Long-term > 60 days, Sentiment: Bullish - The first weeks of 2022 have been relatively quiet with market sentiment undecided as BTC continues to trade relatively sideways in the short-term. The long-term sentiment in the Bitcoin Network has remained bullish as long-term holders (LTH), BTC miners, and other smart money investors continue to collect and accumulate BTC to restrict supply in anticipation of higher prices further in the cycle. With 2021 being the year the institutional capital began to invest more heavily into the protocol, 2022’s theme is shaping up to be the year that investors begin to heavily use the BTC cryptocurrency as an actual currency. As more countries, organizations, and individuals use the BTC network to exchange goods and services, it is inevitable that demand will increase. This increase in use, combined with the number of BTC in circulation becoming illiquid for a number of reasons, is almost guaranteed to create a supply squeeze in the future–establishing the bullish outlook for BTC in the long term.
Mid-term > 14 days < 60, Sentiment: Bullish - As 2021 closed out, BTC investors hoped for new PnL opportunities to emerge at the start of 2022 as fiscal calendars reset and companies start to add new assets to balance sheets. While this has not seemed to have materialised this year, we have only begun the first quarter and much can happen. One reason that might explain extra capital on the sidelines is that investors are gauging the impact that higher interest rates and changing conditions will have on financial markets. On-chain data shows us that Spent Profit Output Ratio (SOPR) for the last two weeks has been trading in the negative due to short-term holder(STH) capitulation and STH traders operating entirely at a loss. The upside is that after events such as this, prices bounce and begin to recover in the mid-to-long term time periods. Small rays of hope peeked through the BTC network later last week as the price of BTC rose from $40,000 to the $45,000 USD range.
Short-term < 14 days, Sentiment: Bullish with Caution - Derivatives markets deleveraged large amounts of long leverage all throughout the month of December 2022. Price action has been muted over the holidays as leveraged investors begin to slowly rebuild positions that unraveled with the relatively steep decline in price from November highs. As leverage builds again, so does unhealthy risk. Smart investors with deep pockets can influence market conditions at levels that can manipulate the price of BTC. These investors create conditions where liquidations occur in both long and short positions, effectively cashing in on short-term speculators. In addition to this liquidation game, current news and social media have been plagued with FUD (Fear, Uncertainty, Doubt) that has negatively affected many markets, and the BTC market has not been immune to these factors. The good news is that Bitcoin has weathered many negative news cycles and seasoned investors know BTC investing is a long-term play. That said, considering the resets that have occurred in derivatives markets and in STH supply dynamics; there is a greater expectation for a short-term price recovery as the bottom sets in at the $40,000 USD range.
BTC Price Expectations:
Long - $75,000+
Mid - $55,000-75,000+
Short - $45-$55,000
Long-term (>60 days) - Sentiment: Bullish $75,000+
2022 is shaping up to be an exciting year as greater BTC adoption feels inevitable and on-chain data confirm these assumptions. On-chain data allows us to reach a conclusive answer to where we stand in a market cycle and what kind of price movement is expected in the coming three, six, or 12 months. On-chain analysis provides us with hundreds of key performance indicators to observe the economic activity of its’ users, providing a unique view into Bitcoin’s supply and demand environment.
Over 8 million new addresses in 2021
Last year we saw 8m new addresses created in the BTC network, at a rate of about 22,000 new addresses per day. This year has matched that pace with over 200,000 new addresses created in the first 10 days of 2022. We can infer that as the number of addresses grows, the number of users grows with it. As users and investors require more BTC to store wealth or to use it as a currency, that demand is certain to translate into higher prices later in the cycle.
