Bitcoin Forecast – 25/02/2022

  • Long-term Outlook - Sentiment: Bullish - The long-term outlook for Bitcoin remains strong. As more investors decide to hold their BTC for the long term, they contribute to a deepening supply shock in the Bitcoin market. On-chain data shows that some long-term holders (LTH) have sold some of their BTC holdings in recent weeks, low levels of distribution suggest strategic profit taking rather than mass capitulation. The fundamentals of the Bitcoin Network remain sound with hash rates on the rise and the potential for more BTC products, such as spot ETFs, growing on Wall Street.
  • Mid-term Outlook - Sentiment: Neutral - Large amounts of cash sit on the sidelines as investors de-risk and store holdings in stablecoins. Stablecoins are a proxy for fiat currencies on many crypto exchanges as traders wait for strength to return to markets before deploying their capital. Indicators such as Net Unrealized PnL and MVRV Z-Score started to flash bullish; these KPIs signaled good buying opportunities in the past. Despite positive on-chain indicators, the negative macro environment warrants caution.
  • Short-term Outlook - Sentiment: Bearish - Global headwinds continue to drive the narrative as looming Fed rate hikes, the Russia/Ukraine conflict, and struggling equities markets have seemed to hit the pause button on BTC growth. Derivatives markets cool as BTC investors wait for the macro factors to improve and Q1 2022 opens with a great deal of uncertainty.

Long-term Outlook - Sentiment: Bullish

Crypto-assets have a distinct advantage over other assets due to the fact that there is precise and real-time data that can be used to classify different types of BTC investors. This so-called “on-chain data” adds important color to our long-term perspective and can help us evaluate a market cycle through a variety of key performance indicators. Short-term news, events, and sentiment usually play a relatively small role when forecasting the price of Bitcoin in the long term. By exploring the activity of its users, on-chain data provides a unique view into Bitcoin’s supply and demand environments - the two key drivers of price.

Illiquid Supply is at ATH and Keeps on Rising - A Long-term Bullish Signal

In any market, price is driven by demand and supply. This is particularly true for Bitcoin. We therefore place careful consideration on a metric coined “Supply Shock”.

Supply Shock = unavailable supply / available supply

This is because the available and unavailable supply carry intent. When we combine the data from all the illiquid sources and compare them to liquid sources, we can gauge which investors are selling, and which investors have little or no intention of selling. This information is highly informative and can provide a leading indicator as to when we might see a change in BTC supply - with a possible long-term effect on price.

For example, if we notice that long-term holders are moving significant amounts of BTC from cold wallets into exchanges, we can clearly see their selling intent prior to actually any Bitcoin being sold. In combination with other metrics, we may deduce a bearish signal from this behavior.

Today, the market seems completely the opposite. Illiquid supply - those Bitcoins that are highly unlikely to be sold - is at an all-time high and keeps on growing. This is a strong bullish long-term indicator.

In the above chart, we can observe that a strong supply shock is forming in the BTC market. This is due to the large number of investors that are holding their BTC for the long term (more than 155 days) with no intention of selling.

This investor behavior has limited the liquid supply of Bitcoin, which has been reduced by over 500,000 Bitcoins in the last 24 months and is now at its lowest level since 2018. In other words, over 76% of the total circulating supply of BTC is illiquid, a figure that is rapidly growing as more investors choose BTC as a long-term store of value. Assuming that demand for BTC remains at least stable, the gradual reduction in supply will eventually ignite a price rally.

2021 - The Year Investors Decided to Become Long-Term Holders

Exactly a year ago, 70% of BTC was being held by LTH. Since then that number has grown to nearly 80% as more and more investors hold BTC for the long term. LTH are defined as investors with wallet addresses that have held Bitcoin for more than 155 days (which is about five months). Glassnode data shows that Bitcoin held longer than 155 days has a significantly lower probability of being spent than Bitcoin held for less than 155 days.

The more long-term investors, whales, and institutions buy up the supply of Bitcoin, the greater the magnitude a supply shock will have on the price of BTC in the future.

Experienced Investors Taking Profits

The below chart highlights that LTHs have accumulated Bitcoin consistently since Q2 2021 - a strong sign that smart money expects price appreciation in the future. We can observe that some LTH have recently begun selling their holdings. Such instances in the past have almost always coincided with price appreciation of Bitcoin. There are very few exceptions to this observation. One salient example is the unexpected COVID market crash in early 2020.

The typical behavior is that experienced investors begin to sell into strength in the middle of bull markets, with an expectation that they can sell into price appreciation. Even though the general supply dynamic appears to be changing, we should note that LTHs have not moved large amounts of BTC back into the market. This suggests strategic profit-taking rather than capitulation. Considering the current market and the negative macro sentiment, the low levels of selling should be viewed as a positive signal for the Bitcoin market.

Mid-term Outlook, Sentiment: Neutral

Cryptocurrency coins that are pegged to the dollar, so-called “stablecoins”, have been growing exponentially over the last two years. In February 2020, the stablecoin market was worth about $5bn. Since then, it has grown by 40x to reach $200bn or close to 10% of the entire crypto market cap. Tokens like USDC, USDT, BUSD, and others are used as proxies for fiat currency that traders can use on crypto exchanges. Stablecoins offer low volatility for traders and are attractive “placeholders” for value before entering or when exiting trades. It should be noted that stablecoins are currently traded at volumes higher than any other type of cryptocurrency, denoting their popularity and usefulness.

