January 20, 2023
Greg Cipolaro

Research Weekly - What’s Driving the Rally?


  • A look at the role short liquidations have played in the recent price rally
  • Bitcoin's developer community continues to grow despite the crypto winter
  • What the jump in Bitcoin’s difficulty says about mining and where it might head

Liquidations Spike, But Unlikely to Be Driving Entire Rally

Short futures positions that were closed by trading platform liquidation engines spiked during the bitcoin rally over the past 10 days. While the data shows these liquidations occurred during bitcoin’s biggest price moves, our conclusion is that while liquidations likely played a factor in the rally, they are unlikely to account for all of the recent price action.

Our analysis shows short liquidations occurred during some of the more significant price appreciations over the past 10 days. There was a notable spike in liquidations as the price of bitcoin jumped from roughly $17,500 to roughly $18,200. A second jump in liquidations occurred as bitcoin went from roughly $18,000 to nearly $19,000. A third and much bigger jump in liquidations occurred as bitcoin went from $19,000 to $21,000. In total, roughly $349M worth of bitcoin futures liquidations occurred over the price move from $17,500 to over $21,000 from January 10th to January 13th. While this is a large absolute dollar amount, it is still a far cry from the multibillion-dollar liquidations we saw during big price moves in 2020 and 2021.

How do we determine whether liquidations were the cause of the price bump or a result of the price bump? While determining causality can be a tricky endeavor, looking at price discrepancies between spot (BTCUSDT on Binance) and futures (BTCUSDT perpetual swaps on Binance) may yield some clues. This analysis shows that spot was trading at a premium to “perps” through the first two liquidations but then flipped to a discount in the third liquidation. This means that spot was likely leading futures in the first two jumps, as bitcoin went from $17,500 to $18,200 and then from $18,000 to $19,000. This dynamic flipped in the third move, from $19,000 to $21,0000, as "perps" led spot.

Anecdotally, our trading desk has experienced renewed spot buying, which had been depressed amidst the volatility in the industry over the past few months. We understand the hesitancy of many market participants to believe the worst is behind us, especially given the extreme events of 2022, but it is important that investors understand this rally has not entirely been driven by positioning and short liquidations.

Report Shows Continued Growth of the Bitcoin Developer Community

This week, Electric Capital published its annual Developer Report. The 185-page report published by the venture capital firm analyzes the open-source developer communities of many digital asset ecosystems, including Bitcoin. Their mapping of Bitcoin-related projects is something we relied heavily upon in our own Developers of Bitcoin report published last September. Their latest report shows continued growth in the Bitcoin developer ecosystem (beginning on page 50) throughout 2022. While there was a slight drop in monthly active developers during the window of December 2021 to December 2022, attributed to the loss of developers who contributed only once to the project, the growth trend is still undeniably up and to the right. The Bitcoin ecosystem continues to grow with over 1,900 added in 2022, even with the bear market. We encourage readers to review the entire report, in addition to the section on Bitcoin, and appreciate the efforts Electric Capital has gone to catalog and measure the digital asset ecosystem.

Bitcoin’s Difficulty Jumps to a New High

Bitcoin’s difficulty, a measure of how hard it is for miners to find new blocks, jumped 10.3% to a new all-time high on Sunday, January 15th. Roughly every two weeks, the protocol compares how long it took to produce 2,016 blocks versus an expected time of 10 minutes per block. The network then makes an adjustment to bring block production back to a 10-minute average amidst changing network hash rate. Since new bitcoins are produced every block, this self-adjusting feature is one of the ways the supply of new bitcoins is regulated.

The jump to new highs is likely reflective of new hash rate coming to the market. Despite the challenges in the mining industry, many miners ordered mining rigs when bitcoin’s price was much higher. The increase in hash rate is likely explained by the delivery of said machines. Importantly, some mining entities have clean balance sheets and the financial flexibility to continue to add capacity, and prices are still above break-even for sites powered by cheap electricity. Given this dynamic, we think it is likely that the network hash rate continues to grow until this capacity is absorbed.  

Market Update

Bitcoin jumped this week, rising 10.7%, amidst bullish trading activity. Equities fell on the week despite higher-than-average correlations with bitcoin, with the S&P 500 down 2.1% and Nasdaq Composite down 1.4%. Commodities also rallied on the week, with gold up 1.3% and oil up 2.5%. Bonds were mixed on the week with investment grade corporate bonds up 0.3%, high yield corporate bonds down 0.8%, and long-term US Treasuries up 0.2%. Real yields fell on the week while inflation expectations were flat to up.

Important News This Week


Peter Thiel’s Fund Wound Down 8-Year Bitcoin Bet Before Market Crash - FT

Gemini Launches a Fully Electronic Over-the-Counter Trading Solution - Gemini

OKX publishes January Proof of Reserves Report - OKX

Increasing the Transparency of 1:1 Backing for B-Tokens - Binance

Regulation and Taxation:

Nexo Agrees to Pay $45 Million in Penalties and Cease Unregistered Offering of Crypto Asset Lending Product - SEC

FTX Puts Focus on Ripple Case for Who Should Regulate Crypto - Bloomberg

Founder and Majority Owner of Bitzlato, a Cryptocurrency Exchange, Charged with Unlicensed Money Transmitting - DOJ

FinCEN Identifies Virtual Currency Exchange Bitzlato as a “Primary Money Laundering Concern” in Connection with Russian Illicit Finance - FinCEN


Genesis Initiates Process to Achieve Global Resolution to Maximize Value for All Clients and Stakeholders and Strengthen Its Business for the Future - Genesis

Binance Custody Launches Its Off-Exchange Settlement Solution - Binance

FTX Provides Additional Information to Customers and Other Stakeholders - FTX

Crypto Media Outlet CoinDesk Taps Bankers for Potential Sale - WSJ

CleanSpark Builds 50MW Additional Mining Capacity at Georgia Site - CoinDesk

Upcoming Events

Jan 27 - CME expiry

Feb 1 - FOMC rate decision

Feb 14 - January CPI reading

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