Long-term bitcoin holders haven’t shed their holdings amid market weakness as short-term speculators are primarily responsible for the selloffs that are exacerbating the asset’s slide, according to Coinbase’s latest monthly report.

Crypto miners and firms that are forced to liquidate positions to stay solvent amid an exodus of cash showed the industry is in for credit risk rather than a crypto-specific crisis, also notes. the document.

True believers hold

Titled “The Elusive Bottom,” the report examined the overall state of the market in June as the major cryptocurrency showed signs that it was nearing the bottom. According to data from the chain, holders who had held bitcoins for more than six months still accounted for 77% of the 21 million bitcoins ever available to be mined, despite a slight drop from the 80% recorded at the start of the year.

It demonstrated relative asset strength as the percentage of ownership by long-term holders surpassed the 60% level at the peak of the previous cycle in December 2017. The report viewed such a phenomenon as a positive indicator for true believers. less likely to deepen selling pressure during choppy times.

A credit crisis

Notably, the ongoing bloodbath has been driven primarily by Fed-induced rate hikes and overleveraged crypto firms, as well as miners forced to offload their holdings when their collateral lost in value was in danger of being depleted. liquidated.

The report argues that CeFi lenders significantly increased their short-term debt when the bull market was in effect. They took out huge loans from DeFi protocols and lent the capital to counterparties who paid even higher interest rates. Some counterparties had “duration mismatches and heavy re-hypothecation of assets on their books,” which were lent to crypto hedge funds and other entities.

The snowball continued to roll until the severe correction hit the market, causing an increased contagion effect that quickly spread throughout the market. In particular, the OTC trading desks were largely responsible for the liquidity squeeze that forced margin calls or outright recalls on some of the loans.

“These OTC desks tend to expand their balance sheets and facilitate transactions by borrowing without collateral to try to maximize their capital efficiency. These unsecured loans would be granted based on on-chain and off-chain credit data from these OTC bureaus. Nevertheless, when these loans are repriced or recalled, offices are forced to show their clients wider bid-ask spreads or smaller trade sizes.

To compound the ongoing credit crunch, publicly traded miners — who had taken out huge loans secured by bitcoin holdings or mining machinery during the bull market — were forced to sell their positions amid falling prices. asset prices. However, since the top 28 public mining companies only account for 20% of bitcoin’s hashrate, their sales will not drastically affect trading volume.

“Even if the bitcoin price were to reach $10,000, they would have to liquidate 16 bitcoins from their reserves to pay the difference each day, which means they can still last around 120 days. We believe this is unlikely to have a significant impact on the price given that there are approximately $6 billion in average daily volumes of BTC on exchanges.

Concerns about stablecoins

Against the backdrop of the Fed pledging to raise rates to fight runaway inflation, investors tend to pull capital out of DeFi protocols to seek higher returns from traditional finance. The impact is seen in the decline of the total market capitalization of stablecoins, from $162 billion at the beginning of May to $149 billion at the end of June.

$12.6 billion in capital may have left the crypto ecosystem due to the search for higher returns. Considering the CPI for June came in at 9.1% — well above what Wall Street expected — the Fed is likely to follow another 0.75% rise this month. As such, stablecoin releases are expected to increase accordingly.