Friends:

It looks like the week is ending the same way it started: with a crash. In today's newsletter, we make a bold (or not) call on market regime, get into why cryptocurrency markets are likely to stay under sell pressure for the next few weeks, and identify data points that indicate this bear may not live long. If you're new here, welcome. If you're not, forward this to a friend. Either way, hit "reply" with your feedback and questions.

I am taking a vacation in July, but Crypto Long & Shortis not. This newsletter will come out over the July 4th holiday weekend, one week from today, in a lightweight, long-weekend edition. The following three newsletters will be in the capable hands of my colleagues Christine Kim and George Kaloudis.

Weekly Wax: I recently switched from Mac OS to Windows. It's good to be wearing big-boy pants in Excel, but just about everything else on Windows is a dumpster fire, from my Markdown editor to Zoom. I'm consoling myself this week with "Nortoncomputerforpeace," the third studio album from Italian-born producer Doris Norton, who was first (I think?) to use an Apple computer to make electronic music. In 2018, Mannequin Records reissued this album and two other early Norton productions.

– Galen Moore, Director of Data & Indexes

Cryptocurrencies are in a bear market.

It's not a call to be taken lightly. Analysts have already made bear-market calls prematurely on two occasions this year, numbly applying an off-the-shelf rubric (a 20% drop in a market benchmark).

In cryptocurrencies, bitcoin is the benchmark for the overall market. Bitcoin dominance, its share of the estimated total market value of all cryptocurrencies, is down to the mid-40s, and it still has no analogy in equities. If Apple, the largest company in the S&P at a $2.2 trillion market cap, commanded as large a share of the S&P 500 total market cap as bitcoin does of cryptocurrencies, it would be a $17 trillion company. As a result, all cryptocurrency returns generally have a strong correlation to bitcoin.

For bitcoin, 20% drops are quite common, on the way to new all-time highs. Earlier this quarter, we identified a simple method for determining whether such a drop (or rise) has ushered in a new market regime: a change of 20% in the CoinDesk Bitcoin Price Index (XBX), followed by at least 90 days in which bitcoin does not return to its previous high (or low).

The chart above tracks cryptocurrency bull and bear markets across the years, using this methodology. The XBX reached its all-time high on April 14 (UTC): $64,888.99. By April 22, it had fallen by more than 20%, to a low of $50,500. (Since that time, it's fallen as low as $28,825.76.) As of Sunday, 24 days remain until that 90-day threshold.

Predicting that bitcoin won't recover to $65,000 in the next three weeks doesn't feel like a particularly bold move. But this is bitcoin. At the time I'm writing this, the XBX is at $33,493.55. Recovering its ATH would be a 93.7% gain. Since XBX's inception in April 2014, bitcoin has made such a 24-day run not less than 25 times.

Here's why I don't think this July will make it 26 times, but I do think this bear market will be short-lived.

Spot market alternatives

Two alternatives are easing spot market buying pressure right now.

1. GBTC discount

Shares of the Grayscale Bitcoin Trust (GBTC), the largest bitcoin fund, have traded at a discount to net asset value since February. That's unlikely to change, as a large raft of shares in the trust approach their lockup expiry this July. GBTC cannot be redeemed, but some investors who might have bought bitcoin in the spot market are likely to take advantage of the discount instead. (Disclosure: Grayscale is owned by Digital Currency Group, the parent company of CoinDesk, and GBTC is benchmarked to the CoinDesk Bitcoin Price Index (XBX).)

2. ASIC glut

Beijing's crackdown on bitcoin mining looks to be more than just government by press release. Miners are shutting down across China, resulting in a flood of unused mining equipment.

Bitcoin mining is not for the faint of heart or short of capital, but at some scale, it presents investors an opportunity to acquire bitcoin below spot market price. It's unclear whether idled machines in China will be viable in North American operations or in other growing mining centers. If they are, hosting space may not be available. Nevertheless, some large investors who otherwise might buy and hold are no doubt eyeing increasingly attractive capital-expenditure projections in a mine-and-hold alternative.

A rudderless market

Evidence points to a retail-driven run-up in April: volumes in altcoins, including meme currencies like dogecoin, eclipsed that of bitcoin on spot exchanges. Now, retail buying seems exhausted.

Meanwhile, barometers of institutional participation, such as volumes on LMAX Digital and open interest in CME bitcoin futures, are not showing signs of institutional buyers rushing to buy the dip and take retail buyers' place.

These tea leaves can be misleading, but the quick takeaway is that nobody is in the driver's seat right now. Network data bears this out, with active addresses down on both Bitcoin and Ethereum networks.

'Fundamentals' say otherwise

A market interregnum may indicate a short-lived bear regime, between bull markets. Some network data supports this analysis.

