flows (rather than internal chip conversions).

Capital Flow: The Cooling of ETF Channel Funds

In the November 2023 report, we noted that the stablecoin channel funds turned positive in mid-October, marking the first time since February 2022, representing the arrival of a new phase. Subsequently, BTC initiated a significant upward movement.

Major Stablecoins Inflow and Outflow Statistics (Monthly)

During the more than five months of adjustment, May and June were the moments when market funds were most scarce, with only $1.201 billion recorded in inflows over the two months. ++This pessimistic situation is beginning to reverse, with inflows in July and August reaching $2.696 billion and $5.09 billion, respectively. The influx of these funds indicates recognition of the price in the new high consolidation zone and a long-term optimistic outlook for the latter half of the bull market.++

After the approval of 11 BTC ETFs in the U.S. in January this year, the funds from this channel began to become an important independent force. In previous reports, we repeatedly pointed out that the funds from this channel have independent will and, due to their scale and action, will become an important force in pricing BTC. In July, during the panic sell-off triggered by the German government's liquidation, BTC ETF channel funds decisively stepped in, acquiring a substantial amount of cheap chips.

However, as the U.S. dollar interest rate hikes became increasingly confirmed in August, the unexpected interest rate hike by the yen led to aggressive liquidation by arbitrage traders, triggering severe fluctuations in global stock markets, which affected BTC ETFs viewed as high-risk assets. At the beginning of the month, continuous sell-offs from ETF holders caused BTC to drop to $49,000, hitting a new low in months and breaking through the lower edge of the "new high consolidation zone." Subsequently, ETF channel funds gradually flowed back (with stablecoin bottom-fishing funds also pouring in later), pulling BTC prices back to $64,000. By the end of the month, as ETF channel funds flowed out again, BTC prices also retreated below $60,000.

August 11 BTC ETF Fund Overall Capital Inflow and Outflow Statistics (Daily)

Looking at it monthly, the inflow of BTC ETF channel funds this month was -$72.83 million, the second-worst month in history, only better than April.

11 BTC ETF Fund Overall Capital Inflow and Outflow Statistics (Monthly)

We will combine the two sources of funds for analysis------

Stablecoins and 11 BTC ETF Channel Funds Inflow and Outflow Combined (Monthly)

++Although stablecoins have recorded inflows for three consecutive months, the outflow from the ETF channel this month resulted in an overall inflow of only $5 billion in August, lower than July's $5.9 billion. EMC Labs believes that under the increasingly solid chip distribution background, the inflow of funds is the fundamental reason why BTC was able to rebound to $65,000 after a major collapse in August. However, the decrease in fund inflow caused this month's peak of $65,050 to be far below July's $70,000. The reduction in funds comes from the ETF channel funds, which dropped from $3.2 billion in July to an outflow of $72.83 million this month.++

++The attitude of BTC ETF channel funds, closely connected to the U.S. stock market, has become the most critical factor determining market trends.++

September Interest Rate Cut: Soft Landing vs. Hard Landing

Unlike BTC's weak performance in August, the U.S. stock market showed remarkable resilience despite experiencing severe fluctuations. The Nasdaq recorded a 0.65% monthly increase, while the Dow Jones Industrial Average reached a historic high. During this period, discussions about whether to raise interest rates by 25 or 50 basis points in September were rampant, but traders' real focus was on the core issue of whether the U.S. economy would achieve a soft or hard landing.

++Based on the current analysis of the U.S. stock market trends, EMC Labs believes that the market overall leans towards the view that the U.S. economy will achieve a soft landing, so it has not initiated overall downward pricing under the expectation of a hard landing. Based on the assumption of a soft landing, some funds chose to withdraw from the previously significantly risen "seven giants" (most of which underperformed the Nasdaq this month) and enter other blue-chip stocks with smaller increases, pushing the Dow Jones index to a historic high.++

Based on past experience, we tend to judge that U.S. stock market investors view BTC as an asset similar to the "seven giants"—though it has great potential, it currently carries the risk of being overvalued, leading to large-scale sell-offs that generally coincide with the sell-offs of the "seven giants." However, relative to mainstream funds, the attractiveness of the "seven giants" far exceeds that of BTC, so after the sharp decline, the rebound of the "seven giants" is stronger than that of BTC.

Currently, the CME FedWatch shows a 69% probability of a 25 basis point interest rate cut in September and a 31% probability of a 50 basis point cut.

++EMC Labs believes that if a 25 basis point interest rate cut is confirmed in September, and no major economic and employment data indicate that the economy does not meet the characteristics of a "soft landing," the U.S. stock market will operate steadily. If the seven giants recover upward, then BTC ETFs will likely restore positive inflows, pushing BTC upward and once again challenging the psychological barrier of $70,000 or even a new high. If there are major economic and employment data indicating that the economy does not meet the characteristics of a "soft landing," the U.S. stock market will likely correct downward, especially the seven giants, and correspondingly, BTC ETF channel funds will likely not be optimistic. In this case, BTC may decline again and challenge the lower edge of the "new high repair period" at $54,000.++

This speculation is based on the assumption that stablecoin channel funds will not show a trend change in September. Additionally, we are cautious about stablecoins; although this channel's funds are continuously accumulating, we tend to believe that they will struggle to drive BTC out of an independent trend. ++The most optimistic prediction is that under the backdrop of the seven giants' upward revision, stablecoin and ETF channel funds will simultaneously flow in positively, driving BTC upward. If so, the probability of breaking through the previous high will be significantly increased.++

Conclusion

BTC broke through $54,000 in January this year, reached a historical high in March, and has been consolidating in the "new high consolidation zone" since April, which has lasted for more than five months, approaching the six-month consecutive rise since last September, indicating that it is nearing a trend inflection point.

BTC Monthly Chart

This should also be the reason why stablecoin channel funds are gradually gathering to reshape buying power.

However, a true breakthrough still relies on favorable macro finance and core economic data from the U.S., as well as the subsequent re-entry of mainstream funds into BTC ETF channels.

As the U.S. dollar re-enters a rate-cutting cycle, September becomes the most crucial month of the year, and the U.S. stock and crypto markets will provide preliminary answers in this month.

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EMC Labs was established in April 2023 by cryptocurrency 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 competitive advantages, aiming to participate in the thriving blockchain industry through research and investment, promoting the benefits of blockchain and crypto assets for humanity.

For more information, please visit: ++https://www.emc.fund++