On-chain weekly March 18th

  • Long-term Outlook - Sentiment: Bullish - The long-term outlook of the Bitcoin Protocol continues to remain bullish even as new US regulations loom and negative geopolitical risks dominate the world’s attention. Long-term holders continue their accumulation of BTC while miners continue to add to Bitcoin’s infrastructure with increasing hash rates. The liquid supply of BTC is further dwindling as more coins are put into “cold storage”, increasing the possibility and magnitude of a potential supply shock.

  • Mid-term Outlook - Sentiment: Bullish - Stablecoin levels remain at all-time highs, representing a large amount of capital that can be deployed into crypto markets at short notice. Spent Profit Output Ratio (SOPR) is a reliable metric for measuring the general market sentiment in different market cycles. When comparing this cycle to past cycles, the recent market sentiment is little more muted with relatively low activity in SOPR underlying the uncertainty in the current market environment.

  • Short-term Outlook - Sentiment: Neutral with Caution - While a bullish outlook emerges for the mid- to longer-term, we feel there needs to be a certain “normalization” of the geopolitical tensions and other macro headwinds in order for the short-term outlook to clearly flip bullish. Having said that, there were large exchange outflows towards mid March, bringing the percentage held on exchanges to a four year low - traditionally a bullish signal. On the flip side, the Realized Price Distribution metric shows that 4 million Bitcoins are currently held at loss, so the risk of a potential capitulation event is still looming.

Long-term Outlook - Sentiment: Bullish

Bitcoin Miners Continue to Grow the BTC Network - Hash Rate at ATH

Bitcoin mining is the process of creating new Bitcoins by solving complex cryptographic puzzles and, by doing so, securing the Bitcoin network. BTC miners use specialized computers and compete with each other in large collective groups called mining pools. Miners are a necessity to maintain the Bitcoin network as they validate and write transactions, including all of the data that can be analysed on-chain. Miners are motivated to participate in this validation process with rewards paid to them in BTC. When a miner in a pool solves a puzzle, that miner wins the privilege of adding the next block to the BTC Blockchain and the pool is rewarded with BTC that is shared by all miners in the pool.

In May of 2021, the BTC network – supported by a global network of thousands of BTC miners and nodes – dropped by 42% after China banned BTC mining within its borders. Miners in China were forced to move or sell their mining equipment, and new mining facilities elsewhere were quickly developed to host the miners that had been working from China. The network recovered over the following six months and hash rates returned to the same levels in November of last year. Since then, hash rates have increased by an additional 20% and are currently at ATH levels representing more computers added to support BTC transactions and to secure the Bitcoin network.

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Deflationary Driver: Illiquid Supply

Illiquid supply can be defined as BTC that are being moved out of exchanges and into cold (not connected to the internet) wallets. While this metric does not tell us how long Bitcoin is in those wallets, we can make some inferences about the investor’s intent. In this case, we can assume that an investor who does this is likely moving their BTC to hold it for the long term; keeping in mind that this is not always the case. The key to this concept is considering that any BTC that is stored offline must be moved back online, into an exchange, before it can be sold.

We can observe that in the past month there has been more and more BTC being moved into cold wallets, and since the start of the war in Ukraine – there has been a considerable spike in illiquid supply. This will ultimately contribute to the looming supply shock that has been forming in the BTC market for more than a year.

A BTC Supply Shock Is Forming

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 being moved to cold storage, with the expectation that these coins will only be sold in the distant future (thus increasing illiquid supply). The chart above illustrates this point quite clearly. Since China’s mining ban, on-chain data exposes more and more BTC being stored in wallets that are typically not connected to the Internet. Investors that store their Bitcoins in “cold storage” are generally regarded as more experienced and have more conviction in Bitcoin in general, especially since selling these coins would first require them to move their holdings to a “hot wallet” on a CEX (centralized exchange, i.e. Coinbase, Binance, FTX).

Long-term Holders Are Stacking Bitcoin Again

Long-term holders are holders that Glassnode (our data provider) 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 statistically much 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. An upside spike might push 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.

This month, as investors seek greater clarity on the situation in Ukraine, LTH sensed an opportunity to add to their holdings as BTC traded sideways in the high $30,000 to low $40,000 range. These accumulation cycles are notable and precede bull markets but the timing can be hard to pinpoint. In the past, we have seen long bear markets that have extended for many months (e.g. 2018 Bear Market) or much shorter ones that occur during the course of just a few months.

