⚡BitPulse Index

Hi there fellow Bitcoiners, my name is Publius and I’ll be releasing a bi-weekly report called the BitPulse Index covering three of the most relevant trending Bitcoin indicators displayed on an easy to read “Speedometer” dashboard (see below).

My inspiration for writing this is simple. In today’s environment I feel overly burdened with financial “noise” wherever I turn. From Bitcoin Twitter to the non-stop clickbait thumbnails on YouTube or LinkedIn, everyone seems to be vying for our most precious resource, our attention.

For this reason, I’m partnering with BN Research who are focused on cutting through the bullshit to provide unique, high signal and easy to understand financial bitcoin analysis. Lets begin!

⌛️ Estimated Read Time: 1.3 Blocks (~12 Mins)

Table of Contents

1. Metric #1: Global Liquidity Breakout

2. Metric #2: Inconsistent ETF Flows

3. Metric #3: Miner “Capitulation”

4. Key Takeaways

Metric #1: Global Liquidity Breakout

Institutional investors, capital allocators and finance professionals are constantly talking about the concept of “global liquidity” to assess whether asset prices are likely to rise / fall as new money flows into the financial system.

Before exploring why its worth paying attention to a “breakout in global liquidity”, first principles thinking dictates we first define what “global liquidity” actually is.

The definition has a rather interesting history, having evolved over the years alongside the development of our financial system and subsequent changes in the nature of central bank policy (read “intervention”).

To this date, there are still no widely agreed upon definition of global liquidity however there are two widely used definitions which have emerged to broadly refer to the term.

Definition 1

The first definition is the most popular given its relative simplicity. This definition measures global liquidity as the “global aggregate of M2” which equates to ~$90T depending on how many/which countries are included in the metric.

Recall that M2 is a measure reported by a country’s central banks, representing:

• all the banknotes/coins in circulation (“M0”) +

• various liquid deposits (i.e. savings and demand deposits).

This results in charts such as the below which are a good approximation for assessing the level of money “circulating” in the global economy.

However, the above definition is rather static and incomplete as it only accounts for the money available for transactions and saving within an economy.

Definition 2

It does not include broader aspects related to international settlements/credit which includes aspects such as shadow banking activities, new debt issuances, and changes in the value of asset holdings (like stocks and real estate).

The second definition of global liquidity is closer to what the Bank of International Settlements (BIS) would explain as their metric for global liquidity:

Although a more vague definition, the BIS is focused on the credit capabilities of particular nations, i.e. their balance sheet capabilities vs only cash & cash equivalents (which is what M2 is used for when assessing liquidity).

In conclusion, the term “global liquidity” extends beyond the components included in M2, including factors such as:

• bank credit (which extend beyond just the time/savings deposits mentioned in M2);

• international reserves;

• financial market instruments;

• shadow banking activities; and

• various forms of global capital flows that influence liquidity conditions.

This broader definition of “global liquidity” is closer to ~$170T in total value based on data from CrossBorder Capital, and has been rangebound for some time now.

As such, it would seem that although certain “global liquidity” metrics (M2) are breaking out, others (including components as the shadow banking system and global capital flows) remain neutral (yellow circle above).

Ok, but who cares?

Having defined global liquidity we can now assess why its such an important metric. There are two reasons:

1. Global liquidity leads price movements in other asset markets, primarily because we’re in a hyper-financialized world with a debt spiral that results in constant need to inject more liquidity into the system to refinance (i.e. prevent balance sheet values from being impaired).

2. When liquidity does increase, this typically has a high correlation with other risk assets, of which Bitcoin is HIGHLY correlated to this. Based on the data, for every 10% increase in global liquidity the price of Bitcoin goes up 50% (a 5x multiple)

Bitcoin bull markets have typically coincided with the rapid expansion in monetary liquidity (strong correlation based on the below chart). This is likely due to the markets growing faith in Bitcoin’s code being able to consistently hedge investors against long term fiat debasement.

Whether this has any predictive value is yet to be determined and not within the scope of this article, but for those interested, its worth digging into Michael Howell’s global liquidity index that forecasts 65 month long average liquidity cycles (see chart below).

Metric #2: Inconsistent ETF Flows

Although price is typically the least interesting component of the Bitcoin ecosystem, I still believe its worth addressing. Many Bitcoiners are questioning why Bitcoin’s price isn’t rising, even amidst record ETF inflows.

The answer is relatively simple, however a few noteworthy narratives are circulating, some of which have validity and other which don’t.

