On-Chain Weekly May 13th

  • Long-term Outlook - Sentiment: Bullish - The Bitcoin Network has suffered while bearish sentiment has descended into the lower time horizons bolstered by headwinds and a struggling geopolitical situation. Miners continue to invest in mining equipment, adding infrastructure to the protocol and keeping hash rates high. Long-term holders continue to accumulate as pricing weakens, expecting higher prices later in the cycle.

  • Mid-term Outlook - Sentiment: Bearish - Mid-term outlook feels bearish, with short- and long-term holders experiencing deep losses. In the past, similar PnL dynamics have preceded rising prices. However, weak demand may further stall any meaningful recovery at this time. Spent outputs have signalled mainly losses being taken from all cohorts of BTC investors.

  • Short-term Outlook - Sentiment: Bearish - For the previous 90-day period, BTC had been moving out of exchanges at notably high levels, peaking in above 100,000 BTC per day. This behaviour has changed this week amidst a sell-off that sent the price of Bitcoin down by $10,000, bottoming out below $30,000 at some exchanges. Markets continue to de-risk during a historic period of uncertainty generated by rising inflation, Fed rate hikes, and international conflict.

Long-term Outlook - Sentiment: Bullish

BTC remains fundamentally strong

The current market has been difficult for traders as the price of BTC struggled amidst painful corrections into the lower $30,000s this week. The lower trading volumes by BTC holders on either side of the trade can be attributed to downturns in other markets, such as equities, that are highly correlated with Bitcoin. Obviously, macroeconomic headwinds are a prime factor in weakening markets – generated by various global situations that are creating a risk-off environment for investors.

Mining Hash Rates at ATH

Bitcoin “mining” can also be described as verifying transactions that are being written to the Bitcoin blockchain, a specialized decentralised database. As data is written into the blockchain by miners, the miners are paid a fee through an automatic mechanism programmed into the protocol. What’s important to understand about the Bitcoin Network, is that no one person or organization controls all of the miners. Each miner is like an independent operator that has a copy of the entire BTC ledger stored in its memory.

The metric above, Mean Hash Rate, represents the growing number of miners adding processing power to the BTC network. As you can see, hash rates have been increasing steadily over the last two years – with the dip in the chart representing when China outlawed BTC mining last year. Since then, other countries have stepped in to rebuild mining operations, investing billions in value to secure the Bitcoin Network. More miners do not mean more BTC mined or created, it only means more competition between miners for the same Bitcoin. Currently, approximately only 1000 BTC are issued per day as a reward to miners and this number will decrease (after the next BTC halving), irrespective of the number of miners. More accurately, high hash rates are bullish for BTC as more miners represent more investment into Bitcoin’s infrastructure and greater network security.

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Long-term holders step in to support BTC

In the past, this publication has explored the behaviours of long-term holders, 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 future 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. With the market selling off large amounts of BTC this week following rate hikes that were thought to be already priced in, it is bullish that some long-term investors are seeing the weak market as an opportunity to purchase more Bitcoin.

Mid-term Outlook - Sentiment: Neutral

STH supply in loss has preceded higher prices

Long- and Short-Term Holder Supply in Profit/Loss refers to the relative amount of circulating supply of Bitcoin held by long-term and short-term holders in profit/loss.

Over the past year, there have been two occasions when short-term holders were nearing positions where all the BTC they were holding were being held at a loss. The first time, near the end of July 2021, followed a relatively short bearish period that emerged following the first top of the 2021 bull run that started at the end of 2020. This first instance culminated in more than just a bounce, as the market surged into a second top and Bitcoin at $67,000. The second occurrence happened in January of this year, and also preceded a positive bounce in the price of BTC. These occurrences are marked in green below.

Following the bounce in January, a meaningful recovery did not emerge. Instead, the market has struggled and dropped over 50% from the last ATH achieved on 8 November 2021. With short-term holders again hitting the 100% loss mark, a bounce in prices should be expected. However, considering the uncertainty and choppiness present in the market today, Investors on all-time horizons could begin to lose conviction and sell, further pushing prices down and deepening losses.

