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Bitcoin inflow to crypto exchanges hits 10-year low

While some analysts are predicting that Bitcoin will drop to $40,000 per coin and others are talking about the end of the bull cycle after hitting a new all-time high, network metrics are showing growing pressure from the demand side.

The current cycle is diverging from how things usually go since a new all-time-high price was set before the halving event. This was due to a significant influx of capital as a result of spot Bitcoin ETFs being allowed to go to market in the United States. In the past three weeks, inflows have given way to outflows, confirming the hypothesis about the end of the momentum and a potential reversal.



ETFs have been a strong mover in 2024, but they're far from the only one. Hodlers' sentiment and market participants' long-term assessments continue to play a leading role. One key metric is the inflow of Bitcoin onto crypto exchanges. The more people there are who want to exchange BTC for stable coins or fiat currency, the greater the influx is.

At the end of April, this figure fell below 10,000 BTC per day, hitting a 10-year low.



The high interest in savings is also indicated by the continued rapid influx of coins to savings addresses. These include addresses where two or more incoming transactions have been recorded and where there is no outflow of funds.



The overall picture is spoiled by a decrease in the share of coins that have remained idle for more than a year. That figure has dropped from 70.8% at the end of November to the current level of 65.8%. However, it must be kept in mind that nearly half of this trend was provided by the conversion of the Grayscale trust fund into a spot ETF. Some investors rushed to take profits, while others transferred their investments to similar ETFs with lower management fees.

Since it converted to a spot ETF, this fund has more than halved to 292,000 BTC.



If we talk about time intervals and expectations for setting new all-time highs, the post-halving price rise lasts from 350 to 500 days.



Moreover, in the first two months, there has always been a consolidation with minor price fluctuations.



Only about 20 days have passed since the halving event took place, so it's too early to summarise the new cycle's results, and investors should be patient.


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Miners' record profits aren't a reason to buy their stocks

Q1 2024 was phenomenal in terms of many publicly traded miners' profitability. Riot Platforms put up a record-high net profit of $211.8 million, with 249% growth compared to the previous quarter.


Image source: tradingview.com

Marathon Digital, which rose to number one in terms of capacity among publicly traded miners last year, was officially included in the S&P SmallCap 600 index yesterday. This index tracks companies with a market capitalisation between $1 billion and $7 billion. Marathon became the first among its peers to receive this honour. Its capitalisation reached $5.5 billion, while net profit in Q1 2024 was around $200 million.


Image source: companiesmarketcap.com

At the same time, the pace of the arms race remains high, and competition is becoming tougher. Riot plans to nearly treble its computing power this year to 31.5 EH/s and to reach 100 EH/s by 2027.


Image source: riotplatforms.com

Firstly, miners' optimism is associated with Bitcoin's movement. Most of them are baking in an increase for BTC's value to $100,000-$150,000 in their forecast calculations for the next two years.


Image source: cryptocurrency exchange StormGain

Secondly, miners are pinning high hopes on the network, seeing the spread of by-products, such as ordinals and runes, whose hype in April led to an explosive increase in commission payments. On the day of halving, the income from filling blocks was over three times higher than the income from mining the currency, setting a new all-time record.


Image source: hashrateindex.com

After the halving, however, the price stalled, and interest in quasi-tokens faded. Network fees have returned to minimum levels, depriving miners of a promising source of income.


Image source: dune.com

Halving deprived miners of half of the income received for mining a block. Since the new reality was too harsh for some miners, some equipment was turned off. The network hashrate decreased from a record-high 691 EH/s to the current level of 582 EH/s.

The reduction in overall computing power will lead to the highest adjustment in difficulty since December 2022, with a decline of approximately 5.2% today.


Image source: btc.com

Q1 2024 was successful for miners primarily due to the emergence of spot ETFs, which caused Bitcoin's price to rise by 66% during the reporting period. However, Q2 may become a trying period due to the significant decline in revenues.

Mining companies are now reporting record profits, and their stocks are soaring on the news. Nevertheless, now is not the best time to invest in the crypto-mining industry.


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Factors for Ethereum's fall in May

For the third year in a row now, Ethereum has been outpaced by Bitcoin. This year alone, it's dropped by 13% compared to the original cryptocurrency. Two important factors point to this trend strengthening in May.


Image source: cryptocurrency exchange StormGain

Shattered hopes

The main catalyst for Bitcoin's rise this year has been the emergence of spot ETFs in the US, which have attracted $11.7 billion in investment in five months of operation.


Image source: farside.co.uk

Ethereum investors are counting on Ethereum experiencing a similar takeoff when the deadline for a decision to be taken on VanEck's application to launch a spot Ethereum ETF approaches on 23 May.


Image source: twitter.com/JSeyff

If the SEC wants to refuse it, it will have to find a compelling argument. Otherwise, the very first judicial objection will put the regulator in an awkward position, which is what happened with Grayscale’s application last year.

Since the staking programme is one of the stumbling blocks, Ark Invest and 21Shares recently introduced an amendment to exclude this option for ETF investors. Most experts, however, agree that this won't help.

The SEC was extremely negative towards Ethereum after the cryptocurrency transitioned to the Proof-of-Staking (PoS) algorithm, which SEC Chairman Gary Gensler notified the public about on the same day. In his opinion, the altcoin should be considered a security rather than a commodity like Bitcoin. This places a completely different level of demands on both ETF managers and investors.

One indirect sign that the SEC will reject the application in May is the lack of negotiations with the applicants. Before Bitcoin ETFs launched, the regulator's representatives met with potential managers several times a week for a month and a half.

