Bullish Fundamentals in a Bear Market
Overview
Long-term Outlook - Sentiment: Bullish - The fundamentals of the Bitcoin Protocol remain strong through sustained global challenges. A supply shock continues to form as illiquidity continues to remain a factor. Accumulation addresses add $9bn in value to their balances, and the “fair-market” value of BTC, as measured by the MVRV Z-Score looks increasingly attractive as prices continue to trade sideways in the short and medium-term.
Medium-term Outlook - Sentiment: Bearish - Spent Profit Output Ratio (SOPR) remains below the value of one, a bearish sentiment indicating that BTC is generally being traded at a loss. Net Unrealized PNL is hovering in the “Hope-Fear” range, a bearish range that has seen further downside in past markets. Bitcoin is still appearing in net surplus on exchange balances as investors vie for exit liquidity.
Short-term Outlook - Sentiment: Bearish - Short-term investors and speculators pour on more open interest as levels rise by over $2bn in contracts in the last 30 days. The on-chain Estimated Leverage Ratio has surged by 5% alongside the increase in futures interest and is notably high – an indication that could mean more volatility in the short term as investors over-leverage their positions.
Long-term Outlook - Sentiment: Bullish
Despite continued stress from various global geopolitical challenges, uncertainty building on the regulatory front for crypto, growing inflation, and a seemingly endless stream of negative news, the long-term fundamentals of the Bitcoin protocol remain surprisingly strong. Each day, more and more BTC are being stored in cold storage, effectively being removed from circulation and adding to the deflationary narrative of Bitcoin.
BTC: Supply Shock still forming as accumulation continues
In any market, long-term price is driven by demand-and-supply dynamics. 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, data can show which investors are selling, and which investors have little or no intention of selling. This is highly informative and can provide a leading indicator as to whether there may be a change in BTC supply with a possible long-term effect on price.
Accumulation Addresses increase in value for 2022
“Accumulation addresses” are BTC wallets held by investors that have not “spent” or withdrawn any of the BTC that transferred into them. These wallets can be cold (self-custody) or hot (online/on a centralised exchange) and are not tracked in relation to the time that the BTC has been held. As soon as BTC moves out of this type of wallet, it immediately loses the designation of an Accumulation Address.
Since the beginning of 2022, the amount of BTC has grown within these accumulation addresses by 8% or about $9bn in value. This is a considerable amount of value, and can be generally interpreted as bullish as more coins moving out of supply will further restrict the number of available BTC for sale at any given time. The caveat to this signal is that it can change very quickly and coins held in these wallets do not give investors any indication as to the intent of the investment.
Who is currently buying the 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 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 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.
Accumulation Trend Score by Wallet Cohort
The Accumulation Trend Score by Wallet Cohort sorts down the Accumulation Trend Score into various wallet cohorts based on the amount of BTC in the wallet. The relative strength of the accumulation for each entity balance size is measured by both the size of the entities, and the number of coins they have acquired over the last 15 days. The metric below complements the more general ATS score, giving a clear indication as to exactly who is buying and who is adding to the circulating supply of BTC.
This month, cohorts with more than 10,000 BTC and with less than 1 BTC in their wallets have changed from distribution to accumulation. It should be noted that the smaller wallets (<1 BTC) are shaded with a deep dark blue hue, signifying extremely strong accumulation amongst those investors. It can also be assumed that this cohort is made up of mostly retail buyers looking to benefit from BTC’s currently low price–an overall bullish indication that investors are buying with the expectation of future price gains. Conversely, more reddish hues would denote an uptrend in sales and a weakening in conviction.
Long-term holders are distributing
Long-term holders (LTH) of BTC have historically moved with other smart-money players in the BTC market. In the past, this publication has explored the behaviors of long-term holders, specifically in regards to whether or not this group is buying or selling BTC. Glassnode, an on-chain data provider, 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. Below, we can see that this behavior has generally held up throughout the last two years of market activity.
