Long-term > 60 days, Sentiment: Bullish with Caution - The Bitcoin Network had a relatively uneventful transition into 2022, with relatively long periods of consolidation in the mid-$40,000 USD range. Even though the start of the year has been slow, the long-term on-chain perspective remains bullish. Long-term holders (LTH), who are generally considered the “smart money” investors of Bitcoin have been slowly distributing their holdings since the beginning of November 2021. This combined with the fact that BTC miners continue to accumulate provides us with a longer-term bullish narrative. LTH, miners, and whales continue to hold with the expectation of higher prices later in 2022.
Mid-term > 14 days < 60, Sentiment: Neutral - Unfortunately, Bitcoin did not start 2022 as it did last year. Last year, we saw nearly 100% growth in price during the same time. While not nearly as exciting as last year, what is notable is that the price has remained relatively stable over the past weeks rallying in the high $40,000 USD range. While price in the short-term may appear stagnant, transaction volumes and new users to BTC have grown sharply over the first week of 2022. Greater adoption of BTC and additional interest via institutional products should drive investors of all shapes and sizes to the Bitcoin Network throughout the coming year.
Short-term < 14 days, Sentiment: Bearish - Leverage remains relatively high with open interest rebounding slowly from the heavy liquidations that occurred in early December of 2021. Long-positions suffered through the end of the year with another round of liquidations happening as the price of BTC dropped below $50,000 USD.
Long-term > 60 days - Sentiment: Bullish with Caution
The new year started with little fanfare with the price of Bitcoin stubbornly settling in the mid-to-upper- $40,000 USD ranges for more than the last 30 days. Despite recent periods of Bitcoin trading sideways, the long-term on-chain perspective remains bullish.
On-chain data reveals user behaviors
On-chain data is an important segment in the financial analysis of the Bitcoin Network as it reveals key indicators of the economic activity of the Bitcoin users. Technical Analysis, which focuses almost entirely on price movement, often lacks context and ignores important narratives that on-chain data can expose. On-chain data can provide us with a more nuanced perspective, by providing data points such as cost basis, length of holding, active wallets, and even balances in individual wallets. Arguably, supply and demand are the most important factors when estimating the long-term price of BTC. Conversely, in the short-term BTC price can be affected by unexpected news, regulatory events, and media sentiment; all factors that can not be objectively measured on-chain.
Long-Term Holders Change to Accumulation
LTHs are defined as 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. Generally speaking, we can infer that LTHs are more experienced and make up a large segment of the “smart money” investors in Bitcoin.
For much of the last year, we have observed LTH consistently accumulate BTC in anticipation of higher prices later in the cycle. We can see on-chain that a percentage of LTH did sell off small amounts of their holdings last month, changing their behavior from net accumulation to net distribution. This change in activity usually happens in the middle of bull markets when price appreciation is expected and smart money sells into strength. This bull cycle has been somewhat different than last year’s bullish period during the fall and winter. Last year at this time we saw heavy distribution and incredible price growth in an extremely short amount of time. This week, LTH reverted back to accumulating coins. We know that when LTH begins to accumulate BTC, they are doing so because they expect higher prices later.
Referring to the bull market in 2013 from the chart below, we can see that there are times when LTH has changed behavior mid-bull cycle.
Miners are HODLing
Miners are also continuing to collect (and mine) Bitcoin, there have not been any significant end-of-the-month transfers of Bitcoin from miner wallets to exchanges. This suggests that miners agree with the LTH that higher prices are expected later in the year.
Recent news concerning the US Federal Reserve’s stance on interest rates and economic stimulus has negatively impacted markets globally. Markets have seen sell-offs mid-week and cryptocurrency markets were not immune to the bearish sentiment that has permeated Twitter and social media. While these factors can create risk in the Bitcoin market in the short- and mid-terms, long-term BTC investors have weathered waves of fear, uncertainty, and doubt over the years.
Illiquid Coins Continue to Grow
A supply shock continues to form in the Bitcoin Network. A BTC supply shock is an event that changes the supply of Bitcoins that are available for purchase, resulting in unexpected price movement. If we assume that BTC demand stays the same or grows during a supply shock, then we can infer that a negative supply shock will cause the price of BTC to spike upward. One thing to consider when trying to understand why BTC has illiquidity is that large amounts of BTC are lost on a regular basis due to human error. Lost private keys, passwords, and other mistakes continually add to the illiquid supply, even though most of the illiquid supply is likely being held by LTH in cold storage for undetermined periods of time available highly liquid and liquid supply of Bitcoin for new buyers to purchase has reduced by 700,000+ Bitcoins over the last 18 months and nears a four-year low in December 2021. In other words, 77% of the total circulating supply of Bitcoins is illiquid, a figure that is rapidly growing. With the demand for Bitcoin staying at least unchanged, the continued reduction in supply is expected to lead to price appreciation over the coming three to six months.
