EMC Labs May Report: Policy Factors Intensify, Buying Power Gathers to Seek Breakthrough Points

Author: 0xWeilan

The information, opinions, and judgments regarding markets, projects, cryptocurrencies, etc., mentioned in this report are for reference only and do not constitute any investment advice.

After 15 years of development, the BTC and Crypto industry has transitioned from technological research and validation in niche markets to a phase of large-scale adoption. From being obscure and notorious to experiencing rapid growth, the paths and forms of its realization are often unexpected.

Everything seems coincidental, yet it appears to be all inevitable.

Following the approval of BTC ETFs in January, the U.S. SEC unexpectedly announced on May 23 the approval of 8 ETH ETFs. The market had previously assumed that the approval of ETH ETFs would be postponed to the second half of the year, and this unexpected positive news led to a rebound of over 11.4% for BTC and 24.83% for ETH, both of which were in a weak state.

In the long journey of large-scale adoption of BTC and Crypto, the transformation of traditional finance and regulatory agencies has brought tremendous momentum to the development of the crypto industry and market. In terms of Crypto, the "unexpected" shift of the Democratic Party not only shows that the influence of the 50 million Crypto holders in the U.S. can no longer be underestimated, but also reflects the policy impact brought by the massive entry of traditional financial institutions represented by BlackRock.

U.S. Policy

On May 23, the U.S. House of Representatives passed the "Financial Innovation and Technology for the 21st Century Act" (also known as FIT21) with a high vote. In the long run, the passage of the FIT21 Act will have a far greater impact on the development of the Crypto industry than the approval of BTC and ETH ETFs.

For the crypto industry, the institutional affirmation and protection that the FIT21 Act will bring is profound. The Act provides a pathway for blockchain projects to launch safely and efficiently in the U.S.; it clarifies the regulatory boundaries between the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) based on whether the regulated targets are securities or commodities; it specifies regulations for cryptocurrency exchanges and establishes trading rules to protect U.S. investors.

After passing the House, the FIT21 Act will be submitted to the Senate for review, and if approved, it will be sent to the U.S. President for consideration. The approval of the FIT21 Act will take time, and its implementation will be even longer. However, its breakthrough significance has already begun to emerge, indicating that the crypto industry, which has resolved its legitimacy crisis, has become one of the key industries for development in the U.S.

Macroeconomic Finance

In early May, the U.S. released April economic data—unemployment and non-farm payroll data were far below market expectations, leading to an increase in interest rate cut expectations, which pushed the dollar index down. The three major U.S. stock indices, which had seen significant declines in April, rebounded strongly. Additionally, bolstered by Nvidia's much better-than-expected earnings report, the Nasdaq index rose by 6.88% in May, recovering all of April's losses and setting a new historical high.

In May, the Nasdaq rose strongly by 6.88%, recovering all of April's losses and setting a new historical high.

In mid-May, the Federal Reserve continued to release hawkish statements, suppressing expectations for the initiation and frequency of interest rate cuts, causing market fluctuations. However, the mild recession in parts of the U.S. economy led market participants to believe that interest rate hikes were unlikely, and that rate cuts were only a matter of time. Goldman Sachs has revised its forecast for the initiation of rate cuts from July to September, and the current market trend can be seen as already reflecting this expectation.

If there are no abnormal economic data in the future, it is expected that the bullish trend in U.S. tech stocks will not change.

Crypto Market

In May, BTC opened at $60,621.20 and closed at $67,472.41, rising by $6,850.31 or 11.3% for the month, with a volatility of 25.54%.

BTC Monthly Chart

Unlike the Nasdaq, which strongly recovered April's losses, BTC's performance in May was relatively weak. After significant fluctuations, the trading volume did not effectively increase, leaving long upper and lower shadows in the price movement. The biggest gain was effectively reclaiming the range after breaking out of the top box at the beginning of the month, returning to the fluctuation range of $58,500 to $69,500.

Although on-chain activity fundamentals continue to deteriorate, the price has effectively rebounded, and support from macro finance, industry, and capital dimensions has temporarily set aside concerns about the end of the bull market.