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 resumption of accumulation for most of April and May of this year. Currently, the coins being sold from long-term holders could be temporary or could be the start of a larger capitulation event that is necessary for market psychology to change back to bullish in the near term.
Testing the fair market value of BTC
On-chain data allows investors to examine the Bitcoin Network from a variety of perspectives. That can be used to measure the true value of a Bitcoin. MVRV Z-Score can be defined as the ratio between the difference between BTC’s market and realized capitalization, and the standard deviation of all historical market cap data, i.e. (market cap – realized cap) / std(market cap). In other words, the MVRV Z-Score can be used to reliably mark the tops and bottoms of BTC market cycles. When the market value of BTC is significantly higher than realized value, MVRV Z-Score has indicated a market top (red area below). Conversely, during weak markets, the metric has marked market bottoms (green area below).
This May, MVRV Z-Score has made a significant downward move toward the green zone, signalling the bottom of the current market. The most recent bottom observed on MVRV Z-Score occurred in March 2020, during the “COVID Crash” that sent markets downward as investors from all markets rushed to move their assets into safe havens. Overall, MVRV Z-Score has been successful in recording the last four major bear market bottoms. It is expected that over the next weeks, MVRV Z-Score will dip down into the green area on this chart, revealing the bottom of the cycle.
BTC: Undervalued periods can last for months
It should be noted that in past markets, MVRV Z-Score has shown BTC being undervalued for a period of 20 days up to nearly 300 days; an average of about 120 days. BTC market recoveries can take time to get momentum, but in March 2020, the market took less than a month to change direction and begin its relatively quick climb from $5,000 to over $60,000 later that year. Considering the macroeconomic sentiment is quite bearish across markets, the BTC Network could languish over the next months until market conditions change.
Medium-term Outlook - Sentiment: Bearish
SOPR in a bear market
The Spent Output Profit Ratio (SOPR) metric is useful to understand the overall market sentiment regarding profits and losses in the medium-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.
More downside in the medium term
Net Unrealized Profit/Loss (NUPL) is the difference between Relative Unrealized Profit and Relative Unrealized Loss. It differs from Percent Entities in Profit as it examines the unrealized PnL of the coins in the network rather than the entity holding the coins. This metric can be calculated by subtracting realised capitalization from market capitalization and dividing the result by market capitalization. In layman's terms, NUPL answers the question, “if all coins in circulation were sold today, would they be sold at a profit or a loss?” The metric has changed dramatically in recent months and is currently down 50% from its ATH above 70% last spring.
The current market structure, expressed by NUPL above, resembles a similar period in the first part of 2020. At that time, the world was entering a period of uncertainty with the COVID pandemic starting to spread. Markets reacted with large sell-offs and BTC was not immune to the COVID Crash that followed. Profitability during that period was further hit with an additional 30% dip during the already soft period that emerged after a dead-cat-bounce recovery in February 2020. This pattern emerged again in 2022, albeit at vastly different price scales. The past four BTC bear markets have all been marked with large capitulation events that were evident on NUPL by an additional dip of at least 30% from the local lows. If the current trend continues and more LTH sell, the price of BTC could further weaken as it has in past bear cycles to the high teens or low $20,000s.
Supply moving back to exchanges: bearish
For most of 2022, a steady outflow from exchanges has been the overwhelming theme with some investors withdrawing up to nearly 100,000 BTC per day. This BTC is purchased and then stored in self-custody BTC wallets. This demand has been surprising, considering many investors view Bitcoin as one of the riskiest assets that can be used to store value in any environment. This behaviour, however, has reversed course in recent weeks as investors push coins back onto exchange balances looking for exit liquidity. The increased BTC exchange balances are likely to provide further downside pressure in the short to medium-term.
Short-term Outlook - Sentiment: Bearish
While uncertainty feels like the primary driving factor in the current market, Bitcoin has remained resilient and has performed well during historically difficult challenges present today. The short-term BTC market sentiment is currently bearish–linked in lockstep with other financial markets. Bitcoin has always been sensitive to equities markets, and until a decoupling between them occurs, the expectation that the price of BTC will move with other markets still holds.
