Bearish markets dominate
Overview
Long-term Outlook - Sentiment: Bullish - Accumulation Trend Score (ATS) reversed this week back into accumulation as a large part of the Bitcoin Network bought the dip as prices dropped into the upper-$20s for the first time since July 2021. Long-term holders (LTH) bought and stored more illiquid BTC for later in the cycle, albeit at lower levels.
Mid-term Outlook - Sentiment: Bearish - Long- and short-term holders continued to take losses, marked by the lowest values aSOPR has recorded in nearly a year. BTC, which has been moving off-exchanges primarily this year, has begun to move back to exchange wallets. Historically, past Bitcoin market cycles have bottomed out with some notable capitulation events, this could be it for this cycle.
Short-term Outlook - Sentiment: Bearish - Short-term supply dynamics have shifted, with more evidence of older coins being revived and introduced back into supply. Long positions took a hit this week as the price dropped, driving down open interest to pre-bull market levels last seen in the summer of 2021.
Long-term Outlook - Sentiment: Bullish
Buying the latest dip
While long-term holders’ 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 looking at what Glassnode calls “a big part of the network”. To do this, Glassnode has created a metric it introduced in 2021 called the Accumulation Trend Score (ATS) to collectively 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. The scale of the ATS metric 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 (0-1).
An Accumulation Trend Score of closer to one (darker colour) indicates that on aggregate, larger entities (or a big part of the network) are accumulating, and a value closer to zero (lighter colours) indicates they are distributing or not accumulating. This provides insight into the balance size of market participants and their accumulation behaviour 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.
For much of 2022, ATS has not established any clear trends in regards to buying or selling Bitcoin. Instead, uncertain times have made profiting in this environment tricky. This data point corroborates long-term holders (LTH) data showing accumulation (in the chart below) – albeit at lower levels compared to other times in this cycle. Most of this year has been marked with a mix of light and dark colours in ATS, reflecting uncertainty and a lack of clear direction in the market. It is notable that long-term holders continue to champion the BTC market stepping in to support the weakening market with obvious conviction.
This pattern of choppiness has been expressed in previous markets, usually following strong periods of accumulation and then distribution into strong bull markets. The last 90 days bear market has a strong resemblance to the market structure that was observed after the “Covid Crash” in March of 2020. During that time the pandemic created a great deal of uncertainty for risk-on assets and the BTC traded sideways for almost the entire year, before going on to reach new ATHs in the early spring of 2021. As demand flows back into a stronger market, we should see the accumulation taper off and change into distribution.
A supply shock is still on the horizon
In any market, price is driven by demand and supply. This is particularly true for Bitcoin. On-chain analysis, therefore, places careful consideration on a metric coined “Supply Shock.”
Supply Shock = unavailable supply / available supply
The key to understanding the importance of a supply shock is that the available and unavailable supply carry intent. When data is combined and compared from all the illiquid and liquid sources, the data can show which investors are selling, and which investors have little or no intention of selling. This information is highly informative and can provide a leading indicator as to there may be a change in BTC supply - with a possible long-term effect on price.
The chart above confirms our assumption that the illiquid supply of BTC is still growing. In other words, there is more accumulation occurring in the market, and more Bitcoin is being put into “cold” storage. There is a visible surge in coins becoming more illiquid over the last quarter. This behaviour has slowed in the past few days as the BTC market slumped this week. However, as altcoins and other crypto-related projects suffer–investors may turn back to investing in BTC for the long-term as the rest of the “crypto-sphere” burns.
Mid-term Outlook - Sentiment: Bearish
SOPR in a bear market
The Spent Output Profit Ratio (SOPR) metric is useful for understanding the overall market sentiment regarding profits and losses in the mid-term timeframe. These are the key points to consider when using this metric.
When SOPR is greater than one (>1), coins are transacting at a profit.
When SOPR is less than one (<1), coins are transacting at a loss.
“SOPR reset” (SOPR=1) can signal the start or end of a mid-term cycle.
aSOPR is a more advanced metric that filters transactions to remove any “in-house” activity. aSOPR is an effort to provide a better market signal compared to its raw-data counterpart.
aSOPR/SOPR can be further segmented by LTH/STH cohorts
For all of 2022, aSOPR has been stuck in a neutral or sideways trading pattern since November of last year. This metric is especially useful for analysing market sentiment as it is fairly easy to read. Currently, aSOPR is clearly struggling to remain below or above the value of one for any significant period of time. This choppiness can be attributed to lower interest and the overall intensity of trading in the market. Looking at past markets, the range of values in the current cycle is clearly compressed into a tighter range. This last week, aSOPR dipped to its’ lowest value since July 2021–a clear indication of a strong bearish sentiment present in markets.
BTC moving back to exchanges
Supply and demand are the critical factors in the price of any asset, and BTC is no different. Typically in any market, smart money investors sense undervaluation and quickly move in to buy at a discount with the expectation to sell at higher prices later in the cycle. Over the past months, this behaviour has been observed on-chain as major exchanges are seeing record withdrawals of BTC from their ledgers. For most of this year, billions in value have moved from exchanges as short- and long-term holders buy coins to be held in self-custody solutions like the Numbrs Bitcoin wallet. This is generally a bullish indicator, reflecting demand and adoption by investors savvy enough to manage their own holdings.
This week, investors abruptly changed from taking coins off of exchanges, to putting BTC on exchanges. This is a bearish indication, signaling that investors are preparing to sell their BTC–and likely at a loss. During past BTC market cycles, each major cycle has resulted in a “capitulation event” where Bitcoin has changed from the hands of long-term holders to new investors. Considering the current market and the forces that are driving the bearish sentiment, if BTC continues to show up on exchanges for sale more downside price action is probable in the short- and mid-term time horizons.
Short-term Outlook - Sentiment: Bearish
Futures Open Interest reflects the bearish sentiment in BTC
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.
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. There was an uptick of long-liquidations last week following a price drop that pushed the price of BTC back down to $29,000, a level not seen in nearly a year.
At the moment the Bitcoin Network resembles past bear markets when uncertainty and headwinds have dominated, such as when China banned BTC mining last year, or the COVID crash in March 2020. Both times showed slowed growth and interest in the protocol, and this period feels similar in regards to sentiment and fear in the market.
Nearly 5 billion is revived from long-term holders
If BTC moving from hot wallets on exchanges into cold, self-custody wallets is generally bullish, then moving supply from “cold-storage” back to exchanges is decidedly bearish. That is what has been happening at an elevated rate this month. For the first seventeen days of May, approximately 165,000 BTC was taken from long-term storage and moved on to an exchange. As mentioned in the mid-term outlook, previous BTC cycles have all culminated with a notable and deep capitulation event.
Long-term holders continue to step in and purchase the demand coming back to exchanges, but if the sell-side pressure continues then more short-term risk should be expected.
Conclusion
Fewer coins become illiquid as the bear market continues
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.
Revived supply signals capitulation
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 20 marked a strong sell-off that has long-term holders moving their Bitcoins to exchanges, evidenced by a surge in revived supply. This means some long-term holders are losing convictions in the protocol. Until recently, this sentiment has been balanced out with some LTH investors stepping up and absorbing the additional supply. Unfortunately, the demand has not been enough to support prices in the $30,000 range, if more coins appear on balances of exchanges–investors should expect further downside risk and pricing.
A negative macro-environment, inflation, and war
Fear of inflation and interest rates were considered to have been priced in over the past months. This obviously was not the case as the weakened 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 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 USA.
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