On-chain weekly March 25th

  • Long-term Outlook - Sentiment: Bullish - Long-term holders (LTH) and large entities continue to add Bitcoin to their holdings in another period of accumulation that began in early 2022. Continuing a trend that started more than two years ago, BTC is moving from exchanges, as investors opt for self-custody.

  • Mid-term Outlook - Sentiment: Bullish - Bitcoin has been in a downward trend for over 100 days characterized by relatively low demand and activity in the market. Large amounts of stablecoin reflect the potential for a rapid recovery in the mid-term, as investors wait for renewed retail and institutional demand.

  • Short-term Outlook - Sentiment: Neutral with Caution - BTC has traded sideways over the past month with some signs of relief being expressed in short rallies around the $43,000 price point. Futures interest is expected to climb if the price of BTC continues to rally, otherwise, newly established positions could unravel if the downward price trend continues.

Long-term Outlook - Sentiment: Bullish

Long-Term Holders Accumulate

In the past, this publication has explored the behaviors of long-term holders (LTH), specifically in regards to whether or not this group is buying or selling BTC. Glassnode defines LTH as entities holding BTC for greater than 155 days. In general, these investors can be considered more experienced and their decisions often correlate with other smart-money players in the Bitcoin market. Long-term holders generally sell BTC into strength and accumulate with the expectation of higher prices. This year, long-term holders have been purchasing more BTC than they have been selling, with February being the exception as some older coins did make it to exchanges. These sales could be seen as more strategic due to the relatively small amounts of BTC that were sold, and the quick change back into accumulation this month.

Exploring a Large Portion of the BTC Network

While long-term holder’s economic activity is important and observable on-chain, it is also very specific and can create blind spots in Bitcoin’s supply and demand dynamic. To broaden this perspective, the BTC market can be explored more generally by looking at what Glassnode calls “a big part of the network”. To do this, Glassnode has created a new metric called Accumulation Trend Score (ATS) to track if a large part of the BTC network (or a collection of its’ largest entities) is either accumulating or distributing Bitcoin.

ATS is a metric that attempts to express the relative size of entities that are actively buying and selling in regards to their current Bitcoin holdings. ATS’ scale represents both BTC balance and the amount of change (monthly) to the balance of the entities that it classifies. The ATS metric is scored between the values of zero and one.

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Accumulation Trend Score

An Accumulation Trend Score of closer to one (darker color) indicates that, on aggregate, larger entities (or a big part of the network) are accumulating, and a value closer to zero (lighter colors) indicates they are distributing or not accumulating. This provides insight into the balance size of market participants, and their accumulation behavior over the last month.

  • A score closer to 1 reflects that, over the last month, big participants (or a big part of the network) have been accumulating coins.
  • A score closer to 0 reflects that, over the last month, big participants (or a big part of the network) haven’t been accumulating coins or that they have been selling them.
  • Exchanges and Miners are not included in this metric.

At the time of writing, ATS is at 0.60 indicating that a majority of the BTC network is accumulating Bitcoin – a bullish signal in regards to price expectations later in the cycle. This data point also correlates with the LTH data showing accumulation – further enriching our long-term narrative with more context. Additionally, most of this year has been marked with a mix of light and dark colors, reflecting uncertainty and a lack of clear direction in the market.

BTC Consistently Moving into Self-Custody Wallets

Over the past two years, on-chain data shows that BTC is consistently flowing out of exchanges. While this fact does not immediately contribute to a bullish or bearish sentiment, it can reveal important characteristics about the behavior and knowledge of the investors on the network.

The first question that comes to mind is, “where is the BTC going when it moves away from exchanges?” The simple answer is that the outflowing BTC is moving into self-custody wallets. Self-custody wallets are wallets that are not controlled or maintained by any CEX (centralised exchange). These types of wallets are wholly controlled by their owners and can be hardware wallets, browser-based wallet plugins, or app-based like the Numbrs Bitcoin Account.

Self-Custody Signals Sophistication

Stalwart and enthusiastic Bitcoin investors see out-flows from exchanges into self-custody as a bullish indicator, positing that BTC moving away from exchanges means they are being taken out of liquid circulation, thereby restricting supply. This is not always the case, and it should be noted that BTC can be moved back onto exchanges just as easily as they are taken off, hollowing out this bullish theory. What is bullish, is that we can assume that, as the BTC market matures, its users will become more and more sophisticated and knowledgeable on the topics of storage and the use of Bitcoin.

