Encryption market May report: Policy factors exacerbate, buying power gathers to find a breakthrough point

Write 0xWeilan

The market, project, currency, and other information, opinions, and judgments mentioned in this report are for reference only and do not constitute any investment advice.

After 15 years of development, the BTC and Crypto industries have transitioned from technology research and development to large-scale adoption, from being relatively unknown and notorious to becoming prominent and unexpected in their path and form of realization.

Everything seems accidental, but it all seems inevitable.

Following the approval of the BTC ETF in January, the U.S. SEC unexpectedly announced the approval of 8 ETH ETFs on May 23. As the market had previously assumed that the approval of the ETH ETF would be postponed to the second half of the year, the unexpected favorable news suddenly boosted the weak BTC and ETH, resulting in rebounds of over 11.4% and 24.83% respectively.

In the long process of mass adoption of BTC and Crypto, the transformation of TradFi and regulators has brought a huge impetus to the development of the encryption industry and market. In terms of Crypto, the “unexpected” defection of the Democratic Party not only shows that the influence of the 50 million Crypto holders in the United States cannot be underestimated, but also shows the policy impact of the large-scale entry of TradFi institutions represented by BlackRock.

U.S. Policy

On May 23, the US House of Representatives overwhelmingly passed the Financial Innovation and Technology for the 21st Century Act (FIT21). In the long run, the passage of the FIT21 Act will far exceed the approval and issuance of BTC ETF and ETH ETF in promoting the development of the crypto industry.

For the cryptocurrency industry, the FIT21 bill will have a far-reaching impact on institutional certainty and protection. This bill provides a pathway for blockchain projects to launch safely and efficiently in the United States; it clarifies whether regulated tokens belong to securities or commodities as benchmarks, and clarifies the regulatory boundaries of the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC); it also specifies regulations for cryptocurrency exchanges and establishes implementation trading rules to protect US investors.

After passing the House of Representatives, the FIT21 bill will be reviewed by the Senate, and if approved, it will be reviewed by the President of the United States. The approval of the FIT21 bill will also take time, and its implementation will be even longer. However, its breakthrough significance has been initially revealed, indicating the institutional affirmation and promotion of the Crypto industry’s substantial development in the United States, showing that the Crypto industry, which has removed the legitimacy crisis, has become one of the key industries for development in the United States.

Macroeconomics

In early May, the US released economic data for April - the unemployment rate and non-farm payroll data were much lower than expected, leading to increased expectations of an interest rate cut and causing the US dollar index to decline. The three major US stock indexes, which experienced a sharp decline in April, rebounded strongly. In addition, supported by Nvidia’s better-than-expected financial report, the Nasdaq index rose by 6.88% in a single month, recovering from the decline in April and reaching a new historical high.

In the middle of the month, the Federal Reserve continued to release hawkish remarks, suppressing expectations of rate cuts and the frequency of rate cuts, causing market fluctuations. However, mild economic recession in certain parts of the United States has led market participants to believe that interest rate hikes are unlikely to occur, and rate cuts are only a matter of time. Goldman Sachs expects the start of rate cuts to be postponed from July to September, and the current market trend can be seen as reflecting this expectation.

The long trend of US technology stocks is expected to remain unchanged unless there is abnormal economic data in the future.

Encryption Market

In May, BTC opened at $60,621.20 and closed at $67,472.41, with a monthly increase of $6,850.31, or 11.3%, and a volatility of 25.54%.

Unable to recover the April decline as strongly as the Nasdaq. BTC performed relatively weakly in May, with trading volume failing to increase significantly after a large-scale fluctuation, leaving long upper and lower shadows in its trend. The biggest gain was the effective recovery after falling out of the top box at the beginning of the month, returning to the range of $58,500 to $69,500.

Although the on-chain fundamentals continue to deteriorate, the price has rebounded effectively. In addition, the support from macro finance, industry, and capital dimensions has temporarily shelved concerns about the end of the bull market.

