Miner outflows since then have remained moderately stable as expected, with a notable increase towards the end of July going into August. However, they remain relatively modest compared to earlier in the year where Bitcoin started to show signs of slowing down. This indicates that some miners have taken advantage of the rally to capitalise on the prices, but the majority are content with current market conditions.

Another interesting point is that the Bitcoin mining hashrate has marginally recovered since the lows witnessed at the end of June. This is likely due to the relocation of mining operations, as well as the entry of new miners who are looking to take advantage of the drop in mining difficulty. The difficulty of Bitcoin mining is set to increase over the next few months as the hashrate recovers.

Grayscale Bitcoin Trust

Looking at the GBTC unlock schedule the vast majority of the potential selling pressure from this influence is behind us. Whether or not it is coincidence that the rally began a couple of days after the largest unlock is unclear. However, what can be said is that the uncertainty surrounding the Grayscale unlocks is no longer a contributing factor to the market, which likely had a greater effect than the actual unlocks.

Who’s selling?

It's always important to look at who the sellers and buyers are at any point in time, usually you don't want to be on the new retail side as they take rash decisions that later on prove to wrong (more often than not).

We stated in the June journal that we believed it was newer entrants to the market that were selling their Bitcoin at a loss. It can be seen in the below chart, where those who have been holding for 1-6 months+ now make up a higher proportion of the overall holding population than we have seen in past corrections. In theory this suggests that there have been new entrants to the market over the last 8-12 weeks.

In addition, the number of wallets that have been active for less than a month has declined which suggests they have either been shaken out by the correction or have graduated up into one of the higher time frame categories. Either way, we believe this to be a sign that market conditions have stabilised for the most part.

Recent Rally

We believe that the recent price action we have witnessed is partly due to the resolution of the factors outlined in the June report. One of the most impressive things about the rally from the bottom of the range was its strength. Bitcoin witnessed 10 green candles in a row on the daily chart, rallying an impressive ~41% over the period between the 21^st and 31^st of July.

From a higher timeframe perspective all major resistances on the way up were passed through relatively cleanly which, quite frankly, was unexpected given the failure to convincingly breach $36k for around 4 weeks from the mid-late of June. After the stagnation under low volume seen over the last 14-21 days this action was certainly a welcome sight for the bulls.

Bitcoin has only ever seen a rally of this duration a couple of times in its history depending on which chart/exchange you are looking at. Using the TradingView BTC INDEX ticker the only instance we could find was once in 2013 where there were 10 consecutive green candles. On the Coinbase ticker there was 12 days in row in the 2017 bull run, and there are a few instances on the Bitcoin Liquid Index (BLX) ticker.

However, generally it is a very rare event and not one that should be brushed off lightly. The rally caught the bears off guard and data from Coinalyze shows that over $700 million in short positions were liquidated around the mid-point of the rally on the 26^th of July. The liquidations added to the buy side pressure as these short positions were closed, further fueling the upward momentum.

Bitcoin’s exceptional show of strength also led to market-wide rallies for most assets. ETH saw 13 consecutive green days, with the hype surrounding EIP-1559 likely contributing to the extended move. This is the greatest number of consecutive green candles that Ether has seen in its 6-year history, gaining around 46% from the 21^st of July open over the course of nearly 2 weeks.

The release of EIP-1159 did not stop price but rather helped it move further up as a large number of ETH was being burned due to the large activity taking place on Ethereum with the hype around NFTs.

We have been patiently waiting for volatility to return to the markets after almost two long months of stagnation and it appears to have returned in spectacular fashion. The strength of the rallies and the lack of substantial selling pressure on the way up, combined with the short liquidations, suggests that sellers are less confident than they were earlier in July.

Offside Bears

After the May crash, prices stagnated for a very long period of time and the main bet taken by the majority of market participants was either panic selling or shorting. This was provable due to both the open interest (bottom indicator) increasing and the funding rate (upper indicator) turning negative as you can see below.

As price started moving to the upside, shorts became underwater (i.e. at a loss) which pushed them to either close their positions or outright get liquidated. The latter treatment was given to over $700M in short position in a single day. The market is not moving up based on strong fundamental catalysts but rather due to the fact that large sellers are not resisting which can be observed on the orderbooks. This move is happening off the back of shorts being closed - quite literally sponsored by bears' blood.

Where will it end?

One factor we are looking at is "funding" and are awaiting for it to see exorbitant rates once again near the 0.5%+ area which is yet to happen.

When funding goes higher it would mean that the majority of the market is turning bullish, so much so that they'd be willing to pay high rates just to stay long on leverage. This coincides with acceleration to the upside usually and that's where we speculate the market goes into a pullback - nowhere as steep as the May one though. Given the fact that funding isn't high after a +50% move in less than 30 days tells us that there's still decent upside.

Outlook

To summarise, the market is now unwinding shorts which is acting as buying pressure (to close a short, you must buy back your position). The other aspect is that there are no longer any extreme sources of FUD of the kind we witnessed in May through June – the effect of the mining ban was massively influential in damaging investor confidence. However, with hashrate on the mend and the continued relocation of mining rigs from China it appears that this has only been a temporary hinderance in the grand scheme of things. With that being said, we can't get ahead of ourselves and simply assume runs towards ATHs across the board and we must remain rational.

The question on everyone's minds is:

Is this the real rally and will it lead to new ATHs, or is it just a bounce?

Before we answer, we'd like to note that no one knows what the market will do next with absolute certainty, any theory posed is just conjecture and our answer is based on both our experience in the market and stats.

Our answer is: both - depending on which asset you're looking at.

The majors: Bitcoin and Ether, seem to be underway towards new ATHs whereas most altcoins (with a few exceptions such as SOL/FTT/AXS) will likely have some more ranging to do over the coming months.

When a -70% or -80% drawdown occurs, the recovery is almost never a V-shaped one and further ranging is required to rebuild investor confidence. These represent times of opportunity depending on whom you ask. Of course, we may be wrong and the market simply V-recovers from here - which would make us a lot of money - but it isn't the most probable outcome.

August vs September

Other than building a bias based on facts, we also like to look at average historical returns per month as they sometimes convey important information.

Let's first take a look at the average returns during the month of August from 2014 till 2020.

On average, we can deduce that market returns in August were usually net positive with the largest advances happening across ETH and other alternative cryptocurrencies - which is coherent with what we're seeing.

Let's also observe the average returns during September (remember these are just averages based on historic returns and do not necessarily predict the future).

September has historically been a net bearish month for crypto and based off other factors, the odds of a pullback taking place sometime around September seem reasonably high.

Acting on it

We, Cryptonary, do not offer financial advice and hence cannot tell anyone what to do with their capital - whatever each person does with theirs is their full responsibility. What we can offer you though, is some mind opening thoughts.

If you held through the correction and the level of stress you endured was extremely high, this probably suggests that you were/are overexposed to the crypto market. If your risk appetite does not allow it, the market is not too far off ATHs to take some off the table and reduce your risk exposure. Of course that comes with reducing potential rewards, but stress is detrimental to one's decision making and health.

In our case, we're investors in this space, while we know that the odds are we'll see another pullback in the coming weeks, we're not interested in trading short-term price action and remain long-term holders. Many may think "that's extremely stupid" but walk down this line of though with us:

"Imagine selling and awaiting a short-term pullback but it never comes, at what price does that thesis get invalidated? Where would we buy back?"

The risk:reward is poor on such moves unless it is a macro top, which we don't believe it is. You see, to this day we consider both BTC & ETH to be highly underpriced.

They say: "Don't let your trades turn into investments", the inverse is also applicable.

Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.