BTC Daily Chart

In this cycle, the upward momentum of BTC has gone through three stages: inventory replenishment, speculative hype around the approval of BTC ETFs, and the capital inflow driven by the operation of BTC ETFs. By the end of May, aside from the ETF channels, the inflow of capital in the market had significantly slowed down. EMC Labs determined that in May, the rebound in BTC prices was primarily driven by the ripple effect of ETH's strong rise.

There are signs of capital flowing from BTC to ETH in the market, which can be confirmed by the increased trading volume of the ETH/BTC trading pair after May 15.

Significant increase in ETH/BTC trading volume

The reverse flow of industrial capital indicates that the price discovery of BTC in the future will mainly depend on the inflow of funds from the BTC ETF channel and whether the existing market capital will take action.

Market Supply

During the progress of the bull market, long-term holders gradually sold their BTC to the market in batches, while short-term holders, attracted by prices, continuously increased their positions to outperform the market.

Since December, this trend of "long to short" has continued until it reversed in May. This month, the long-term holders collectively shifted from selling to accumulating, increasing their holdings by 93,400 BTC, while short-term holders began to reduce their positions, selling 38,200 BTC.

Long-term holders, short-term holders, CEX, and miner holdings status (EMC Labs chart)

In the first month after the miners' halving, both block rewards and transaction income declined, leading to a significant drop in income to $963 million (according to The Block). EMC Labs found that under the pressure of sharply reduced income, miners were forced to take two actions this month: one was to sell their accumulated 6,000 BTC to the market, and the other was to reduce hash power supply.

Following the price drop, the Bitcoin network lost up to 28% of its hash power after peaking on April 23.

Bitcoin network hash power statistics

Currently, miners hold 1.8 million BTC and have not conducted large-scale sell-offs since this bull market began. If the market experiences a downturn, miners may sell to maintain the operation of their mining farms, potentially pushing the market down from a weak equilibrium state.

Capital Flow

Since the beginning of this cycle, stablecoins have achieved net inflows since October 2023, driving the market upward. The inflow scale reached the highest records in March and April of this year, becoming an important force to absorb the liquidity shock caused by the large-scale realization of BTC profits (another force being the fiat capital from the BTC ETF channel).

By May, accompanied by massive chip exchanges and intense market fluctuations, along with the delay in interest rate cuts, the inflow speed of stablecoin channels significantly decreased. EMC Labs reported that in May, stablecoin inflows were only $341 million, far below the $8.9 billion and $7 billion in March and April.

Monthly changes in major stablecoin supply (EMC Labs chart)

Comparing the two major stablecoins, USDT saw an inflow of $1.394 billion this month, while USDC recorded an outflow of $973 million for the first time in five months, indicating that the trend of capital in the U.S. stablecoin channel is more sensitive than that in the Asian region.

BTC ETF Flows in May (SoSo Value chart)

EMC Labs observed that in the ETF channel, fiat capital saw outflows on 5 trading days out of 22 in May, with net inflows recorded on 17 trading days, resulting in a total net inflow of $1.905 billion for the month, far exceeding the $341 million inflow from the stablecoin channel.

As of the end of May, the assets held by 11 BTC ETFs in the U.S. had reached $58 billion, holding 852,256 BTC, which accounts for 4.32% of the total supply, becoming an important force influencing BTC prices.

Conclusion

In the April report, we judged that the market had entered a bull market continuation state, and the first wave of large-scale chip exchanges (March to April) had already occurred. Throughout May, both long and short trades significantly decreased, and market supply returned to a "short to long" state, with the stock of BTC on exchanges returning to an outflow state, marking that the BTC market had entered a weak equilibrium state after the passionate outburst.

We maintain our judgment that there is a trend of capital migrating from BTC to ETH in the market, and "Ethereum time" will continue. The future trend of BTC will depend on U.S. macroeconomic data and the Federal Reserve's market statements.

BTC, in a weak equilibrium state, does not actually require much capital to push upward. Possible buying power may come from the ripple effect of the approval of ETH ETFs and the fiat capital from the BTC ETF channel. With its continuous growth and synchronization with the Nasdaq, the fiat capital from the BTC ETF channel may become an independent force influencing BTC prices.