EMC Labs April Report: Macro Financial Crisis Emerges, On-Exchange Funds Remain Stationary

*The information, opinions, and judgments mentioned in this report regarding markets, projects, and cryptocurrencies are for reference only and do not constitute any investment advice.
When the US and Hong Kong approved BTC ETFs, and we celebrated the integration of DeFi and TradFI, we were not yet aware of the profound changes in the crypto market structure.
As investors trying to explore market trends and industry cycles, it is important for us to understand which parts of the market are changing, which parts are staying the same, what new factors are influencing market trends, and what existing factors are still playing a significant role.
In April, there were variable policy expectations, which caused significant volatility in global financial markets.
Macroeconomic Finance
For BTC, with a market value of over $1.2 trillion, its strong correlation with the performance of the Nasdaq is well-known. This makes macroeconomic data, financial data, and global central bank policies significant factors influencing BTC price movements. In April, these data took control of BTC trends.
The US CPI data for March, released in April, reached 3.5%, exceeding the 3.2% in February. The unexpected rebound in CPI dampened expectations of interest rate cuts in the US for the first half of the year. Previously, there was much attention on the pressure on US government bond yields in a high interest rate environment. However, with the current core task of the Federal Reserve to bring CPI below 2%, which seems unattainable, no one doubts the further delay of interest rate cuts. There are even voices suggesting that there is no hope for interest rate cuts this year and that there could be a possibility of further rate hikes – this is not impossible, as what else can the US do if CPI rebounds significantly?


US CPI index rebounded for two consecutive months
At the same time, the Federal Reserve’s tapering plan is still being firmly implemented.


Size of US Federal Reserve holdings of US Treasury bonds
Since the start of the tapering operation in 2022, the Federal Reserve has sold over $1.2 trillion worth of US Treasury bonds. This is another powerful pump in a high-interest environment. This pump removes liquidity of up to $95 billion from the market every month ($60 billion of US government bonds and up to $35 billion of institutional bonds).
The pessimistic expectations and changes in strategies resulting from the above two factors have driven the US dollar index to continue strengthening and led to a 5-month decline in the Nasdaq and Dow Jones indices. After reaching historic highs in March, these two indices experienced declines of 4.41% and 5.00% respectively this month.
Correspondingly, BTC, which completed its reduction in supply this month, also ended its 7-month rally, with a monthly decline of $10,666.80, representing a 14.96% decrease. After breaking the upward channel in March, the attempt to build a trading range in April seems to have failed.
Is a storm brewing? Is the tide turning?
Cryptocurrency Market
In April, BTC opened at $71,291.50 and closed at $60,622.91, marking a 14.96% decline for the month. The volatility was 19.27%, ending the 7-month rally and registering the largest monthly decline since January 2023 (i.e., the recovery period of this bull market).


BTC monthly trend
After the major sell-off in March, buying power in the BTC market encountered significant setbacks and has remained weak since then. In April, it mostly traded below the 7-day average price and reached a low point of $59,573.32 on April 19.


BTC daily trend
Since February, BTC has established a bull market price uptrend on the daily chart (green background in the chart). After reaching its all-time high on March 13, it started testing the lower boundary of the uptrend channel. In April, it attempted to establish a trading range between $59,000 and $73,000 (purple background in the chart). However, the construction of this trading range has become challenging due to the shift in macroeconomic expectations and the decline in US stock indices.
Sell-off and Holding
In our March report, we mentioned that “December 3, 2023, was the highest point in the long positions in history, with a total of 14,916,832 BTC held by long positions. Since then, with the gradual start of the bull market, long positions have begun their biennial cycle of major sell-offs, with a total of 897,543 BTC sold as of March 31.”
The biggest positive news for BTC in January – the approval of 11 spot ETFs – led to a massive sell-off by long positions at the all-time high, resulting in short-term saturation and a cooling of enthusiasm among new investors. This behavior was a response to the temporary rise in BTC and the reason for its price stoppage and subsequent consolidation in March. After entering April, the trend of long positions dominating the market during the bull market phase was suspended.


BTC positions of different market participants (monthly)
Based on statistical data, the selling volume by long positions in April decreased to 10,000 BTC (compared to the 520,000 BTC sold in March), while short positions increased their holdings during the price decline. They not only absorbed the sell-off by long positions but also withdrew tens of thousands of BTC from centralized exchanges.
Despite the completion of the supply reduction this month, the mining community continues to hold their coins (“holding coins steady”). Although the downward pressure on prices is approaching the cost price for some miners, a large-scale sell-off has not occurred, and miners still hold approximately 1.81 million BTC steadily.
From the statistics of the holdings of different market participants, it is clear that the trend of long positions dominating the market has been temporarily halted.


BTC holdings of different market participants
Looking at the data on the change in holdings over the past 11 years, it can be seen that during the mid-2016 bull market, there was also a pause in the sell-off by long positions. This often indicates that with a sharp decline in prices, long positions, who believe the bull market will continue, choose to stop selling and wait for the market to restore supply-demand balance before resuming their sell-off.
The pessimistic expectations and changes in strategies resulting from the above two factors have driven the US dollar index to continue strengthening and led to a 5-month decline in the Nasdaq and Dow Jones indices. After reaching historic highs in March, these two indices experienced declines of 4.41% and 5.00% respectively this month.