Mid-term Outlook - Sentiment: Neutral with Caution

Not All Bear Markets Are The Same

The first quarter of 2022 has been a continuation of difficult times for Bitcoin investors. During Q4 of 2021, the market corrected and flushed out billions in leveraged positions. First, the expectation was that this may be positive in the mid-term and BTC investors waited for retail investors to come back into the market to buy the dip. A similar demand that we saw at the start of 2021 did not materialise this year - as many have hoped - and notably, retail demand has been muted ever since. There are however first signs of demand coming back into the market now. It remains to be seen if this trend continues.

The metric “Adjusted Spent Output Profit Ratio” (aSOPR) is useful for understanding the Bitcoin Market in regards to the general market sentiment. When aSOPR is greater than one, investors are in profit when they spend or sell their BTC, otherwise, below one, they are executing transactions at a loss. Another way to interpret this metric is that when SOPR is above or below the value of one for a series of days or weeks, then the market sentiment is generally bullish or bearish, respectively.

While looking at the aSOPR chart above, we can compare the current bear market to the short “mini-bear” market that emerged during the summer of 2021. There are two things to note: 1) the correction that occurred in May 2021 happened very quickly and, 2) the range that aSOPR moved was significantly higher than during the current bear market. What this reveals is that the bear market during the summer was much more driven by the low conviction from newer investors that bought the top in April. When prices started to fall, those investors immediately capitulated and sold into the waiting wallets of long-term holders and the smart money - who were prepared to quickly capitalize on the falling prices.

In March 2022, we can infer the market is different with a greater conviction among Bitcoin investors and more investors deciding to HODL their coins for the long term – reflected with fewer spent outputs recorded on aSOPR. Unfortunately, the bullish overtones must be tempered with the macro uncertainty that is present in the current market environment. That said, the market structure feels quite neutral and highly sensitive to current events that can quickly change investor sentiment.

Large Amounts of Dry Powder Ready to be Deployed into Bitcoin

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 to around $160 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 stablecoins to deploy capital into crypto markets and also use them as proxies for fiat currency. 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 in Stablecoins Deployed in mid March

The week of March 14th saw some of the stablecoin that had been building up over the last month getting 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 accurately reflects 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 financial sanctions and the collapse of Russia’s national currency, the ruble. While typically large amounts of stablecoin ready to deployed 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

Large Exchange Withdrawals in Mid March - Possibly a Bullish Signal?

Towards the middle of March, large amounts of Bitcoin started to be removed from exchanges into the custody of investors - it was the largest of such withdrawals since August 2021. Long-term holders usually buy their Bitcoin on exchanges and thereafter move those coins either to their cold wallets or their custodian. Such events indicate that these long-term investors expect rising prices later in the cycle, which - in the case of August 2021 - did indeed materialize. It remains to be seen if the same trend will emerge in the weeks and months that follow.

The Potential for a Capitulation Event Among Macro Uncertainty

Bearish sentiment has been present in the BTC market since well before the Ukraine conflict and the rate hike by the Fed this month. In regards to general macro headwinds, we can safely assume that the market has priced some of those in for the short-term. Unfortunately, the current market is trickier than normal and great caution is advised for any investor due to the overwhelming uncertainty that is present in the current market environment - including geopolitical, regulatory and economic risks.

With conflict festering in Ukraine, the potential for a black swan event to influence the price of BTC in the short term is relatively high. BTC has been resilient through more than one bear market and, this month, we did see the price of BTC move up while stocks dipped for at least one day. We would like to see more of such behavior, leading Bitcoin to eventually decouple from other asset classes.

The chart below shows us the cost basis for all of the BTC being held in the market, broken out into individual prices. The gray/dark line below represents the current price. To the right of that line, there are roughly four million BTC being held at a loss. Four million BTC is 20% of the total circulating supply of BTC. All Bitcoin bear markets have been marked with large capitulation events (where weak hands sell into sharply falling prices) but we have yet to see one in the current bear market.

Considering what the market has endured over the past three weeks and the negative macro-environment in regards to regulatory risk and other financial headwinds, one could argue that if a large sell-off were to happen, it would have happened already. This is the bullish perspective, with the conclusion being that the BTC market has matured to a level of conviction that can withstand a global war; or that the world is finally seeing the real utility of Bitcoin – as a decentralized store of value. The bearish perspective is that the conflict in Europe expands into contagion in financial markets – partnered with a sharp sell-off in equity markets that spill over in crypto markets. This is obviously a time of great uncertainty and there remains the risk for a large sell-off that could push prices well below the current levels.


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, adding to the growing supply shock potential in the long term - a clearly bullish signal.

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 high $30,000 to low $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 to be invested, with relatively low supply incoming from long-term holder wallets. In short, we feel cautiously optimistic.

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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