March was a calm month for global financial markets. The Nasdaq and Dow Jones indexes both reached new highs without any surprises. The continuous rise of the Nasdaq over the past five months indicates that long positions in the US are increasingly tolerant of the delay in interest rate cuts.
There were several factors that caused the delay in interest rate cuts. The US Consumer Price Index (CPI) rebounded slightly from 3.1% to 3.2% on a month-on-month basis. The US Manufacturing Purchasing Managers’ Index (PMI) rebounded to 50.3%, indicating a trend of entering an expansion phase. Japan also raised interest rates for the first time after eight years of negative interest rates.
The probability of a rate cut in April in the US has significantly decreased, and the probability of a rate cut in May has fallen below 50%.
The influx of capital back into the US has driven up both equity and safe-haven markets. With the interest rate cut in the US, the macro-financial environment has entered a period of easing, and the equity and cryptocurrency markets have entered a new cycle of growth.
The cycle begins with long positions selling and ends with short positions buying, maintaining a dynamic balance between the two. During the upward phase, new inflows of capital control the pricing power, and the main buying volume drives the price up to achieve equilibrium. During the downward phase, when short positions control the pricing power, the main selling volume drives the price down to achieve equilibrium. Additionally, there is an important subgroup of profit-taking short positions that also contribute to the downward pressure on prices during the upward phase.
Observing the sell-off in March, we found that both long and short positions were selling off at the same time. On February 26th, both groups started transferring coins to exchanges for large-scale sell-offs, reaching a peak on March 12th. After that, the scale of transfers continued to decrease. On March 20th, the BTC price was pulled back to $71,288.90 by the buying power of the bulls. However, selling pressure continued to flow in after March 20th, leading to a collapse in prices in the first two trading days of April.
The sell-off on March 12th, initiated by both long and short positions, was the first large-scale sell-off and profit-taking peak after entering the bull market. On that day, the two groups collectively realized profits of up to $3 billion. From February 26th to March 31st, the total profit reached $63.1 billion.
It is worth noting that during the first half of the sell-off from February 26th to March 12th, BTC was in a period dominated by buying power, and the price rose from $51,730.96 to $71,475.93. During the second half of the sell-off from March 13th to March 31st (which is not yet over), BTC was in a period dominated by selling power, and the price dropped from a high of $73,709.99 to $60,771.74. Although the peak of the sell-off occurred on March 12th, the daily sell-off volume of both long and short positions remained above $1 billion until the end of the month.
Solana, an alternative to Ethereum, is considered the new carrier of DeFi and the underlying public chain for USDC payment narratives. However, it should be noted that the adoption of Solana is still in its early stages. Currently, the main use case for the Solana network is the issuance and speculation of MEME coins. MEME coins like Bonk, BOME, and WIF have emerged, with daily trading volumes reaching hundreds of millions of dollars. Many short-lived MEME coins have completed their lifecycle within a week, but speculators are still enthusiastic, resulting in the birth of over 1,000 new MEME coins every day. While Solana is making remarkable innovations in areas such as DeFi, DEX, Staking, Oracle, and RWA, the current large-scale adoption of Solana is still primarily driven by MEME speculation, similar to the Ethereum ICO frenzy in 2017. This is a worrisome trend.
In previous reports, EMC Labs has repeatedly pointed out that the trend of stablecoins transitioning from outflows to inflows in October 2023 is cyclical. This trend is a major external factor for the start of a bull market and will not end in the short term due to its cyclical nature. In March, the total inflow of stablecoins reached $8.9 billion, setting a monthly record for inflows in this cycle. This inflow is the fundamental support for BTC’s record-breaking prices this month and is also one of the buyers of BTC. The circulation of stablecoins has not yet reached the peak of the previous bull market, and the scale and rate of subsequent inflows need to be closely monitored. Since the approval of 11 BTC ETFs by the US in January this year, funds from this channel have also become an important factor affecting the market. Looking at the data, BTC ETFs did not experience large-scale outflows in this round of major sell-offs, only recording a slight outflow from March 18th to March 22nd.
Based on the analysis of the inflow and outflow of BTC ETFs, we conclude that the funds from this channel only reduced their positions for a short period of time, with a scale of around $10 billion. Compared to the $63.1 billion in locked profits, this scale is relatively small, so it is not the fundamental reason for this round of adjustment. The funds from the BTC ETF channel are still flowing in, which is one of the important supports for the recovery and new highs of BTC prices. The growth of funding supply is the direct cause of price increases, and the continuous growth of funding supply is the direct cause of the start of a bull market.
In conclusion, in this report, we analyzed the phenomenon of the first round of large-scale sell-offs by long-term investors and short-term profit-takers after BTC prices reached new highs. This round of sell-offs helped sellers lock in $61 billion in profits, leading to a 17% drop in BTC prices. Based on market structure, we believe that this sell-off is a normal phenomenon during the upward phase of the market. Based on the inflow of stablecoins and funds from ETF channels, as well as the adoption of application chains, we believe that there will still be fluctuations in the future, but this round of cryptocurrency bull market is unfolding in an orderly manner, and long-term investors should actively go long with caution.