Spent outputs showing losses

Using the 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 behaviour 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.

SOPR has been quiet over recent weeks and held down below one for most of the year. This indicates mainly losses being realized in the network, particularly for short-term holders. The losses are not restricted to just STH, as the latest dip pushed many LTH underwater as well.

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 one as parts of the market attempt to mitigate losses by accepting any liquidity available on exchanges.

Short-term Outlook, Sentiment: Bearish

Futures Open Interest reflects the bearish sentiment in BTC

While uncertainty is definitely a factor in the current market, Bitcoin has fundamentally remained resilient and has remained relatively stable in the mid-$30,000 range for many weeks. 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 with lower volumes than in the fall, but still above bearish levels that were observed during the summer of 2021.

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. The current period resembles past markets when uncertainty and headwinds have dominated the global stage, slowing growth and interest in Bitcoin. On a more positive note, while open interest is nowhere near the levels it was last fall, it still remains relatively high considering the bearish sentiment in the market.

BTC moves back on to exchanges, poised to sell

This week, the transfer volume of BTC to exchanges spiked as investors positioned themselves to sell their coins in an attempt to capture any liquidity available as coins are being sold. In general, BTC moving to exchanges is bearish for the protocol, as it signals a weakening in conviction and many of those BTC could quickly be cashed out for fiat currency in the event of a capitulation.

Balance on exchanges reverses momentum this week

For most of 2022, a steady outflow from exchanges has been the overwhelming theme with some investors withdrawing more than 100,000 BTC per day. These BTC are purchased and then stored in self-custody BTC wallets. This demand has been surprising, as many investors consider Bitcoin one of the riskiest assets that can be used to store value in any environment. This behaviour, however, has reversed course this week as investors push coins back into hot wallets ready for sale.

BTC transfer volume shows Bitcoins moving to exchanges, but it does not mean that the Bitcoin was sold back to the exchange. Those sales are captured in a different metric, visible above in the % of BTC on Exchange Balances. Using the combined perspective of an increase in transfer volume and % balance on exchanges, on-chain data can confirm transfer and sales back to exchanges – a truly bearish indicator. As more BTC flow back and are sold at exchanges, the short-term outlook remains bearish until new demand appears and/or financial markets improve.

Conclusion

BTC remains a fundamentally sound investment. The fundamentals of the Bitcoin Network continue to show strength throughout difficult global challenges that are affecting all markets. A cohort of long-term holders continues to step up and buy BTC, absorbing some of the influx of coins coming from other short- and long-term holders. The supply dynamics for the long-term outlook remain overwhelmingly bullish as more and more BTC continues to change from liquid and highly-liquid BTC, into illiquid coins held in self-custody and cold storage.

Capitulation has begun. Past markets have bottomed in pricing during capitulation events that emerged at the end of 2017 and 2019, when investors from all cohorts sold large amounts of their holdings at a loss. This created a flood of relatively inexpensive BTC that held prices down for more than a year. This market is no different.

Week 19 marked a strong sell-off that has long-term holders moving their Bitcoin to exchanges, evidenced by an upward spike in BTC balance on exchanges. This means some long-term holders are accepting losses, a negative indicator in regards to conviction. Until this week, this sentiment has been balanced out with some investors stepping up and absorbing the additional supply. Unfortunately, the demand has not been enough to support prices in the high $30,000 range. If more coins appear on balances of exchanges, investors should expect further downside risk and pricing.

A bear market. Fear of inflation and interest rates were considered to have been priced in over the past months. This was not the case as sentiment has changed from more neutral to clearly bearish.

The geopolitical landscape continues to create black swan events that are difficult to price into markets, creating unclear effects. What is clear is that Bitcoin remains tightly correlated with the equities markets and, until a decoupling occurs, BTC will be subject to the headwinds and tailwinds of the larger financial markets. With more Fed tightening expected this year, this bear market could extend into the fall months unless changes in policy or unforeseen political actions are taken, considering it is an election year in the US.

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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