If the SEC rejects the application, it would serve as grounds for a sell-off of Ethereum since some investors are disappointed in its prospects.

Inflation

Ethereum became deflationary after the London hard fork and the inclusion of a mechanism to burn part of the reward. In other words, the number of coins destroyed began to exceed the number of new ones issued. All other things equal, this would be a reason for the price of any asset to go up. The effect intensified after the transition to PoS.

However, the staking craze and low network activity led to the undesirable result of inflation taking place again. In the past month, this indicator has stood at 0.4%.


Image source: ultrasound.money

The number of active validators (who must be paid a reward) is now over 1 million, which is more than enough to ensure the network's security and functionality. A further influx will only cause congestion due to the growth of technical messages.


Image source: validatorqueue.com

The algorithm for reducing profitability based on the number of validators turned out not to be flexible enough, which is why developers are considering the option of forcing a reduction in the reward.

At the same time, network activity, which led to increased coin burning, fell due to a shift in interest to L2 and L3 networks. Simply put, users began to spend more time in Base or Arbitrum, from which transactions in Ethereum are received in a compressed form.


Image source: l2beat.com

Since the mentioned trends are gaining momentum, it's likely that inflation in Ethereum is here to stay for a long time. It will have a long-term negative effect on the cryptocurrency's value, and coupled with the SEC’s refusal, it will lead to Ethereum pulling further apart from Bitcoin.


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Record outflows from Hong Kong ETFs

The last major event to move Bitcoin's price was the launch of spot ETFs in Hong Kong in early May. The ETF market's small market capitalisation of $50 billion (versus $9 trillion in the US) has been offset by rumours of an imminent connection to the Stock Connect system, which will open up access to mainland Chinese investors.

The hopes were false, though. The Hong Kong stock exchange denied the rumours. On 13 May, Chinese Bitcoin ETFs saw their largest outflow, $32.7 million.



US ETFs don't look much better. After a month-long sell-off, they returned to regular inflows, closing the last week at $286 million.



Despite that, Bitcoin is performing well enough and hasn't fallen into a full-blown correction. The maximum drawdown from the record high is only 23%. In previous bull cycles, it ranged from 36% to 71%.



One key factor for the price's stabilisation is institutionalisation. Bitcoin sees less price turbulence because it's recognised and incorporated into the traditional financial system via the same ETFs. In the past, large US investors overlooked the asset because of the risk that companies would suddenly ban cryptocurrency transactions like what happened in China. However, these companies are now increasingly looking to invest in it.

Even JPMorgan, whose head called Bitcoin a fraud and a worthless asset, declared to the SEC on 10 May that it purchased shares in spot Bitcoin funds worth a total of $760,000. Compared to the bank's total amount of assets under management, the purchase size is modest, but the start of cryptocurrency investments has now taken place.

With inflows into spot ETFs slowing considerably and exchange-traded activity already down 43.8% in April (compared to March), macroeconomic factors are coming to the fore.



The focus this week will be on data from the US. The Fed previously planned to cut its key rate in June. However, the jump in inflation to 3.5% in March forced the regulator to reconsider when it would begin cutting rates.



The data for April may have a surprise in store. If inflation declines significantly, the chances of a monetary policy reversal in the summer will increase significantly. This, in turn, will be grounds for risky assets, including Bitcoin, to strengthen. The indicator will be released on 15 May.


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FTX clients unhappy with upcoming 118% bankruptcy payouts

In November 2022, FTX, the third-largest crypto exchange, collapsed as a result of diverting customers' funds to its affiliate company, Alameda Research. Funds from the company it controlled were spent on political donations, purchasing luxury real estate and unwise investments. Each year, the hole got bigger and bigger, reaching $10 billion in 2022.



The debt was masked by issuing more of the FTT token, which was listed on Alameda's balance sheet as an asset and as collateral for loans issued to third parties. On 2 November, Coindesk published an article that triggered a massive outflow of client funds and a liquidity crisis at Sam Bankman-Fried's empire.

On 11 November, FTX declared bankruptcy, leaving over 2 million customers high and dry. The liquidation committee's first valuation showed that the total cryptocurrency held in all controlled accounts was worth only $3.3 billion, while the company had liabilities of $8 billion to customers.



The first compensation announcement presupposed a payout to customers of just 10 cents on the dollar. However, as the values of assets have risen and the commission has succeeded in finding all the cryptocurrency wallets controlled by the company, the expected payout for most customers has risen to 118 cents on the dollar.



It's very rare for global jurisprudence to see clients recover more money than they had in their accounts as a result of a private company's bankruptcy. However, not all customers were happy with this result.

The reason for this is that payments are scheduled in US dollars, according to how things were on the day of the bankruptcy. Meanwhile, the value of Solana, which formed the backbone of assets held by FTX, has risen nine-fold to $162 during this period. Bitcoin's price, meanwhile, has quadrupled to $66,000.



Bloomberg reports that more than 80 petitions have been filed with the bankruptcy court by dissenting customers who want their cryptocurrency funds back. FTX's CEO, John Ray, responded to this by saying that he had the best interests of the majority of customers in mind. The cryptocurrency assets, on the other hand, are simply not enough to meet all requests in full.

In June, customers will be able to vote on the proposed reimbursement plan. If the majority favours a cryptocurrency payout, the judge may reject the bankruptcy commission's proposal and send it back for further review. If the majority of clients are satisfied with a payout in US dollars, they will receive the funds throughout 2024.


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