Crypto Market Decline: Is a Tactical Bottom for Bitcoin on the Horizon?

André Dragosch, PhD Director, Head of Research — Europe

Ayush Tripathi Research Analyst

André Dragosch, PhD Director, Head of Research — Europe

Ayush Tripathi Research Analyst

Overview

Chart of the Week
Performance
Sentiment
Fund Flows
On-Chain
Futures, Options & Perpetuals
Bottom Line
Appendix

Last week, cryptoassets underperformed due to fears of a renewed distribution of bitcoins by the US government and a general risk-off sentiment in traditional financial markets.
Our in-house “Cryptoasset Sentiment Index” currently signals a bearish sentiment.
The good news for bitcoin and cryptoasset investors is that the recent market developments have already led to a significant decline in crypto market sentiment which signals an increasing probability for a tactical bottom in bitcoin and other cryptoassets in the near term.

Chart of the Week

Performance

Last week, cryptoassets underperformed due to fears of a renewed distribution of bitcoins by the US government and a general risk-off sentiment in traditional financial markets.

More specifically, 69,370 BTC that were seized from Silk Road are about to be sold by the US Department of Justice (DOJ). According to the latest data provided by Arkham Intelligence, the US government still controls 198.1k BTC across different wallets and has not yet conducted these sales at the time of writing this report on Monday morning. So, there is still some downside to be expected from the effective distribution of these bitcoins. However, markets have been trading down in anticipation of these sales already.

Moreover, the general risk-off sentiment in traditional financial markets has also affected bitcoin and cryptoasset markets negatively. The reason is that US Treasury yields as well as the Dollar have continued to drift higher, signalling a continued tightening in financial conditions which was further fuelled by the stronger-than-expected payrolls report on Friday.

As of this morning, Fed Funds Futures anticipate only one more rate cut in 2025, with the first one happening as early as June. In September 2024, the market had previously anticipated five rate cuts in 2025. The Fed's pivot has been steadily priced out by the markets.

Traditional financial markets have also been affected negatively due to worries about fiscal debt sustainability and financial market contagion caused by a significant decline in insurance company stocks due to the dramatic LA fires.

The good news for bitcoin and cryptoasset investors is that the recent market developments have already led to a significant decline in crypto market sentiment, which signals an increasing probability for a tactical bottom in bitcoin and other cryptoassets in the near term (Chart of the Week).

Any further downside could create a very attractive entry point in order to increase exposure to cryptoassets into 2025 as Bitcoin on-chain factors generally continue to provide a significant tailwind as outlined in our most monthly report as well.

Recent on-chain developments also reveal that the liquid supply of bitcoins on exchanges continues to decline, signalling an increasing supply deficit.

This supply deficit will continue to be exacerbated by high demand for bitcoins from ETPs, corporations and sovereigns in 2025.

On Saturday, the trading launch of the US spot Bitcoin ETFs also had its very first anniversary.

The result: US spot Bitcoin ETFs have been the most successful ETF trading launch of all time, having attracted a combined amount of +38.372 billion USD in net inflows and amassed assets-under-management of 107.636 billion USD.

As far as corporations are concerned, 75 publicly listed companies worldwide already have added bitcoin to their balance sheet and the latest addition has been Heritage Distilling (CASK).

Yesterday, Michael Saylor has also indicated on Twitter/X once again that Microstrategy (MSTR) has likely increased their bitcoin holdings even further.

What is more is that Meta has recently received a shareholder proposal to include BTC as corporate treasury asset as well. Now, Amazon and Meta will both vote on this topic in 2025.

In general, we expect the corporate treasury adoption of bitcoin to be a major source of demand for BTC in 2025 as well.

There are 7 days left until Trump’s official inauguration as the 47th president of the United States on the 20th of January 2025.

Meanwhile, the sovereign adoption of bitcoin on a state level in the US continues evolve. For instance, senators and representatives from North Dakota have introduced a bill last week to invest state assets in Bitcoin. Furthermore, a bill to establish a Strategic Bitcoin Reserve was introduced by State Representative Keith Ammon of New Hampshire. In general, there are already 6 US states that have introduced a bill to establish a Strategic Bitcoin Reserve or to invest parts of their state assets into bitcoin.