Investors go long after the dip
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 hot, prices can fluctuate up or down by 10% to 40% in the short term. Earlier this month, the price of BTC dropped from $39,000 to $28,000 in just seven days, with nearly $2bn lost in open interest over the same amount of time. This last week, investors returned with $1bn of open interest flowing back to derivatives exchanges, following the crash that started on 4 May.
Using leverage to fund the recovery
Examining the quality of the funding for any particular asset is an important fundamental for any investment. Futures Estimated Leverage Ratio (ELR) is a metric that can be used to explore how much leverage is used by investors on average at a derivatives exchange. This information measures a trader's sentiment and whether they are taking a high or low-risk position. ELR can be interpreted in two ways, by value or by trend.
An increasing trend means more investors are taking increasingly high-leverage risk in the derivatives trade. If the value itself is high, then it could signal that the market is over-leveraged and investors should expect volatility.
A decreasing trend in values indicates more investors are taking off leverage risk in the derivatives trade. Low values signal low leverage in the market and less expected volatility
As the price of BTC drops significantly, as it did in the first week of May 2022, long positions can quickly unravel, pushing prices further down. Exchanges involuntarily liquidate positions opened with leverage to mitigate losses after stop losses are hit or margin calls go unanswered. In weak markets, liquidations cause prices to drop further as coins flood the markets at lower and lower prices. Earlier this month, over $2bn in open interest was lost when long liquidations were triggered–dropping prices down into the $20,000s for the first time in two years. ELR is back on the rise, growing 5% over the last two months as investors use leverage to secure their positions. This does present some short-term risk, as falling prices could force more coins onto the market via liquidations.
Conclusion
The fundamentals of the Bitcoin Network continue to show strength throughout difficult global challenges that are affecting all markets. A cohort of buyers, comprised of large and small holders, continues to step up and buy BTC, absorbing the slow trickle 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 be stored in Accumulation Addresses and cold storage wallets.
Will long-term holders capitulate in this cycle?
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 in some cases. Long-term holders have been selling some of their coins, evidenced by a downward trend in LTH-SOPR. This means long-term holders are accepting losses, a negative indicator in regards to conviction. This sentiment is balanced out by the low volume of sales, and the corresponding net increase in accumulation observed on-chain.
BTC moving off of exchanges is a two-year trend
Recent news of inflation and interest rates have largely been digested by markets, reducing their impact on the price of BTC. The geopolitical landscape continues to create black swan events that are difficult to price into markets. 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.
Even while the short-term perspective is uncertain, the long-term fundamentals of the BTC protocol remain strong with consistent demand evidenced by a two-year trend of BTC outflows from exchanges into self-custody wallets. In addition to the steady, albeit slow, demand, it is becoming more obvious that users who store their own Bitcoin in self-custody or cold storage are more experienced, more savvy investors, contributing to an expansionist narrative that illustrates greater mainstream adoption and acceptance.
Stablecoins on exchanges have hit new ATH
Another silver lining to the current market sentiment is that a relatively large amount of stablecoins are on exchange balances. The number of stablecoins peaked again this month hitting $35bn in value. Cryptocurrency coins that are pegged to the dollar - so-called “stablecoins” - have been growing exponentially over the last two years. 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 stablecoins are currently traded at volumes higher than any other type of cryptocurrency, denoting their popularity and usefulness.
Many traders use these tokens as a primary vehicle to open and exit 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.
(*The chart above only accounts for the following Stablecoins: BUSD, GUSD, HSUD, DAI, USDP, EURS, SAI, sUSD, USDT, USDC)
Investors use stablecoins to deploy capital into crypto markets and also use them as proxies for fiat currency. When we observe large levels of stablecoin 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 stablecoin can be viewed as a bullish signal since investors are keeping “dry powder” ready to be deployed at short notice in the crypto ecosystem.
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