Illiquid Supply Continues to Increase

Another bullish case we can make for coins that move away from exchanges is that they are becoming part of the growing Illiquid Supply. Illiquid supply can be defined as BTC that is 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 to hold.

Interestingly, in the past month there has been more and more BTC being moved into cold wallets, and since the start of the fighting in Ukraine, there has been a considerable spike in illiquid supply. While the reasons for these increases are not perfectly clear, this will ultimately contribute to the looming supply shock that has been forming in the BTC market for more than a year.

Mid-term Outlook - Sentiment: Neutral with Caution

The first quarter of 2022 has been a continuation of difficult times for BTC investors. During Q4 of 2021, the market corrected and flushed out billions in leveraged positions. This looked positive for mid-term time horizons and BTC investors waited for retail investors to surge back into the dip with relatively low pricing. Unfortunately, the demand that we saw last year did not materialize, as many hoped this year, and, notably, retail demand has been muted and slow to start.

The “Winter Bear” of 2022 - 109 Days of Decline

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 this current bear market to the short “mini-bear” market that emerged during the summer of 2021 and lasted 78 days. 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 low conviction from new 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 smart money who were waiting to quickly capitalize on the falling prices.

At the close of Q1 2022, we can infer that the market is different and with greater conviction and more investors deciding to HODL their coins for the long term. This is reflected in fewer negative spent outputs recorded on aSOPR than in previous bear markets. Supply dynamics are historically positive, with more and more BTC being taken out of exchanges. Unfortunately, the bullish market structure must be viewed with the high levels of uncertainty that are present in the market. That said, the market structure feels quite neutral and highly sensitive to current events that can quickly change investor sentiment.

Stablecoins Hold 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 $5bn. It grew to around $160bn 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 stablecoins 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 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.

SSR is the ratio of the Bitcoin supply and the stablecoin supply, denoted in BTC

BTC investors need to know that when SSR values are 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 visiting all-time low values, a good signal for future growth in the Bitcoin network and higher prices later in the cycle.

Short-term Outlook, Sentiment: Neutral with Caution

While uncertainty is definitely a factor in the current market, Bitcoin has remained resilient and has performed quite well during the conflict in Europe. Spot demand has been weak during the first quarter of 2022, with much of the price action in the BTC market being driven by futures markets. Using on-chain data, investors can look deeply into derivatives markets to see how frothy, or overheated, the BTC market is becoming. When the Bitcoin market gets overheated, prices can fluctuate between 10-40% in the short term. Currently, Futures Open Interest levels are relatively low at exchanges suggesting a relatively calm market with plenty of room to grow if and when investor demand increases in the short term.

We can see in the above chart, Futures Open Interest (OI) is currently sitting at around $15bn. Comparing this point to when the futures markets reached these levels twice last year, in August and later in October 2021, we observe that prices rallied simultaneously with rising OI, following relatively extended bearish periods.

Currently, the short-term outlook is neutral, with markets waiting for retail and institutional demand to flow back into BTC. Positive news, such as the announcement that Honduras will begin to accept BTC as legal tender, or a resolution to the war in Ukraine, could quickly change the market’s sentiment and send the price of BTC soaring into new ATHs. Conversely, a black swan event like an escalation in violence in Europe, overly restrictive regulations, or other negative catalysts, can quickly cause investors to sell off, pushing prices and demand even lower than before.

Conclusion

Bitcoin has remained notably solid, trading sideways through some extremely challenging times. Long-term holders and the majority of current BTC market participants are using the weak price action as an opportunity to add more Bitcoin to their wallets, adding to the growing supply shock narrative in the long term. This continues the two-year trend of BTC moving off of exchanges and into the more sophisticated hands of investors using self-custody wallets.

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 $30bn twice last year, only to drop by over 50% over the past four months. Currently, futures markets are driving the price of BTC even while volumes remain relatively low.

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. The market has shown greater conviction and more maturity, with less BTC being revived than during past bear markets. On-chain data shows a market structure poised and ready with large amounts of stablecoins on exchanges waiting to be invested into crypto, and supply consistently being restricted as illiquidity continues to grow.

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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