In general, among the top 10 crypto assets, XRP, BNB, and Bitcoin were the relative outperformers.

Overall altcoin outperformance vis-à-vis Bitcoin declined last week, with only 15% of our tracked altcoins managing to outperform Bitcoin on a weekly basis. Ethereum also underperformed Bitcoin significantly last week.

Sentiment

Our in-house “Cryptoasset Sentiment Index” currently signals a bearish sentiment.

At the moment, only 1 out of 15 indicators are above their short-term trend.

We are currently observing significant declines in the Crypto Fear & Greed Index as well BTC long futures liquidation dominance.

The Crypto Fear & Greed Index currently signals a “Greed” level of sentiment as of this morning. It had declined to “Neutral” levels last week on Friday for the first time since October 2024.

Performance dispersion among cryptoassets has remained steady at low levels. This signals that altcoins have continued to be more correlated with the performance of Bitcoin lately.

Altcoin outperformance vis-à-vis Bitcoin has declined last week, with around 15% of our tracked altcoins managing to outperform Bitcoin on a weekly basis. Ethereum has also significantly underperformed Bitcoin last week.

In general, increasing (decreasing) altcoin outperformance tends to be a sign of increasing (decreasing) risk appetite within cryptoasset markets and the latest altcoin underperformance signals negative risk appetite at the moment.

Sentiment in traditional financial markets as measured by our in-house measure of Cross Asset Risk Appetite (CARA) has declined last week. However, the index still signals a neutral cross asset risk appetite.

Fund Flows

Weekly fund flows into global crypto ETPs have reversed to the upside last week after some significant net outflows over the preceding weeks.

Global crypto ETPs saw around +187.2 mn USD in weekly net inflows across all types of cryptoassets, after -61.7 mn USD in net outflows the previous week.

Global Bitcoin ETPs flows even accelerated somewhat with net inflows totalling +276.6 mn USD last week, of which +304.6 mn USD in net inflows were related to US spot Bitcoin ETFs alone.

The Bitwise Bitcoin ETF (BITB) in the US also saw some net outflows, totalling -55.5 mn USD last week.

In Europe, the Bitwise Physical Bitcoin ETP (BTCE) saw slight net inflows equivalent to +0.4 mn USD, while the Bitwise Core Bitcoin ETP (BTC1) also attracted some capital of around +0.6 mn USD.

Outflows from the Grayscale Bitcoin Trust (GBTC) decelerated somewhat, with around -47.1 mn USD in net outflows last week. The iShares Bitcoin Trust (IBIT) saw a reversal in flows with around +497.6 mn USD in net inflows last week after record outflows the week prior.

Meanwhile, net outflows from global Ethereum ETPs accelerated somewhat with around -264.1 mn USD in net outflows.

US Ethereum spot ETFs also recorded net outflows with around -185.9 mn USD on aggregate. The Grayscale Ethereum Trust (ETHE) also continued to experience net outflows with around -16.2 mn USD last week.

The Bitwise Ethereum ETF (ETHW) in the US also experienced some net outflows albeit at a slower pace of around -3.1mn USD in net outflows last week.

In Europe, the ETC Group Physical Ethereum ETP (ZETH) experienced negative net outflows of -0.7 mn USD while the Bitwise Ethereum Staking ETP (ET32) continued to attract capital with +2.5 mn USD in net inflows.

Altcoin ETPs ex Ethereum managed to attract some capital last week with around +73.5 mn USD in global net inflows on aggregate. Both the ETC Group Physical Solana ETP (ESOL) and our newly launched Bitwise Solana Staking ETP (BSOL) had sticky AuM (+/- 0 mn USD).

Furthermore, investors also allocated more capital to thematic & basket crypto ETPs with around +101.3 mn USD in global net inflows on aggregate last week. The ETC Group MSCI Digital Assets Select 20 ETP (DA20) also experienced net inflows of around +0.3 mn USD last week.

Global crypto hedge funds have started to increase their market exposure to Bitcoin last week. The 20-days rolling beta of global crypto hedge funds’ performance to Bitcoin increased to around 0.67 per yesterday’s close, up from 0.56 the week before.