Stablecoins on the Sidelines Represent Available Buying Power

Many traders use these tokens as a primary vehicle for opening and exiting Bitcoin positions on exchanges. Stablecoins play a critical role in the supply and demand dynamics of various global cryptocurrency markets, which in turn can directly influence the price of BTC. Stablecoins live natively on the blockchain, allowing on-chain analysts to observe the supply and demand dynamics between BTC and USD.

Investors use stablecoins to deploy capital into crypto markets and as proxies for fiat currency when they are deciding to leave crypto. When we observe large levels of stablecoins in wallets, we can assume that those investors are planning on using those funds to quickly enter markets. Otherwise, we would expect them to convert their stablecoins into fiat currencies on exchanges. Overall, large amounts of stablecoins can be viewed as a bullish signal, since investors are keeping “dry powder” ready to be deployed at short notice in the crypto ecosystem.

The Metric Stablecoin Supply Ratio is at ATH - A Bullish Signal

When the stablecoin supply ratio (SSR) is low, buying power for Bitcoin is high. Low SSR has been used as an indicator for the increased potentiality of driving the price of BTC higher. Like other metrics, SSR provides a narrow perspective and does not paint a complete picture, since fiat currency trades and other trades happening in derivatives markets are not represented in the SSR metric. Recently, SSR has been reaching all-time lows - a good signal for future growth in the Bitcoin network and possibly higher prices in the mid-term.

The MVRV Z-Score Indicates Bitcoin Could Be Close to Bottoming

The MVRV Z-Score has been accurate in identifying times when the market value of BTC is unusually above its realized value. In other words, MVRV Z-Score can signal when the BTC market is overheated or undervalued.

The chart above shows us that the MVRV Z-Score has signaled market tops (within about a two-week window) when the indicator peaked into the red areas. Conversely, when the MVRV Z-Score has been in the green zone, it signaled times when the market price of BTC was far below its realized value, and buying BTC during those times resulted in considerably outsized returns. At the moment, MVRV Z-Score hasn’t reached the green zone yet, but it is very close – similar to the bottom price in July 2021, just before an extremely bullish recovery that pushed the price of BTC to new ATHs.

The Metric Net Unrealized PnL - Another Bottom Signal?

Net Unrealized Profit/Loss (NUPL) is an easily understandable metric that answers the question, “If all of the bitcoin available today were sold, would we be in profits or would we be in losses?” Currently, the market is split, with half of BTC in profit and half in loss.

These conditions are similar to the bottom in July 2021, just before the market surged and strength returned to the markets for the rally that extended from the end of the summer to October 2021. If demand does indeed return to BTC, as it did in the summer, then we could see strong growth in the price of BTC. However, with macro factors casting a shadow on crypto markets, the forecast is uncertain.

Short-term Outlook, Sentiment: Bearish

Market sentiment is bearish with Bitcoin trading sideways amidst news of looming rate hikes in March and the Russian conflict in Ukraine. A bullish recovery could happen quickly if the global environment changes, especially with the amount of stablecoins that are ready to be invested into BTC.

Open Interest (Outstanding Derivative Contracts) is Down by 42%

The last quarter of 2021 saw a drastic reduction in open interest that was mainly removed through liquidations at predominately retail-based exchanges. These leveraged positions were built up through the fall as the price of BTC rose to nearly $70,000 in early November. Many exchanges today allow investors to use their holdings as collateral, where they can take on risky leveraged positions. The problem with this strategy is that these positions can quickly become liquidated with unforeseen price movements as exchanges move to recoup and mitigate losses.

With over 42% of that risky speculation removed from the market, there is hope that the BTC market can move forward with a more sustainable price basis in the near future. Removing risky leverage from the BTC market, especially leverage secured with crypto-based assets, can be seen as a net positive for markets. With fewer positions in the system that can unravel as price changes, the BTC market seems more stable for a potential sideways price action.

Impact of a negative macro environment

Over the past few months, the correlation between equities and Bitcoin has been strong, with the major events that plagued risk on growth equities spilling over into Bitcoin and other digital assets. A significant looming risk in the interim thus remains to be the negative macro backdrop. The expectations of a more aggressive timeline on policy tightening and rate hikes by the Federal Reserve has negatively impacted risk assets in general, with the tech-heavy Nasdaq 100 down nearly 13% YTD.

There are various other potential negative macro factors such as a tense geopolitical environment with Russia, or uncertainty around the impact of Omicron on countries and economies. A significant drop in equity markets is expected to pull BTC down with it in the process - despite relatively strong on-chain fundamentals. Whereas we would expect BTC to recover relatively quickly in such a scenario, it still could lead to heavy losses in the short term.

Whereas our on-chain long-term indicators indicate a more bullish outlook, the mid-term and short-term perspective is much more mixed and is dependent on other, non-fundamental, factors - in particular the negative macro environment.

Conclusion

This month, the price of BTC bounced back into the $40,000s raising investors' hopes that a bottom has formed at around $35,000. LTHs sold some of their BTC last week, a continuing trend that could be a signal for strength returning to the market. Lower open interest and upward price action has paused the long liquidations that have stormed through the Bitcoin market in recent months.

The long-term outlook for the Bitcoin Network is strong with greater adoption and use being revealed daily. As more investors decide to hold their BTC for the long-term, they contribute to a deepening supply shock in the Bitcoin market. The fundamentals of the Bitcoin Network remain sound with hash rates at ATH and the potential for more BTC products, such as spot ETFs, growing on Wall Street.

Several on-chain mid-term signals such as MVRV Z-Score or NUPL indicate that Bitcoin has bottomed or is close to doing so. Having said that, the negative macro environment and the correlation to equities cast a shadow on short-term price development. We expect sideways price action and suggest waiting for the macro environment to brighten before calling the bottom and redeploying capital into the market.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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