Mid-term > 14 < 60 days - Sentiment: Neutral
A year ago, the price of Bitcoin was in the $15,000 USD range. With entities classified as smart money, whales, and LTHs, largely consisting of those who did begin to accumulate BTC more than a year ago, we should measure their economic activity in a way that gives more weight to the coins that they sell.
Tracking Old Coins with the Metric “Coin Days Destroyed”
Coin Days Destroyed (CDD) can accomplish this weighting and adds two key variables to our analysis: time and value. Time is measured as the number of days between when someone purchased BTC and when they sold it. The second variable is the value or the amount of BTC in the transaction. CDD is simply the number of days times the amount of Bitcoin in the transaction.
When you buy Bitcoin and hold it in a wallet, a unique transaction record is created and added to the blockchain. This transaction record is referred to as a UTXO. Consider a UTXO like a single piece of paper money like a 50 Euro note. Think of a Bitcoin UTXO as a unique digital bill that has a “minted” date, and a value, just like the paper note. The only difference other than it being digital is that when a Bitcoin is spent, it is essentially destroyed and a new bill is created with the exact change if any remains.
Coin Days Destroyed (CDD) combines value and time.
Transaction #1: A UTXO for 2 BTC stored for 100-days has accumulated 200 coin days.
Transaction #2: A UTXO for 0.5 BTC stored for 100-days has accumulated 50 coin days.
Transaction #3: A UTXO for 10 BTC stored for 6-hours (0.25-days) has accumulated 2.5 coin days.
We can clearly see a trend last year that falls in line with a relatively bullish narrative. Last year we can see old coins being sold into strength with a direct correlation to price growth. This period extended until the second quarter of 2021. Today, we see a similar trend, however with considerably fewer CDDs and slower price action. This suggests that older coins are continued to be HODLed with greater price expectations later in the cycle.
Muted SOPR in the Mid-Term
Using Adjusted Spent Output Profit Ratio (aSOPR) in the chart above 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.
Something to note when looking at the past cycles is the aSOPR has been greater than 1 and in an uptrend during most of the past bull runs. Currently, aSOPR is trending sideways above the value of 1 which denotes BTC transacting at a profit and that we are currently in a bull market. When we see aSOPR dip below 1, caution should be exercised as this denotes a change in market sentiment.
The “mini-bear” market we experienced during the summer of 2021 has larges spikes in SOPR that range high above and below the value of 1. This suggests large profits and losses being realized. In the current market, we also see spikes above and below the value of 1, but with much lower values. While this directly suggests lower profits and losses being taken at the moment, one could infer that instead of the large sell-offs and buy-ins that are associated with greater spikes in SOPR, the market is slower with less demand.
Short-term < 14 days, Sentiment: Bearish
Short-term pricing is always a challenge in the BTC market since black swan events, derivatives markets, Bitcoin whales, and government actions can push the price up or down with uncanny effect. This week could be considered a perfect storm of all of the above.
Open Interest Continues to Grow
Despite the billions that were lost by investors building up historic amounts of long leverage last month, it seems that the open interest will continue to be a theme in the short-term price of Bitcoin.
Open Interest grew slightly over the past couple of weeks, notably on more retail exchanges (i.e. Binance). As the price of Bitcoin soars, investors - particularly inexperienced retail investors - use leverage to increase their holdings.
Once this happens, even a relatively small spike in price volatility might trigger cascading liquidations driving the price significantly lower within a short period of time. We have seen such liquidations over the last week.
Derivatives markets took another large hit this week, following negative financial news from the USA on the Fed raising interest rates. The price drop that happened mid-week had the immediate effect of flushing out long positions that had built up over the month of December. Market sentiment is bearish, but that sentiment should be tempered with the fact that overall the BTC network is robust and healthy in regards to its’ infrastructure, and while we are seeing negative price action, we are not observing large capitulation events from LTHs on-chain. LTH continues to accumulate which is a bullish sign in the mid-to long term.
Mid- and Long: Neutral/Bullish
The mid-and long-term outlook is bullish as a supply shock is forming and favorable advancements in financial markets, such as different ETF products, are emerging. Long-term holders continue to set the tone for the macro perspective of BTC and where the price will go. As LTH decides to accumulate coins, they send a signal to others that they are expecting the price of Bitcoin to rise in the future.
Greater Global Adoption and Technology Updates
Countries such as Paraguay and Panama (with others) have signaled that they are also considering using BTC as their national currencies. Recent updates to the Bitcoin protocol (Taproot Upgrade) have made it easier for developers to integrate Bitcoin payments into their applications. In addition, the hash rate of the BTC network has never been stronger, meaning there are more computers mining and hosting Bitcoin nodes than ever before.
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