MVC Sep Insight | The overall cryptocurrency market is in depression, like "waiting for the fish to die in the market"

Liquid Fund Metrics Ventures September Market Report Summary:

1/ The overall market remained sluggish in September, with several indicators hitting their lowest levels of the year. Data indicate significant losses of Bitcoin and Ethereum, with accumulations being sold off and open interest dropping substantially.

2/ MVC's buying strategy. In mid-September, we allocated 20% of our holdings to purchase ETH at an average price of around $1,600. This decision was primarily based on the following positive signals: after 11 months of fluctuations, potential selling pressure had been partially relieved and market sentiment showed signs of panic.

3/ The primary contradiction in the market remains the lack of inflows, and this issue currently appears unsolvable.

4/ The analogy in the title, "waiting for the fish to die in the market," reflects our current investment strategy. We will stay patient and wait for genuine buying opportunities to appear.

This report provides an overview and analysis by MVC of the overall performance and market trends in the cryptocurrency market in September.

The title of this monthly report is inspired by a funny story: A middle-aged woman goes to a fish market, stands by a small stall, and keeps staring at the fish. The vendor, puzzled, asks why she hasn't made a purchase yet. The woman replies, "For the same fish, the live ones cost 13 dollars, and the dead ones cost 3 dollars. I'm waiting for them to die." This analogy reflects the mindset of many secondary investors who hold a significant amount of assets in the current market. They are patiently observing and waiting for the fish to die before diving in to buy at a discount.

Indeed, our mindset is quite similar. The bustling Token2049 conference in September was particularly like a fish market, where some fish had already turned belly up, there were still some seemingly healthy and lively fish. However, in reality, everyone knew they wouldn't last much longer.

In mid-September, we established some positions, primarily allocating approximately 20% of our holdings in ETH at an average price of around $1,600. This decision was made as we observed some marginal changes in the signals we've been monitoring, both in terms of market sentiment and accmulations.

From the accumlation data, we can observe that as the market declined, the Bitcoin accumulations in the $29,000-$30,000 started to shift towards the $25,000-$26,000. This indicates that the positions in paper losses due to the anticipation of a Bitcoin ETF approval and positive expectations from the XRP/DCG lawsuit are now surrendering and selling off their accumulations. Additionally, the on-chain data shows that there is relatively supportive buying pressure from the spot market. ETH also exhibits similar characteristics, with almost 50% of on-chain ETH accumulations realizing losses. This aligns with the characteristics of previous panic bottoms and suggests that the bleeding positions (positions suffering from great losses) in the spot market are being sold off. (Through the observation of on-chain data, we also noticed large-scale whale selling behavior on Arbitrum on September 10-11, with widespread realized losses ranging from 30-40%. This indicates that patience among large holders and whales in the market has finally reached its limit since June.)

From a sentiment perspective, market sentiment has quickly shifted towards pessimism.

From the chart above, it can be observed that after nearly 11 months of market consolidation, more than 97.5% of short-term BTC positions are currently in paper losses. While the drop from $30,000 to $25,000 may not seem like a significant decline, the pain of selling off and realizing losses can be quite intense. The liquidation of positions at this level should, in theory, lead the market to cool off for approximately one month.

From the data of perps, in early September, the BTC open interest in Binance alone dropped from a peak of $4.81 billion to $2.88 billion, representing a decrease of about 40%. In January 2023, during the market's most sluggish period, this number was $2.52 billion, and during the March U.S. banking crisis, it was approximately $2.85 billion. This indicates that the disappointment of several positive expectations in mid-September indeed significantly eroded the confidence of market players and led to a strong liquidation of leverage in the market. Furthermore, throughout September, the OI of perps recovered slowly, with moderate fees, and the market sentiment remained subdued, to the extent that there were few willing to long or short.

Taking a closer look at the hourly BTC price action in the chart, it's evident that the narrow-ranging volatility in the market during September was indeed a hell for perp players. There were frequent liquidation events, with positions getting liquidated both on upswings and downswings. The sequence of rallies followed by sharp drops led to repeated liquidations (a pitiable situation indeed). So, it's quite clear that the sentiment around Bitcoin at the $27,000 level was even more pessimistic than it was at $16,000. The characteristics of a deep bear market were more pronounced, and the entire September and even October seemed to be a phase of oscillation and digestion of trapped traders and selling pressure.

Not only did the sentiment in the on-chain spot and perps markets remain subdued, but even the industry's most speculative players, who typically enjoy participating in on-chain Meme activities, also experienced a significant downturn. As shown in the chart below, the gas base in Ethereum reached a new low for the year, and ETH itself entered a rare state of inflation since the Merge was completed. The market was even colder than the freezing one of December 2022. Based on our monitoring of Mempool transaction data, the activity of tax-free tokens sharply declined.