Sell-off volume of long and short positions and CEX accumulation statistics (daily)
Looking at the data on BTC flowing into and out of exchanges, the inflow in April has been decreasing compared to March, and the stockpile of centralized exchanges has remained relatively high with a small outflow.
Fund Flows
Funds are an important factor determining market trends. After observing the internal market structure, let us continue to examine the inflow and outflow of funds.


Changes in major stablecoin supplies (EMC Labs chart)
By examining the issuance of stablecoins, EMC Labs found that in April, funds entering the market through stablecoins amounted to $7 billion, with USDT accounting for $6.1 billion and USDC accounting for $900 million. According to eMerge Engine, BTC entered the recovery phase of this cycle in January 2023 and achieved a net inflow for the first time in October. Since then, stablecoins have been in an issuance phase, and in April, the inflow reached $7 billion, ranking second in terms of inflow volume.


Issuance volume of major stablecoins
As of April 30, the total issuance of stablecoins has grown to around $149.9 billion, an increase of approximately $30 billion since the low point, but still not reaching the peak of the previous cycle.
Furthermore, the stockpile of stablecoins on centralized exchanges remains high. However, these funds do not seem to be eager to be converted into buying power. It is worth noting that the main accumulation on centralized exchanges is in USDT, while there has been little increase in USDC accumulation.


On the BTC ETF side, there is a clear trend of funds entering and exiting. Since mid-March, when the price stopped rising, there has been a continuous outflow.


Inflow and outflow statistics of 11 BTC ETFs (SosoValue chart)
Based on its funding characteristics and volume, we believe that the BTC ETF channel is currently neither the main cause of the price decline in BTC nor capable of independently reversing the situation.
Supply Pressure and Cycle
Everything has its ups and downs, and cycles continue.


Long and short positions and overall market unrealized profit and loss ratio
During a bull market, there will always be significant adjustments. These adjustments objectively help clear out speculative positions.
An indicator worth paying attention to is the short-term MVRV (unrealized profit and loss ratio) of short positions. As prices rise during the recovery and uptrend periods, holders’ unrealized profits increase. At this point, the market needs to use a decline to clear out short-term chips from recent buyers and long-term chips with sufficient profits. In history, this clearing often requires prices to drop to a point where the short positions’ MVRV approaches 1 to stop. Since last year, this type of clearing has occurred twice, in June and from August to October. In January, it reached a low of 1.03. As of April 30, this cleaning has reached 1.02 (MVRV dropped to 0.98 on May 1). It is worth noting that after BTC prices have gone through this severe test in history, they have often experienced a significant increase.
Another scary speculation is that this cycle is running ahead, with the peak of the bull market already reached before the supply reduction. One piece of evidence supporting this is the VDD burn indicator.


BTC VDD burn data
The VDD burn indicator not only considers the realized value but also factors in the holdings of long and short positions in the realized value, making it of great reference value.
The speculation of reaching the peak is more reminiscent of the last bull market (2021). Based on this data, another speculation is that we are more than halfway through this bull market, and after one (similar to 2013) or two (similar to 2017) large-scale VDD burns, the bull market will come to an end.
One major interference factor in this cycle’s VDD data is the redemption of Grayscale Trust holdings after they have been converted to GBTC. This interference data can also affect the judgment of the scale of sell-offs by long positions.
Conclusion
Based on multidimensional judgments of fundamentals, market sentiment, policy factors, market cycles, and industry cycles, EMC Labs believes that the decline of BTC in April is the result of a weak balance between buyers and sellers after some investors sold off their positions during the 7-month rally, while new entrants cautiously waited on the sidelines. Traders who base their transactions on macroeconomic data and technical indicators dominate the market, resulting in a correction that is comparable to previous bull market pullbacks.
Based on the inflow of stablecoins (the second-highest since last year), market enthusiasm for going long has not extinguished. The current adjustment is due to macroeconomic and economic data exceeding expectations, causing new funds to remain on the sidelines. Therefore, macroeconomic data, especially the Federal Reserve’s stance on interest rate cuts and core economic data such as non-farm payrolls, will dominate market sentiment in the coming months and determine the price trend of BTC.
Bitcoin’s on-chain activity has significantly declined to bear market levels, with user activity shifting to Solana and Ethereum, where user data is still in an upward trend. It is worrying that the market is now expecting interest rate cuts to be postponed until after September. In the next four months, what information will market participants and short positions base their trading decisions on? The current balance is very fragile, and the decisions of both sides will break the balance and drive the market to move sharply upwards or downwards.


BTC price movements after each supply reduction
If the market moves upwards, it is highly likely to initiate the second phase of the bull market and usher in an Altcoin Season.
If the market moves downwards, confidence among holders will collapse, triggering a chain reaction, and previously severely corrected altcoins may break through their previous lows.
This is a low probability but worst-case scenario.
END
EMC Labs was founded in April 2023 by cryptocurrency investors and data scientists. It focuses on blockchain industry research and investments in the crypto secondary market. With its core competitiveness in forward-looking insights and data mining, EMC Labs is committed to participating in the booming blockchain industry through research and investment, and promoting the well-being of humanity through blockchain and crypto assets.
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