Narrative #1

The first is the recent claim by JP Morgan which infers that flows into Bitcoin ETF’s are potentially overestimated by up to 2x. Their argument is as follows:

• Bitcoin ETF’s offer deeper liquidity + a more efficient regulatory structure than holding in an on chain wallet

• Coinbase’s Bitcoin balances have been declining since the launch of the ETF (see chart below)

• Thus individuals must be selling their BTC from their Coinbase wallets and buying Bitcoin ETF’s

• Causing a double counting of total new net inflows into Bitcoin ETF’s ($12B vs the reported $25B)

In reality, however, as TXMC correctly points out, there’s missing data that has not been accounted for. The above Bitcoin holdings do not include data for other Coinbase institutional products such as Coinbase Advanced, Prime and Vault.

We thus have little factual insight into the extent to which capital has rotated directly from on-chain addresses into Bitcoin ETF type products. There are also other factors such as the friction of moving capital, taxes etc. which further inhibit the probability that flows have been double counted to the (large) extent that JPM is suggesting.

Narrative #2

If Bitcoin ETF inflows are strong (reflecting net new demand) then why hasn’t the price responded positively? The simple reason is that large hedge funds are putting on what’s called a “cash and carry” trade whereby they’re exploiting price arbitrage in the derivatives markets to earn a (risk free) profit.

They do this by simultaneously going both long and short an asset at the same time, pocketing the difference in price. This is reflected by the two charts:

Chart 1 - Investors who are long Bitcoin:
First, we can clearly see from the below chart that ETF flows are at near all time highs (albeit with a minor recent drop off due to a likely “miner capitulation” which we’ll cover later in the report).

Chart 2 - Investors who are short Bitcoin:
Next, we can confirm the increase in short positions by analyzing the positive change in new Bitcoin ETF Flow Open Interest. This is reflected by the blue line below recently showing as positive on average (green) vs negative on average (red).

As such, we can infer that the most logical reason for the the price of Bitcoin remaining relatively flat even though Bitcoin ETF flows are strong, is because large institutions are simultaneously going long Bitcoin ETF’s and short the derivative (via the CME futures market).

Lastly, its also worth pointing out the lack of growth in stablecoin supply may be further adding to the lack of volatility. Typically when when new synthetic dollars are minted, they often tend to find a home in Bitcoin, resulting in a corresponding price increase.

As is evident from the chart below, no such substantial growth has occurred since mid April, corresponding with Bitcoin’s flat price movement.

Metric #3: Miner “Capitulation”

Miners appear to be under the gun at the moment following the recent halving whereby their reward were cut in half. Many are calling this a “miner capitulation” but the real question is whether this is worth paying attention to, or just more “noise”.

Infamous on-chain analyst Willy Woo stated that we were seeing a “rare miner capitulation” based on the below chart of Bitcoin’s hash ribbons.

These hash ribbons were developed by Charles Edwards back in 2019 and are based on the following logic:

1. Bitcoin miners are likely to turn off their machines when their all in Bitcoin cost basis exceeds the Bitcoin price;

2. During prolonged periods of large price drawdowns, Bitcoin miners show more resilience (lower price drawdowns) than public investors/hodlers;

3. Using a simple 30-day and 60-day moving average of these “hash ribbons”, we can find periods of hash rate declines which have historically offered excellent buy signals.

However, the optimal time is not as soon as these hash ribbons intersect, but rather during the middle of this “miner capitulation” period.

But is this truly a rarity and cause for alarm or just business as usual?

CryptoQuant head of research Julio Moreno provided the below chart confirming the substantial OTC selling pressure (recall that miners typically offload their BTC holdings via OTC desks to ensure more favorable pricing).

Although this sell volume (red rectangle below) is certainly higher than usual, it doesn’t seem excessively high and certainly doesn’t justify any cause for concern.

The takeaways from this are twofold:

Firstly, although a “rare event" according to Bitcoin Twitter, this type of post halvening miner behavior is extremely common. Its simple math - miners rewards were cut in half post halvening, resulting in miners turning off their machines and a subsequent drop in hash rate leading the 60-day Bitcoin hash to cross the 30 day ribbon.

Secondly, there remain little short term actionable insight from the “miner capitulation” narrative. However, if you’re a long term investor, now may be an opportune time to add to your Bitcoin position given the attractive historical track record of Bitcoin’s price performance following such capitulation events. 

Key Takeaways

1. Global Liquidity (defined by M2) is breaking out, but if we expand our definition more broadly, we see a more neutral trend.

2. ETF Flows are deceiving because many institutional investors are implementing a cash and carry trade, mitigating the positive price impact we’d typically see from net new demand for Bitcoin ETF’s.

3. Bitcoin miners are weak and have begun turning off their machines and liquidating their BTC reserves; this is expected post halvening behavior and a non-actionable event for most market participants.