Bitcoin doesn't have true "fundamentals," in the sense that a bitcoin doesn't represent a claim on cash flows. However, bitcoin and other cryptocurrencies have a family of metrics that indicate activity over networks. I wouldn't be so naive as to apply Metcalfe's Law (which predicts effect, not value) to the bitcoin price, but network data does provide another layer of insight, especially when combined with market data.

The chart above, from Glassnode earlier this week, shows that a growing share of the bitcoin that has moved during recent sell-offs has been "young coins," i.e., coins that last moved within the past six months. Short-term investors are selling, while longer-term hodlers stand pat. As Coin Metrics' Lucas Nuzzi noted last week, hodlers' unrealized gains haven't hit levels that preceded bitcoin's past major crashes.

A good time for a vacation

Conclusion: If, like me, you're planning on taking a vacation in July, your timing is good.

Bitcoin fell through $30K early in the week, before recovering to the low $30,000s, nearing a retest of last cycle's high at $20K. TAKEAWAY: May and June’s CoinDesk Bitcoin Price Index (XBX) returns have been -35.5% and -13.5% (as of Saturday's UTC 24h close), respectively, or a two-month return of -44%, putting it on track for its worst back-to-back months, ever. So far, it's bitcoin's second-worst quarter ever, after Q1 2018, and it will be the worst if the XBX drops below $29,341.81 at the close (8pm NY on Wednesday).

The Investor’s Perspective on the Bitcoin Taproot Upgrade: Taproot is a bundle of three upgrades that are aimed at improving network security, privacy and scalability. It poses some potential drawbacks to Bitcoin including risks of low adoption, unintended privacy shortcomings and Bitcoin community disappointment and fracturing. In a new report, CoinDesk Research gives an overview of what Taproot is, its risks and potential benefits. Download the full report.

Stablecoin borrow rates on Aave and Compound are now as low as they were in December 2020. TAKEAWAY: Demand is down for leveraged cryptocurrency bets using borrowed stablecoins.

Cryptocurrency exchange FTX in the same week announced "tokenized stocks" (synthetics that track equities) and a sponsorship deal that will put their logos on umpires' uniforms at Major League Baseball games. TAKEAWAY: The bulk of FTX's revenue, and its most innovative product development, take place offshore, but it is spending sports advertising dollars in the U.S., where it operates a subsidiary, FTX.US. A useful analogy (via CoinDesk TV earlier this week) is how alco-pop products like Smirnoff Ice allowed hard-liquor brands to become huge advertisers on sports TV.

Binance is selling an Andy Warhol NFT, and Flow Blockchain, a leader with projects like NFT Genius and NBA Topshot, announced a deal with Rarible to develop an NFT marketplace. Meanwhile, a legal battle is underway between rapper Jay-Z and a former colleague over attempts to sell album artwork and copyright as NFTs. TAKEAWAY: When I discover music I like, I buy the album. Some others discover music they like, and buy the rights to the album. NFTs are interesting, but they are neither of these things.

Robinhood's planned IPO is delayed, reportedly due to the online brokerage's cryptocurrency exchange business. The SEC is giving a slow-bell signal to the offering, Bloomberg reported, citing anonymous sources. TAKEAWAY: If Coinbase (which allows transfers into and out of crypto wallets for KYC'd customers) can go public, surely cryptocurrency trading will not stop Robinhood (which does not) from accessing public markets. Robinhood, on the other hand, may have other issues to discuss with regulators.

Custodian Prime Trust is cutting ties with cryptocurrency lending company Celsius Network. Sources told CoinDesk that Prime Trust raised red flags at a practice of "endlessly rehypothecating assets." Celsius says it never rehypothecates. TAKEAWAY: The more cryptocurrency integrates with mainstream finance, the more it will have the same problems as mainstream finance. The difference is, what lies under layers of hypothecation isn't another database record, it's a digital bearer instrument.

Citibank is launching a cryptocurrency group inside its wealth management division. TAKEAWAY: Beyond the reasons for short-term pessimism (see today's Briefing, above), anecdotes of big-bank client demand for cryptocurrency services continue to mount.

Coinbase is set to begin operating in Japan, following a registration with the Japan Financial Services Agency earlier this month. Coinbase will start by offering pairs in five cryptocurrencies: bitcoin, ether, bitcoin cash, litecoin and stellar lumens. TAKEAWAY: Japanese retail investors, long familiar with complex and high-risk bets, were early adopters in crypto. For firms that can work through stringent regulations, it's an attractive market. And, as some miners in China are learning, regulatory diversification is critical in crypto.

Bitmain, a maker of devices used for cryptocurrency mining, has stopped selling new machines in a bid to lift prices, which are crashing as Chinese miners shut down amid a government crackdown. TAKEAWAY: Focus on risks in centralization of mining often ignores parallel centralization in mining equipment manufacturing.