INTRO: Cooling of eth merge pump portends more downside

With the crypto bear market now entrenched, many are questioning the utility and value of several of even the most established cryptocurrencies. It’s no surprise therefore that bitcoin’s safe haven credentials have been enhanced as a result of months of bearishness that has brought on the bankruptcy of several of the largest crypto lenders as well multiple stablecoin depegging events. At the same time, the evaporation of the Ethereum merge hype in conjunction with the Fed’s hawkish drum beat has neutered the crypto relief rally and cemented the view that a retesting of the lows will soon follow.

What's in the news?

Jackson Hole sinks the relief rally

As per last week’s Weekly Digest, Fed policy announcements are having an increasingly large impact on the market during this period of macro instability, especially for risk-on assets. We also noted the non-linear relationship between these announcements and the market reaction, and bitcoin’s dump following Powell’s nothing burger announcement on August 26, that quantitative tightening could remain "for some time," provided further evidence of this.

Although it was only a semantic variation on the “fed is data dependent” remarks made in July (after which bitcoin surged over 8%), bitcoin sold off hard and briefly dropped under $20K. Equally, the SP500 shed 3.4% as the markets digested the news, suggesting that the bears have taken control of the relief rally that started back in June.

The fading of the ethereum merge hype

One source of optimism this summer has been the hype surrounding the ethereum merge. As anticipated as a bitcoin halving, the merge will cement the L1 network’s transition from proof-of-work (PoW) to proof-of-stake (PoS) consensus which is expected to reduce its power consumption by 99.5%. But growing rumours of potential delays and the threat of forking (that would see ethereum split into two chains post-merge) acted to dampen the enthusiasm for Ethereum 2.0. Consequently, ethereum dropped over 11% on August 26 alone, a decline that was accelerated by the negative sentiment stemming from Jackson Hole.

What does the onchain data say?

Whales step in after Jackson Hole slide

Whalemap has noted that several onchain factors suggest that a macro trend reversal isn’t yet on the cards, and last week’s break of market structure served as confirmation that bitcoin’s consolidation period is far from over.

Interestingly, onchain analytics also revealed that many whales took advantage of the Jackson Hole sell-off to make entries on the most recent dip. We can see in the chart below, that whale inflows had already started rising once the price dropped outside of the rising wedge on August 19, and that this wave of buying continued after the slide towards $20K on August 27 – which also included a 38,000 BTC purchase worth $759 million. This suggests that larger buyers are increasingly stepping into the market on significantly reduced downside risk below the $22K level.

Short-term holders reaching previous cycle lows

Another onchain indicator making interesting moves is the HODL waves for short-term holders (defined here as those holding for 1 month or less). The loss of STH confidence and the redistribution of their coins to long-term holders (LTHs) as the accumulation phase builds often provides some of the most reliable trend reversal indicators.

We can see that in previous cycles, the total supply controlled by short-term holders falling below 8% often served as a reliable indicator of a market bottom followed by a bullish trend reversal, both on a macro and shorter-term scale. The chart below also shows that the total bitcoin supply controlled by STHs is at a historic low of 6.2% as of the end of August, suggesting that even though further downside and consolidation from here is looking highly likely, it will not result in significant STH flush outs given how little of the supply this cohort currently controls.