In this cycle, the upward momentum of BTC has gone through three stages: replenishing inventory, speculation on the approval of BTC ETF, and the stage of fund inflows driven by the operation of BTC ETF. As of the end of May, except for the ETF channel, the inflow of on-chain funds has slowed significantly. EMC Labs believes that in May, the rebound in BTC prices was mainly driven by the linkage effect brought about by the strong rise in ETH.

There are signs of capital within the industry flowing from BTC to ETH, which is confirmed by the increased trading volume of the ETH/BTC trading pair after May 15th.

The reverse flow of industrial capital indicates that the future price discovery of BTC will mainly depend on whether the inflow of funds from BTC ETF channels and the on-exchange funding are sold.

Market Supply

During the bull market process, long-term holders gradually sell their BTC holdings to the market in batches, while short-term traders who are attracted by the price continuously increase their positions.

Since December, this ‘long to short’ trend has continued until May when it reversed. This month, the long group as a whole has increased its accumulation by 93,400 BTC, while the short group has started to reduce positions and sell off 38,200 BTC.

In the first month after the halving, the mining community saw a decline in both block rewards and transfer income, with revenues sharply reduced to $963 million (according to The Block). EMC Labs found that under the pressure of declining income, miners were forced to take two actions this month: selling their inventory and dumping the accumulated 6000 BTC on the market, and reducing computing power supply.

With the price drop, the Bit network has lost up to 28% of its computing power since reaching its peak on April 23rd.

Currently, miners hold 1.8 million BTC and have not conducted large-scale sales since this bull market started. If the market experiences a decline in the future, miners may sell to maintain mining farm operations and push the weakly balanced market downward.

Fund Flow

Since this cycle, stablecoins have achieved a net inflow since October 2023, driving the market to rebound. The inflow scale in March and April this year set a new record high for this cycle, becoming an important force to absorb the liquidity impact caused by the large-scale realization of BTC profits (the other force is fiat capital in the BTC ETF channel).

In May, with massive chip exchanges and violent market fluctuations, coupled with the delay in interest rate cuts, the inflow speed of stablecoin channels has dropped significantly. According to EMC Labs, the inflow of stablecoin funds in May was only $341 million, far lower than $8.9 billion and $7 billion in March and April.

Comparing the two major stablecoins, USDT saw an inflow of 1.394 billion this month, while USDC5 recorded an outflow of 0.973 billion for the first time in 5 months, indicating a more sensitive trend in fund channels for stablecoins in the US region compared to the Asian region.

EMC Labs observed that fiat funds in the ETF channel flowed out on 5 out of 22 trading days in May, while recording net inflows on 17 trading days. The net inflow for the whole month was 1.905 billion billion US dollars, far exceeding the inflow of 3.41 US dollars in the stablecoin channel.

As of the end of May, the assets held by 11 BTC ETFs in the United States have reached as high as 58 billion US dollars, holding 852,256 BTC, accounting for 4.32% of the total supply, and are becoming an important force influencing the price of BTC.

Conclusion

In the April report, we judged that the market has entered a Bull Market Relay state, and the first wave of large-scale chip exchange (March~April) has already occurred. In the whole month of May, both long and short lot trading fell sharply, the market supply resumed “from short to long”, and the stock of BTC on the exchanges returned to the outflow state, marking that the BTC market has entered a weak equilibrium state after the catharsis of passion.

We maintain the judgment that there is a trend of capital migration from BTC to ETH in the market. ‘Ethereum time’ will continue, and the future trend of BTC depends on US macroeconomic data and the market voice of the Federal Reserve.

BTC in a weak balance state does not actually need a lot of funds to drive the upward trend. Possible buying pressure may come from the spillover effect of the ETH ETF approval heat, as well as fiat currency funds from the BTC ETF channel. With its continuous growth and pace similar to the Nasdaq, the fiat currency funds in the BTC ETF channel may become an independent force influencing BTC prices.