BTC Now: Week #23
The On-chain BTC Weekly Forecast: Week #23/2022
Inflows and Outflows
Long-term Outlook - Sentiment: Bullish - The long-term sentiment for BTC remains bullish marked by a two-year trend of coins being bought and held in self-custody. Over two million new non-zero wallets were added to the network in 2022, adding to the twelve million gained during 2020-2021. 35% of the circulating supply of Bitcoin has been held for one to two years, adding to the possibility of a future supply shock.
Mid-term Outlook - Sentiment: Neutral - BTC is still flowing into exchanges albeit at lower rates than in May, signifying a neutral change in supply dynamics. Investors are still transacting at a loss, indicated by the bearish Spent Output Profit Ratio. MVRV Z-Score, a useful metric for timing market tops and bottoms is showing that BTC is nearing undervalued levels. If the market reacts favourably, a relief rally or recovery is possible in the mid-term.
Short-term Outlook - Sentiment: Bearish - Futures Open Interest and Estimated Leverage Ratio (ELR) are both on the rise, increasing the potential for volatility in the short term. Perpetual Funding rates have remained relatively stable throughout this bear market; a marked difference from the last bearish period in the summer of 2021 when funding rates dropped to all-time lows.
Long-term Outlook - Sentiment: Bullish
This publication uses two approaches to form its’ short, mid, and long-term outlooks. First, the Bitcoin Network is objectively evaluated using a number of on-chain indicators to explore the fundamentals of the network. Key Performance Indicators(KPIs) such as user retention and growth, supply and demand dynamics, miner hash rates, and exchange balances as just a few of the hundreds of data points that are explored and vetted using on-chain data. The second approach is formed through a philosophical belief that digital assets will continue to grow in value for the foreseeable future and that Bitcoin is the market leader in the realm of cryptocurrencies. Until there is a paradigmatic shift in the cryptocurrency market, BTC will continue to be the frontrunner in the world’s cryptocurrency markets and maintain a bullish long-term outlook.
The two-year trend of BTC moving off-exchanges continues
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.
Growth amidst uncertainty: +2 million for 2022
The current global market sentiment is overwhelmingly bearish. Recent black swan events in other cryptocurrency projects have crushed some stablecoins–along with many investors’ confidence in crypto. The short and mid-term time frames have merged due to the unusually negative macro environment that has extended into a multi-month bearish regime. This publication’s long-term, multi-year perspective still remains bullish on Bitcoin primarily due to steady and increased adoption rates by individuals and organizations; and the continued investment into BTC mining–all evidenced by on-chain data. User adoption continues to grow month-over-month and over 12 million new investors have purchased BTC since the “COVID Crash” in March 2020. This year has seen increased growth with more than two million new addresses created in the first five months of 2022. This bullish datapoint is visible below in the Number of Addresses with a Non-Zero Balance and marks considerable growth during a period of historic uncertainty and a challenging global environment.
Long-term buy and HODL
Realized Cap HODL Waves is a metric that tracks the age of circulating supply of BTC by cohort. It provides a combined view of BTC’s circulating supply from the perspective of age and economic value. This provides insight into the relative economic weight stored by coins of various holding times, and changes arising from holding and spending behaviour.
Understanding Realized Cap HODL Waves - From Glassnode Academy
“Realized Cap HODL Waves provide unique insight relative to the HODL waves in that it:
Combines coin age and economic weight into a single metric and accounts for changes in market valuation over time.
Minimizes the importance of very old or lost coins last moved at very cheap prices, thus providing a viewpoint that focuses on active, and economically meaningful supply.
Provides a more dynamic/responsive perspective for looking at coin distribution, whereas the original HODL Waves tend to present a slower/smoother chart.”
Despite the uncertainty in markets throughout 2022, it is clear that a large portion of the BTC Network is holding BTC for the long term. Based on the chart below, over 35% of the circulating supply is being held for more than a year and growing. This indicates conviction in the investor base–and an expectation for higher prices for the token in the future.
Mid-term Outlook - Sentiment: Neutral
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.
Fewer BTC at exchanges this week
When coins flow from investor wallets back onto exchanges there can be a surge in selling pressure that can drive prices down. Fewer coins at exchanges can produce the opposite effect on the price, as long as there is healthy demand in the market. This last week, even while exchanges are net positive in regards to their BTC balances, coin supply on exchanges slowed to below 25k BTC, down from nearly 75k BTC that moved to exchange wallets at the end of May 2022. This reduction could signify a change in the short trend that appeared last month triggered by the LUNA collapse that sent over 80,000 BTC to “protect” the UST stablecoin. Hopefully, this new trend will continue and greater demand for BTC will spark a more bullish sentiment for the protocol in the mid-term.
Spent profits continue to indicate losses
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 bearish sentiment still present in markets.
BTC nearing historically undervalued levels
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 capitalisation, and the standard deviation of all historical market cap data, i.e. (market cap – realized cap) / std(market cap). In other words, 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.
MVRV Z-Score: Showing potential
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. The possibility that investors will take advantage of the relatively low prices remains tentative, as demand has been slow all year. However, should the macro sentiment change and demand returns–a relief rally could form in the short and mid-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.
Futures markets are heating up
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 $2B lost in open interest over the same amount of time. This last week, investors returned with $3B of open interest flowing back to derivatives exchanges, following the crash that started on May 4th. This pushed the price of BTC up by 7% earlier this week, up to $31,000 in a short rally that liquidated short positions. The market continues to trade sideways as it waits for new demand for Bitcoin.
Investors use leverage to increase profits
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 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
Currently, ELR is at a new ATH indicating that investors could be over-leveraged. Considering the current market, this is concerning as the last time ELR went above 0.22–the price of BTC plummeted in a relatively short amount of time. Below, ELR spiked in April 2021 marking a 40% decline in the price of BTC over the next weeks. Long investors should exercise caution in the short and mid-term as the price BTC could drop further as more volatility is possible.
Futures Perpetual Funding Rates show conviction
During past BTC bear markets, as conviction and excitement wane, so does interest in futures contracts. Not surprisingly, there are always silver linings to be found within these markets. Notably, perpetual funding rates have remained fairly stable and positive throughout this period of overwhelming uncertainty. This clearly indicates greater conviction in the Bitcoin protocol as we can see low but consistent activity within this area of the derivatives market. Funding rates today are not bullish but compared to the 2021 “Summer Bear” period, it may seem that way. Regardless, the short term outlook remains bearish until there is renewed interest and demand in BTC.
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 HODL’d.
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.
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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