Time-Based Capitulation (of Altcoins)

Altcoin Market Close to Capitulation

The digital asset market has recently faced a huge nose dive, after the "Sell in May" thesis has truly fulfilled its promise this year. While the leading cryptocurrency bitcoin still hangs on to its 57,000 US dollar level, many smaller altcoins have dropped close to their pre-cycle levels.

With the altcoin-related selling pressure increasing, we might meet a new phenomenon called time-based capitulation, which refers to the time it takes for spot prices to reach their lowest point. Time-based capitulation follows a certain trajectory:

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Time-based capitulation forces investors to wait for extended periods, prolonging the uncertainty and causing frustration.

Especially leveraged investors and traders using credit are subject to time-based capitulation.

Source: 0xDith

Time-based capitulation triggers a mindset shift among investors, replacing risk-averse sellers with more risk-tolerant buyers. However, this doesn't guarantee the new buyers won't eventually sell at even lower prices.

Every cycle has its own unique capitulation point, which acts as an essential phase before the sentiment turns around.

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As said, capitulation is an indelible part of any market cycle. Despite the bearish sentiment, we're looking at optimal entry points for your high-convictions tokens. Spot Ethereum ETF launch and Fed's interest rate policy shift might turn the market around in a matter of seconds.

"The very best time for risk assets is when you get a sluggish economy that central bankers want to stimulate. And that's what we got now." - Michael Howell

Perfect Setting for a Short Squeeze?

From a purely technical vantage point, bitcoin has now weakened -23 percent from its spring all-time high of 73,000 US dollars. However, after such a long positive momentum, a correction was to be expected. Referring Charles Edwards of Capriole Investments:

"Bitcoin's all time longest winning streak has just ended. 427 days without a 25% drawdown. Well overdue for a correction." - Charles Edwards, Capriole Investments

The current market structure seems to follow our long-term outlook, forecasted on April 17th:

"The post-halving market might calm down for the summer, and rise again for the last quarter (Q4). Trailing the year 2021, this year might also form a double top structure." - 21metrics

Sources: Timo Oinonen, CryptoQuant

Additionally, bitcoin's price action seems to follow ETC Group's supply scarcity model. Bitcoin's halving on April 19th literally halved the block reward, increasing the scarcity of the asset class. This supply shock will likely provide an increasing tail wind for further price appreciation.

Source: ETC Group

As the declining spot price lures in hungry short sellers, a sudden updraft would trap the shorts, creating a perfect short squeeze scenario. The updraft could be triggered by positive news about spot ETFs, central bank rate cuts, or new institutional buyers.

A moderate short squeeze would result prices gradually climbing back towards $60K, stabilizing around that level as the market reassesses the situation. A heavy short squeeze would mean prices quickly shooting past $65K, potentially reaching fresh all-time highs if the buying pressure is strong enough.

Cumulative volume delta (CVD) shows most investor segments being relatively inactive. The previously active whale level buyers are now quiet, however small $1K - $100K sized demand is growing. The retail segment is clearly buying the dip.

Source: Material Indicators

The End of Stock Market Divergence?

During its early days, bitcoin was often considered as a non-correlated asset, having low correlation with the traditional finance and stock market. The said phase lasted until 2020, when Michael Saylor started an epoch of bitcoin's institutional adoption. Now Saylor's company MicroStrategy (MSTR) is profiled as the de facto bitcoin institution, owning a total of 214,440 bitcoin units.

Since 2020, bitcoin has been increasingly correlated with the leading stock market index S&P 500. The correlation also stems from bitcoin being a global liquidity proxy: historically the growing M2 liquidity has been bullish for high beta assets like cryptocurrencies, as the "cheap dollar" flows into risk-on assets, uplifting valuations.

Source: TradingView

Across the spring of 2024, bitcoin was heavily correlated with S&P 500 and Nasdaq Composite indices, reaching a 30-day Pearson correlation of 0.91 with S&P in mid-March.

However, in June the S&P correlation decreased massively, dropping into a negative territory at the turn of the month. The current correlation figures of -0.78 with S&P 500 and -0.79 with Nasdaq Composite mirror an exceptional situation.

If we assume that the stock market continues its positive trend, ceteris paribus, bitcoin's hugely negative -0.78 correlation with S&P will likely evaporate, and we might see bitcoin rising vis-à-vis S&P again.

Source: The Block

Germany Selling its Bitcoin Stack

Within recent weeks, the German government has been offloading hundreds of millions of US dollars worth of bitcoin, exerting downward pressure on the leading cryptocurrency. The sales have contributed to a sharp decline in bitcoin's spot price, with the token hitting its lowest point since February 2024 last week.

The government initiated the sale of bitcoin from a wallet managed by the country's Federal Criminal Police Office, known locally as the Bundeskriminalamt. The sales involved 900 bitcoins in June and continued with additional transactions, totaling thousands of bitcoins, worth millions of dollars. On Monday July 8th, the German government moved another $500 million worth of bitcoins to crypto exchanges like Bitstamp, Kraken, Coinbase, and market maker Flow Traders.

Source: CryptoQuant

This latest transfer caused bitcoin's price to drop 3% to as low as $55,000 before rebounding slightly. With the latest transfers, the German authorities' holdings have now reduced to 23,788 bitcoin units worth $1.3 billion, while its balance sheet consisted of 50,000 units before the offloading campaign.

SOL ETF Launch in March 2025?

Somewhat surprisingly, the spot Solana ETF might actually be materialized sooner than expected, as the final deadline looms in mid-March 2025. The upcoming US presidential election in November will heavily influence the probability of a spot SOL ETF, as Donald John Trump has profiled himself as the crypto-friendly candidate. You can read more about crypto's impact on politics here: https://www.21metrics.com/blog/how-crypto-impacts-politics-in-2024.