The difference between Long and Short-term Holders
From an economic activity perspective, we can define smart money BTC investors as individuals and groups who have the most experience trading BTC in a variety of social and economic climates. The data we use from Glassnode defines a LTH as an entity that has held BTC for more than 155 days. Studies have shown that 155 days is statistically notable as BTC greater than 155 “days old”, is less likely to be spent than BTC that is “younger” than 155 days. In other words, if you’ve held your BTC for more than 155 days, you’re more likely to hold than to sell on any given day after that. We can also infer that if you do sell, you did because you either: 1. Need to sell it (to buy something), or 2. You’ve lost faith in the Bitcoin Network and you believe the price will drop in the future. Obviously, there are many other possible reasons, but, from a macro perspective, if we begin to see large numbers of LTH selling–that fact combined with other information could provide a very clear perspective on whether the price of BTC was going to go up or down in a given time period. Are LTH selling strategically to take profits or are they capitulating and dumping their positions? Is a key question that sentiment and LTH perspective can answer.
Long-Term Holders & Miners Accumulate BTC
The volatility that is present in cryptocurrency markets can be wide-ranging and gut-wrenching for new investors, which is primarily why data purveyors such as Glassnode clearly differentiate short-term holders from long-term holders. Their behavior in different market environments can be closely observed in on-chain data and linked to changes in pricing throughout a cycle.
In the above chart, we can see for the second half of 2021, LTH accumulated BTC at a high rate relative to the distribution that occurred in November and December. As we start this year, LTH changed back into net accumulating BTC something that is notable considering that we are mid-cycle. As events play out in the short term and the price of BTC rebounds, the expectation is that LTH will change back into a distribution cycle as demand returns to the market and STH positions recover.
Another influential class of entities in the BTC network are the miners. While there are far fewer miners than general BTC holders and investors, their behavior is generally considered to be in line with smart money. The key difference is that BTC miners are doing more than just investing in the Bitcoin Network. The miners represent the infrastructure that the entire network resides upon. When miners are accumulating coins above and beyond what they are earning from block rewards and transaction fees, it is entirely because they expect higher pricing in the future. Therefore, with miners doubling their accumulation effects as they have in the past two weeks, we can assume that they are extremely bullish on higher prices later in this cycle.
Illiquid supply means scarcity
In the past, we have focused on BTC supply shock and the reasons why a shock to supply is highly likely in the future. A key component to supply shock is Illiquid Supply. There is an unseen cost that those who are bullish on the BTC protocol often do not talk about. Creating your own currency and being your own decentralised bank sounds wonderful, but what happens when you make mistakes? It should be noted that a large number of BTC becomes illiquid due to the fact that someone sends it to the wrong wallet, or even because something as small as a typo can be devastating if that typo occurs in a multi-million dollar transaction.
The Bitcoin: Illiquid Supply metric in the above chart tracks the number of BTC that is effectively out of circulation because it is in a “cold storage (not connected to the internet)” wallet, or it is lost and has not been moved for years since its’ creation. We can consider that BTC is a deflationary asset just due to the fact that there is more BTC lost each year than there is BTC mined by miners. The total amount of BTC in circulation is more that 18 million Bitcoins, Glassnode estimates that up to 78% of all BTC is illiquid, which is nearly 15 million BTC. Some estimate that of that 15 million BTC that are illiquid, 20% or 3 million Bitcoin is potentially unrecoverable.
Mid-term (>14<60 days) - Sentiment: Bullish $55-75,000
Looking at the relative supply in profit and loss and separating that supply in regards to STH and LTH holders, there are a number of patterns that emerge as the supply of BTC is transferred from each of these classes. In the chart below we can see “clouds” of lighter reds and blues which signify supply that is being held at a loss by the respective holder. Darker red signifies STH in profit, while darker blues signify LTH holding profitable BTC.
We can note that as STH reach positions where their supply is entirely being held at a loss they begin to heavily capitulate and sell their BTC at a loss. In some instances, it is a truly BTD (Buy The Dip) situation. In this case, a strong argument can be made for bullish conditions to emerge in the mid-term. Over the past year we’ve observed that when the BTC that short-term holders hold is entirely being held at a loss (as you see marked above), the price of Bitcoin begins to appreciate in the short- and mid-terms (green arrows).