Furthermore, within September 2023, the DEX trading volume has not exceeded 30B, even lower than the volume in December 2022, which is 40B. This marks a new low for monthly DEX trading volume since 2021. This observation aligns with the market sentiment we intuitively sense, where the market enthusiasm for BTC at $27,000 has surprisingly been even more subdued than it was at $16,000.

When we observe investors cutting losses and extremely negative market sentiment, we chose to establish our position for a small-scale bottom-fishing. This doesn't necessarily mean that we believe there will be a significant rebound opportunity in the short term. Instead, it's because the current position has released spot accumulations with a high proportion of realized losses, the leverage has been liquidated relatively thoroughly (with open interest nearing its yearly low and a low long-to-short ratio), and sentiment is extremely pessimistic (with weaker trading volume). The market has provided signals that suggest a tendency to establish positions, and the current situation offers a relatively favorable risk-reward ratio. As part of a long-term strategy, the price is also reasonable. Even if there are signs of a potential sharp drop in the short term, we can exit with minimal cost at a clear and low-risk price level.

It's interesting to note that there have been widespread screenshots in the market recently regarding the BTC calendar effect. The main idea is that historically, October has had a high probability of positive performance in the crypto market, often accompanied by a significant Alt Season. But we don't necessarily have high expectations for the October market performance .

At present, the market has barely caught its breath from the game with reduced liquidity. In the past month, the total market capitalization of the top five stablecoins has not significantly decreased, but it can only be considered as an upgrade to a stock game at most. In this context, much of the market's dynamics lean towards oversold rebounds, with limited upside potential, and the driving force primarily lies in the spot market. Due to generally low positions among all market participants, there is some buying pressure from short-covering. Through market research, we have found that secondary institutions and individual investors with more than a hundred million dollars are opting for a dollar-cost averaging strategy to engage in small-scale bottom-fishing with a long-term investment perspective.

If there is indeed something referred to as an "alt season," it's important to note that due to the thin liquidity and low market capitalization of many altcoins, the inflow from short-covering could potentially lead to significant price increases. However, it's also likely that a large number of altcoins will compete for these inflows, resulting in extremely rapid theme rotation, poor market sustainability, and the potential inability to generate significant profit opportunities. Participating in short-term trading may offer limited profit, and not being quick enough to exit could lead to unfortunate liquidation.

The market is at a standstill, with consecutive record lows in volatility. The proportion of long-term positions that remain locked is slowly increasing, and short-term investors repeatedly chase highs and leave with losses, which has led us into a state of inertia, where the market seems neither able to go upward nor downward. The main contradiction in the market remains the lack of inflows, and this particular issue currently appears unsolvable.

The core constraint of the main contradiction in the market indeed lies with the Federal Reserve. In the September, FOMC suspended the interest rate increase temporarily, but the market interpreted this as an indication that interest rates would remain high in the long term. As we approach the vacation of Chineses National Day, it coincides with a critical point in the U.S. government's new fiscal year budget resolution. U.S. treasury yields have risen to levels last seen in 2008, and U.S. stocks, gold, and crude oil have experienced significant declines. The U.S. dollar has strengthened, and overseas markets have been shaken significantly, showing early signs of liquidity tightness, which is also the main consensus in the current crypto market. Many whales who haven't suffered significant losses are closely monitoring the fishpond and awaiting the collapse of the U.S. stock market in Q4 2023 - Q1 2024. They regard the U.S. stock market crash or an interest rate cut as signals of confirming that the fish have completely died (the ghosts of the 312 memories are echoing).

We continue to monitor the macroeconomic changes, but we want to emphasize that since 2023, our investment decisions will not rely on macro information. We are not macroeconomic experts, and the end of a rate hike cycle does not necessarily mean the beginning of an interest rate cut cycle. Each interest rate cut comes after risks have emerged, and this is not a pre-existing signal. At the end of each rate hike cycle, there will be a bubble bursting in some corner of the world, but it is not necessarily U.S. stocks that are going to burst this time. Whether and when it bursts are not very helpful for our "to all-in or not to all-in" decision.

The market is currently experiencing a lack of inflows, and it's unclear where the liquidity will come from. What we may need to confront is a situation where Bitcoin oscillates indefinitely within a 15% volatility range. Oh fish, when will you take your last breath?

In conclusion, the crypto market in September remains in depression, and we maintain a cautious stance. Narrow-range oscillations may persist, until there is an improvement in market liquidity. We will continue to monitor the fundamentals, adjust our positions as needed, and patiently wait for true buying opportunities. A cautious investment strategy is crucial in dealing with this market environment.