Report: Bitcoin Was Able to Absorb Selloff, Investors Are Buying the Dip

Bitcoin Volume, Funding Rates and Market Depth Suggest Price Will Recover

From a price of nearly $60,000 on May 10, bitcoin dived to as low as $32,000 on May 23. The drop was instigated mostly by Tesla’s announcement that it would no longer accept bitcoin as payment, although other factors — such as Tether’s anticipated deadline with the New York Attorney General — may have played a part in depressing the investor sentiment.

Source: CoinGecko

However, while certain commentators have been suggesting the possibility of a full-on market collapse, skew’s data suggest the bitcoin market is still too robust for it to sink to levels last seen before the late-2020 bull market.

As the firm tweeted, available metrics — related to volume, funding rates and order book depth — indicate that the market was much better able to absorb the selloff than it was back in March 2020, when bitcoin plunged below $4,000.

Source: Twitter

What the above chart illustrates is that funding rates — a fee which traders have to pay if they want to trade using leverage (i.e. borrow to trade) — have sunk nowhere near as low as they did in March 2020. In March of last year, they fell as low as -0.4%, indicating that traders were highly reluctant to buy bitcoin using leverage.

By contrast, funding rates this May haven’t quite sunk as low as -0.1%. Basically, this means there’s less reluctance to continue buying, despite bitcoin losing 50% of its value since its all-time high of $64,804 at one point.

Funding rates of just under -0.1% might seem bearish, and they are to an extent, but it’s worth pointing out that the recent crash was decidedly worse than March 2020’s, as data from glassnode reveals.

Source: Twitter/glassnode/Lark Davis

In the week between May 13 and May 20, net daily losses in the cryptocurrency were $2.56 billion. Bitcoin itself suffered $14.2 billion in realized losses over the course of this week, a sum which makes a funding rate of -0.1% seem almost bullish.

This would indicate that there’s plenty of investor interest in bitcoin, and volume data reinforces this assumption. Daily volumes for CME Bitcoin Futures have regularly topped $2.5 billion, whereas they barely reached $1 billion at the height of the March 2020 crash.

Source: skew

The chart above also reveals that open interest in CME Bitcoin Futures remains considerably high. Basically, investors — particularly institutional investors — still want to buy bitcoin, even if they’re currently bidding for it at lower prices.

Another revealing metric shared by skew is the bid-order spread on various exchanges. Measured in percentage terms, a higher bid-order (aka bid-ask) spread indicates a mismatch between what sellers are prepared to accept and buyers are prepared to offer. In turn, this mismatch indicates a lack of market depth, or rather a lack of demand for an asset.

Source: skew

While the bid-order spread on certain exchanges has certainly increased in recent weeks, it’s nowhere near the levels witnessed in March 2020. Back in March 2020, the bid-order spread on Binance rose as high as 8%, while on BitMex it passed 4%. This May, the B/O spread on both exchanges failed to hit 1%, suggesting that market depth — and demand for bitcoin — remains resilient.

Of course, more perceptive readers may notice from the above chart that skew has rather conveniently greyed out the data for bitFlyer and Deribit. These show significant increases in bid-order spreads, with bitFlyer’s daily average rising to 5.31% and Deribit’s to 4.14%. That said, Binance and BitMex are bigger exchanges in terms of volume, so their data is arguably more indicative of the current state of the market.

Institutions Buying the Dip

Another reason to have confidence in skew’s data is that it’s supported by findings from elsewhere.

For example, glassnode figures show that bigger institutional investors — which largely use OTC desks and wallets — have been buying the dip. This is significant insofar as institutions are likelier than retail traders to hold bitcoin for longer durations, thereby reducing circulating supply and exerting positive pressure on price.

Source: glassnode

In parallel, accumulation addresses — addresses that have received at least two transfers of BTC and have never spent their funds — have actually been rising over the current downturn. They achieved a record high of 545,115 on May 24, having been rising consistently since the beginning of 2021.

Source: glassnode

This chimes with data showing that as much as 25% of the recent selloff came from (retail) investors who first bought their bitcoin in the past three (or six) months. Such selling has contributed to the plunge in bitcoin’s price, yet the two above charts show that behavior from (institutional) investors is working hard to compensate for the exit of shorter term buyers.

A critic of cryptocurrency might claim that these figures aren’t as significant as skew, glassnode or anyone else would like you to believe. Volumes may be high, but they’d potentially argue that this could largely be the result of unbacked tethers continuing to circulate through the market. The same might apply to large purchases by OTC institutional investors, with Tether’s Paolo Ardoino telling CryptoVantage earlier in the year that OTC desks are the primary users of USDT.

There may be something to these claims, if only because Tether remains frustratingly opaque. However, there appears to be enough data across the board — including from places such as CME Bitcoin Futures (which are settled in actual US dollars) — to support the picture of ongoing high volumes, and high demand. This is a very reassuring sign for bitcoin, since even if the market is undergoing a period of renewed volatility, it’s being set up for a healthy recovery.