Different than the “Mini-Bear” Market of 2021
Despite relatively bearish sentiment that seems to be propagated throughout the news channels. Current market conditions that mark the beginning of this year look quite a bit different than during the most recent bearish market we experienced in May through August 2021. During that time, the price of BTC dropped dramatically in May and drove down to below half of the ATH it attained earlier that spring. Even though the Bitcoin market sentiment seems bearish, on-chain data paints a different picture. The above SOPR metric shows the market operating just around 1, and can be interpreted as the network transacting in a general break-even environment. Huge profits and losses are not being taken on either side of the equation. The takeaway is that while the market may feel bearish, the on-chain data would suggest more neutral, muted conditions.
Bullish in the Mid-term
The mid-and-long term narratives often intersect with similar themes and assumptions, and this week is no different. While short-term narratives seem bearish and fearful, the mid-term outlook is bullish as supply-side dynamics are creating an expectation for future price growth.
Short-term (<14days) - Sentiment: Bullish with Caution $45-55,000
Since the price of BTC reached $69,000 back in November of 2021, derivatives markets have been purging long leveraged positions to the tune of billions of dollars in just a few weeks. The first week of December last year was especially though as over $10billion was lost in just a few hours as long positions unraveled when the price of BTC crashed and left leveraged accounts empty.
Leverage has been Flushed, Is It Enough?
The effect of those liquidations has set the tone of relative bearishness in the short term, and that sentiment has been pervasive even as we now start the new year. As we explore the current open interest it is notably much lower than before and while there is some open interest growing at some exchanges, the trend is clearly sideways and in an overall macro decline.
We can see from the Futures Open Interest chart above that while we can see this as generally being high, the fact that large amounts of risky leverage that was removed are no longer represented in this chart. This observation provides one relatively bullish data point in regards to the short-term narrative.
Conditions may be right for “Buying the Dip”
Recently, the phrase “Buy The Dip” has emerged as a battle cry for some of the most bullish of crypto investors. In other words, BTD means that whenever the price of BTC goes below the last ATH, buy it. This is not an investment strategy as much as it is just a meme, but, there are instances when buying the dip is potentially a smart move.
There have been a number of clear buying situations that have emerged in Bitcoin’s past. Using a metric called Dormancy Flow can be used to time market lows and assess whether the bull market remains in relatively normal conditions. It helps confirm whether Bitcoin is in a bullish or bearish primary trend.
“Another attempt at capturing phases in BTC’s market cycles, dormancy flow is calculated by dividing current market capitalization by annualized dormancy value (USD), as follows:
Dormancy flow provides the following chart, ideal for both bottom-catching historical global lows and assessing whether the bull market remains in relatively normal conditions:
Whenever network value remains high relative to the yearly moving average of its realized dormancy in USD, the bull market can be considered as “healthy,” since price remains high relative to the market’s annualized spending behavior. Whenever dormancy value overtakes market capitalization at lowest longitudinal levels, the market can be considered in full capitulation — a good historical buy zone.”
In Bitcoin’s history, there have only been five instances where Dormancy Flow has dipped into the green band that David established as a buying signal. This combined with less leverage in the market, and greater adoption in the mid-and-long term time frames provides a bullish narrative for the short-term outlook. Caution should be exercised if open interest begins to climb into higher ranges, however, this has yet to be recorded on-chain.
This week, BTC markets began to awaken after a long winter period of sideways price action, painful liquidations, and continued headwinds from less than stellar news that has impacted nearly all financial markets. On-chain data paints a cautiously bullish picture as we observed smart money players deciding that the time is right to go back to buying and HODLing Bitcoin. In the past, we can confirm that when LTH accumulates BTC they are doing so with the expectation that prices will rise in the future. We also have observed in the past that when these investors begin to sell, they sell strategically into strong markets and rising prices.
When we see that short-term holder’s supply is entirely being held at a loss, prices have bounced upward following these times in the short and mid-terms throughout last year. This combined with unique conditions emerging in BTC Dormancy Flow, bolsters the argument for upward price action in the short, mid-and-long term time periods.
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