On-Chain Weekly March 11th

  • Long-term Outlook - Sentiment: Bullish - Bitcoin continues to remain a bullish bet for many investors. Long-term holders (LTH) have once again decided to buy more BTC in recent days; contributing to a spike in illiquid supply.

  • Mid-term Outlook - Sentiment: Neutral with Caution - Short-term holders (STH) have weathered over 100 days of downward price action while their short-term investments have struggled. Investors continue to hold billions in stablecoin on exchanges, waiting for relief on the global stage.

  • Short-term Outlook - Sentiment: Neutral with Caution - On exchanges, BTC in-flows and out-flows remain in balance, without any notable in-flows such as during the COVID Crash and the mini-bear market last year that sent prices to the floor.

Long-term Outlook - Sentiment: Bullish

Two years ago this month, COVID emerged in the world with a shock. What followed was an immediate crash in the markets and BTC was not spared. The price of BTC dropped by 63% sinking down to $3,900. Since that time, Bitcoin and crypto has surged and global demand reached a frenzy early in 2021 when the price of BTC grew to over 10x in value. Tracking this growth has been exciting and we can see a growing trend as more Bitcoin is being held in cold storage wallets as a long-term investment.

Liquid Supply on the Decline

If more BTC is being locked away into cold storage, we should be able to see that trend in the liquid supply. Looking at Highly Liquid Supply in the chart below, we can see the level of liquid BTC slowly but consistently reducing month over month for the past two years. This is bullish for the Bitcoin Network as fewer liquid coins contribute to the supply shock that will occur with current demand and growing illiquidity.

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Illiquid Supply up 38%

Conversely, we can see the opposite effect when we look at illiquid supply–these are BTC that are being moved out of exchanges and into self-custody wallets. Once, BTC is moved into a wallet that is not directly connected to an exchange or the internet, the ability to sell that BTC is reduced.

A supply shock is an event that changes the supply of a product or commodity, resulting in an unforeseen change in price. Assuming aggregate demand is unchanged, a negative supply shock causes a product's price to spike upward. For our purposes, we define supply shock as the “Illiquid Supply Shock Ratio” (ISS) with the following formula:

ISS = Illiquid Supply / (Liquid + Highly Liquid Supply)

With this perspective in mind, a bullish case for BTC’s price appreciation will continue as long as we see more and more coins purchased today, with the expectation that that coins purchased today will be sold in the distant future (increasing illiquid supply). The chart above illustrates this point quite clearly. Last week, we saw illiquid supply spike with a 38% increase as investors store more BTC.

LTH Are Stacking Bitcoin Again

Long-term holders are holders that Glassnode classifies as an entity that has held BTC in a wallet for more than 155 days. This distinction is important as on-chain data points to the fact that coins held for more than 155 are less likely to be spent or sold than coins that have been held for less time. From this, we make the assumption that a new investor buying their first BTC is more likely to be highly sensitive to price movement, particularly since the price is still fresh in their mind. An upside spike might send a short-term holder to take quick profits, while lower conviction might also cause them to sell off their new BTC quickly if the price moves the other way.

Currently, supply is being restricted with more long-term holders deciding to buy the dip that occurred over the weekend. This is a notable change since some LTH did begin to distribute some of their holdings last month, trying to harvest some profits after a lengthy downturn in price since the end of last year. This month, as investors await a resolution to the war in Ukraine, LTH sense an opportunity to add to their holdings as BTC trades sideways in the high $30,000 to low $40,000 USD range.

Mid-term Outlook - Sentiment: Neutral with Caution

Using Adjusted Spent Output Profit Ratio (aSOPR) in the chart below gives a simple metric that we can use to infer the market’s sentiment and the behavior of the people in it. When aSOPR is > 1, then investors are in profit when they spend or sell their BTC, otherwise, below 1, they are executing transactions at a loss.