On-Chain Data

In general, Bitcoin’s on-chain developments have generally weighed on the market more recently.

Selling pressure remained relatively high with around -1.457 bn USD in net selling volumes on BTC spot exchanges after only -37.5 mn USD the week before.

Positively, exchange balances continued to go down last week, indicating a continuous drop in the amount of liquid supply available on exchanges, indicating that the overall supply deficit in Bitcoin is still there. In sum, exchange addresses hold only 13.9% of the supply.

On a net basis, whales also kept removing bitcoins from exchanges. More precisely, last week, BTC whales sent -18,121 BTC off exchanges, indicating a rise in whale buying interest. Network entities that possess at least 1,000 Bitcoin are referred to as whales.

Looking at more short-term indicators we have seen increasing capitulation from “weak hands” in the market.

For instance, 2.7 bn USD of coins were sold by short-term bitcoin holders on Wednesday last week. One of the highest nominal amounts in the past 12 months which is indicative of a short-term tactical bottom. The short-term holder spent output profit ratio (STH-SOPR) also declined to its lowest level since September 2024 on Thursday which is also indicative of a short-term bottom in the price of Bitcoin.

All in all, on-chain data suggest that the market is oversold and that positioning has become increasingly one-sided.

Futures, Options & Perpetuals

Last week, BTC futures traders slightly increased their exposure as open interest increased by around +8k BTC. BTC perpetual futures open interest increased by around +2k BTC.

BTC long futures liquidations increased last week but still remained below levels seen in mid-December.

BTC perpetual funding rates mostly remained positive but shortly turned negative on Thursday which is indicative of a short-term tactical bottom in the price of Bitcoin.

In general, when the funding rate is positive (negative), long (short) positions periodically pay short (long) positions which is indicative of bullish (bearish) sentiment.

However, the BTC 3-months annualised basis continued to decline to around 10.6% p.a. averaged across various futures exchanges.

Meanwhile, BTC option open interest increased significantly by around +24k BTC last week. The put-call open interest ratio also increased signalling significant put buying last week.

The 1-month 25-delta skew for BTC also increased somewhat but still signals a slightly higher relative appetite for call options and slightly bullish sentiment.

BTC option implied volatilities also remained relatively stable despite the market ructions last week.

At the time of writing, implied volatilities of 1-month ATM Bitcoin options are currently at around 57.7% p.a.

Bottom Line

Last week, cryptoassets underperformed due to fears of a renewed distribution of bitcoins by the US government and a general risk-off sentiment in traditional financial markets.
Our in-house “Cryptoasset Sentiment Index” currently signals a bearish sentiment.
The good news for bitcoin and cryptoasset investors is that the recent market developments have already led to a significant decline in crypto market sentiment which signals an increasing probability for a tactical bottom in bitcoin and other cryptoassets in the near term.

Appendix

Important information:

This article does not constitute investment advice, nor does it constitute an offer or solicitation to buy financial products. This article is for general informational purposes only, and there is no explicit or implicit assurance or guarantee regarding the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. It is advised not to rely on the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. Please note that this article is neither investment advice nor an offer or solicitation to acquire financial products or cryptocurrencies.

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About Bitwise

Bitwise is one of the world’s leading crypto specialist asset managers. Thousands of financial advisors, family offices, and institutional investors across the globe have partnered with us to understand and access the opportunities in crypto. Since 2017, Bitwise has established a track record of excellence managing a broad suite of index and active solutions across ETPs, separately managed accounts, private funds, and hedge fund strategies—spanning both the U.S. and Europe.

In Europe, for the past four years Bitwise (previously ETC Group) has developed an extensive and innovative suite of crypto ETPs, including Europe’s largest and most liquid bitcoin ETP.

This family of crypto ETPs is domiciled in Germany and approved by BaFin. We exclusively partner with reputable entities from the traditional financial industry, ensuring that 100% of the assets are securely stored offline (cold storage) through regulated custodians.

Our European products comprise a collection of carefully designed financial instruments that seamlessly integrate into any professional portfolio, providing comprehensive exposure to crypto as an asset class. Access is straightforward via major European stock exchanges, with primary listings on Xetra, the most liquid exchange for ETF trading in Europe.

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