Our view on the crypto sell-off? Buy the dip

The crypto market saw a broad selloff yesterday in a swift deleveraging event, with BTC dropping to as low as $44.5K from $52.5K, and ETH dropping back down to $3.4K after almost reaching the $4K mark. In our view, this recent sell-off was triggered by a snowball effect and exacerbated by over-leveraged positions. We have not seen meaningful changes to fundamentals, which remain strong. We advise our clients to buy the dip and to consider investing further in Titan Crypto at this time.

As our clients likely noticed, the crypto market had been trending upwards for weeks. Activity surged around Non-Fungible Tokens (NFTs) and Decentralized Finance (DeFi) initiatives. We saw a series of catalyst-rich headlines on multiple layer-1 smart contract platforms, including Ethereum undergoing EIP-1559 upgrade, Cardano launching its highly anticipated smart contract upgrade, Solana gaining mainstream adoption especially in NFT space, and Terra announcing its Columbus-5 network upgrade. Other Layer 1s -- including Avalanche, Fantom, and Celo -- began to offer incentive programs, to attract users and developers to their platforms.

In our view, the renewed optimism around these developments led to the market being significantly over-heated.

Open interest in Bitcoin futures had been trending upward to its highest level since May, and in Ethereum open interest reached an all-time high. Spot margin borrowing was also peaking, leading up to this recent crash. This combination of high open interest and borrowing created enough deleveraging power to flush cryptos’ price. While we believe there’s no single, clear catalyst for the move lower, the dip has been exacerbated by these over-leveraged positions.

In essence, a familiar snowball effect has taken place: the drop prompted more investors to sell, which triggered more liquidations, which led to more investors selling. According to data from Bybt, $3.5B in crypto was liquidated yesterday.

We believe this dip was driven by leveraged derivatives and is unsupported by on-chain fundamentals. As a result, we believe things can return to some semblance of normality after excess leverage has been flushed out. For example, while the price of crypto was down yesterday, we saw increases in exchanges’ balance outflows and long-term investor holding. Zooming out a bit, over the last 1-2 months, we continue to see growth in dominance by large, institutional sized capital who have continued to accumulate and “hodl” their coins.

Additionally, the supply held by long-term holders has reached an all-time-high of 12.69M BTC, surpassing the previous peak from October 2020. On the network usage side of things, Bitcoin continued to see increases in metrics such as daily active addresses and the number of addresses with positive balances. Remember: derivative markets and on-chain investor movements are two different systems. One controls the short-term price. The other controls the long-term price.

At Titan, we pay attention to these developments, but keep our eye steady on the prize: significant long-term gains.

The volatility yesterday has brought down many coins’ valuations, back to attractive ranges. In our view, on-chain fundamentals have remained solid. We encourage our clients to buy this dip and to consider adding more to their Titan Crypto portfolios at this time.

As with all crypto investments, every client should consider their own risk profile, given the high-volatility of this nascent asset class.