Short-Term Holders Losing Out

With the close of Q1 quickly approaching at the end of the month, we can use SOPR to confirm that 2022 so far has been a pretty tough year, particularly for short-term holders. Many of the investors who purchased BTC at the most recent ATH last fall have all but sold off their expensive coins during the long drawdown that has extended over 100 days. The SOPR metric has been reflecting this bearish sentiment, rejecting any values above 1 as short-term holders mitigate losses and sell at a loss.

Looking below at the LTH SOPR we see an entirely different experience on-chain. Long-term holders of Bitcoin have been enjoying a long period of profitability with SOPR dipping below the value of 1 only once this year.

Stablecoins Keep Value in Crypto Markets

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 $5 billion, growing by 40x to $200 billion today - 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 currently stablecoins are traded at volumes higher than any other type of cryptocurrency, denoting their popularity and usefulness.

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

3 Billion USD in Stablecoin Deployed

This week saw some of the stablecoin that had been building up over the last month get deployed back into crypto markets, likely contributing to the rally that started mid-week. The chart below bundles all the data that exchanges have on their stablecoin holdings and does accurately reflect the growing number of these tokens on exchanges.

In recent days, news of investors in conflict zones purchasing large amounts of USDT, or Tether, has emerged in light of stunning financial sanctions and the collapse of Russia’s national currency, the ruble. While typically large amounts of stablecoin ready to deploy can be and usually is a bullish indicator, special consideration needs to be made at this time with the war raging in Ukraine.

Short-term Outlook, Sentiment: Neutral with Caution

When investors begin to move more Bitcoin into exchanges it is likely that they are positioning them to be spent or sold. On-chain data can expose when these coins move to exchange wallets from self-custody wallets in the metric below. In the past, large amounts of BTC flowing into exchanges, especially during bearish periods, can mark capitulation events that precede sharp declines in price. This was observed in March 2020 and again last year during the mini-bear market that emerged after the price of Bitcoin reached nearly $69,000 USD per Bitcoin.

In the days leading up to the Ukrainian conflict and on 24 February 2022, we saw modest in-flows balanced with out-flows on exchanges. This reflects equilibrium between supply and demand in the market. As coins are sent to exchanges for sale, they are quickly being absorbed by other investors. We observed LTH changing into an accumulation cycle which accounts for some of the demand that has kept BTC trading sideways for most of this year.

More Crypto-Margined Positions Emerge

Crypto-margined positions on exchanges can quickly unravel with relatively small moves in pricing in either direction. Many exchanges allow their clients to take many times their holdings in leverage to place risky bets on their exchange. When the price of their leveraged asset changes, sometimes it can change enough to trigger an involuntary liquidation–and the underlying asset is sold. When a large number of these bets unwind, the effect on the exchange can send the price of the asset tumbling in a very short amount of time.

As you can see from the above chart, crypto-margined open interest has been on the decline for many months. In the last two weeks, we’ve seen a slight build-up as the market has shifted back into building up these types of investments. This growth is relatively low, but it does mark a change in direction that this metric is moving in. This could be a fairly bullish indicator during normal market conditions, signaling confidence in the crypto markets. However, under present market conditions, maximum caution should be exercised as the balance we are seeing in the supply and demand dynamic could change very quickly.

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 18% 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

As the conflict continues in Eastern Europe, Bitcoin has remained notably solid trading sideways through some extremely challenging times. Some long-term holders are using the weak price action as an opportunity to add more Bitcoin to their wallets, balancing out the supply that is being moved to exchanges.

Short-term holders, on the other hand, have not seen much relief since the major de-leveraging event in early December last year that flushed out billions in value from derivatives markets. Futures Open Interest reached nearly $30 Billion twice last year, only to drop by over 50% over the past four months.

Aside from the bearish effect that the war in Ukraine has cast on the global economy, the price of BTC has remained relatively stable, trading in the $40,000 range for the past few weeks. On-chain data shows a market structure poised and ready with large amounts of stablecoin on exchanges ready to be invested, with relatively low supply incoming from long-term wallets.

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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