Long-term Outlook, Sentiment: Bullish - The long-term outlook for Bitcoin is strong, with leading on-chain indicators signaling growth ahead. A supply shock is forming, driving price appreciation over the long term. Smart money continues to hold their Bitcoin with the expectation of higher prices later in the cycle. With the Taproot upgrade complete, the Bitcoin Network has more potential for use and integration through Layer-2 solutions like the Lightning Network.
Mid-term Outlook, Sentiment: Bullish - On-chain data places us in the middle of a bull market with an expectation of bullish price action over the coming months. Short-term holders (STH) have been transacting at a loss for the past weeks, while long-term holders (LTH) continue to operate in profit. This suggests that the current selling in the market is being executed by recent speculators who bought in near the ATH in November. In combination with the fact that distribution from LTH has been slow indicates that smart money expects higher prices in the future.
Short-term Outlook, Sentiment: Neutral - Derivatives markets lost ~$10b USD in Futures Open Interest over the last few weeks, representing a 38% reduction since its peak in November. The drop in price triggered cascading liquidations, further accelerating downward price pressure. With considerable excessive leverage and the “weak” hands washed out of the market, a more sustainable basis for short-term price stability has been created. Expect a consolidation with sideways price action.
Long-term Outlook - Sentiment: Bullish
The long-term price development of Bitcoin is nearly exclusively driven by supply and demand dynamics. The short-term news, events, and sentiment play much less a role. It, therefore, is particularly important to analyze advanced on-chain data 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, and 12 months.
A supply shock is forming in the Bitcoin market
A supply shock is an event that changes the supply of a product or commodity, resulting in an unforeseen change in price. Assuming aggregate demand is unchanged, a negative supply shock causes a product's price to spike upward. For our purposes, we define supply shock as the “Illiquid Supply Shock Ratio” (ISS) with the following formula:
ISS = Illiquid Supply / (Liquid + Highly Liquid Supply)
As the aforementioned metric clearly illustrates, a strong supply shock is forming. The 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.
Long-term holders (LTH) start selling BTC - A mid bull market behavior
Over the past weeks, we have observed LTH beginning to change 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.
LTHs are defined as wallet addresses that are holding 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. To put things into perspective, five months ago was mid-June and the price of Bitcoin was in the $35,000 range.
Accumulation of Bitcoin by LTH started in April 2021 and has remained constant for seven months. Starting in mid-November, we can see that a fairly low number of coins are starting to leave LTH wallets and flow into short-term holder’s (STH) wallets. The above chart shows a clear change of behavior with momentum shifting into distribution. The LTHs tend to sell into the rising prices of Bitcoin - which they appear to expect throughout Q1, possibly Q2 2022.
Coin Days Destroyed (CDD) metric confirms the mid bull market signal
It provides perspective to realize that a little more than a year ago, the price of Bitcoin was trading in the $10,000 - 15,000 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 can track their current behavior by tracking the metric Coin Days Destroyed (CDD).
Coin Days Destroyed (CDD) combines the variables 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 value or the amount of BTC in the transaction. CDD is simply the number of days times the amount of Bitcoin in the transaction.
Transaction #1: A UTXO (wallet or user) 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.
Result: If all of these transactions get “spent” the net result is 252.5 CDD for the 12.5 BTC on that day.
In the chart above we use a variant of CDD to get a better picture of the macro behavior of the smart money that is being recorded on-chain. We discard “in-house” transactions and use a 90-day rolling sum so that a clearer signal emerges. After doing so, we can clearly observe a trend of rising CDD into the peaks of bull markets which falls in line with our current bullish long-term narrative.
As an example, last year we observed a large number of 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. This provides further proof that LTH continues to hold the vast majority of their coins while starting to distribute first Bitcoins back into the market. The expectation is that this behavior will continue and increase over the coming months as demand grows through Q1 2022.
Mid-term Outlook - Sentiment: Bullish
The mid-term expectations are similar to the long-term ones as we continue to push through mid-cycle corrections and volatility that is expected in bull markets. Since the mid-term forecast period directly spans through the end of 2021 into 2022, there are additional notes that should be mentioned as we close out 2021.
BTC had an incredible 2021 - Happy New Year
Economic activity around a new year can be volatile as private companies and investors prepare their books for a new fiscal year or liquidate holdings to lock in profits and pay taxes. While impossible to detail each factor or link with on-chain data, we did see a significant bump in demand and price over the last new year. Between 11 December 2020 and 9 January 2021, the price of Bitcoin gained over 100% in value going from $18,000-$40,000 in that time span.
Analyzing the profit and loss of Bitcoin holders provides a bullish outlook
Zooming out past the next few weeks into the new year, on-chain data continues to provide insights into supply and demand dynamics. Dormant coins become revived as the bull market runs and investors rush to capture short and long-term gains. We can see that there will always be days where corrections will happen for a variety of reasons. However, the mid-term outlook looks bullish with the expectation that heavy demand of more speculative STH will absorb the steadily increasing inflow of coins from LTH, whales, and others.
As we track the transfer of coins from LTH to STH, we can visualize when both LTH and STH are entirely in profit. The above chart shows LTH/STH supply in profit and loss illustrating us exactly when and where it happens in regards to the price of BTC.
Last year in November we can see times (in the circled areas of the chart) when the entire supply of BTC was in profit. During these times we see LTH selling their supply to STH holders, and corresponding price appreciation.
Over the next few months, the expectation is that the market behaves similarly to how it did at nearly the same point in time last year. We are now seeing LTH distributing coins, gradually, back into STH positions and on-chain data suggests this might continue into Q2 of next year.
The average Bitcoin is sold at a profit - A healthy market signal
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. 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. We add the 30-day Simple Moving Average to smooth the data and give us a better monthly signal and a broader focus.
Something to note when looking at last year’s cycle is the aSOPR has been greater than 1 and in an uptrend during the last bull market that started in late 2020. This year we see similar on-chain activity and 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. Currently, aSOPR is hovering above 1, investors are net transacting in profit and prices are recovering from the dip over the last few weeks. Mid-term price expectation remains bullish as we start 2022.
Short-term Outlook, Sentiment: Neutral
From a short-term perspective, BTC price volatility is ever-present with corrections up to 40% in past Bitcoin bull markets. The weekend of December 4th saw the price of BTC dip down below $40,000 at some exchanges. The price recovered early in the week, hovering in the high $40k and low $50k range.
Excessive leverage flushed out of the system
The main driving factor behind the dip on 4 December 2021 brings our attention to the derivatives markets and Futures Open Interest (outstanding derivative contracts). Over the course of a few hours, $5bn of leverage unraveled from long positions as stop-losses triggered cascading liquidations that sent prices tumbling. The total open interest was reduced by over $10bn, representing a 38% reduction since its peak in November.
Some (mainly retail) exchanges allow their investors to leverage their assets at a ratio of 1:125, with others allowing up to 200x. Investors with this much leverage are exposed to the risk of liquidation as small price movements can trigger cascading liquidations through an exchange very quickly.
When the price of BTC falls, investors who have taken long positions with leverage are automatically liquidated to limit further losses. This triggers more downward price movement and further liquidations. The recent liquidations removed excessive leverage out of the system, building a more sustainable basis with the expectation of sideways price consolidation.
Derivatives markets took a large hit in early December, flushing out 38% of the Future Open Interest that had built up over the past weeks as the price of BTC soared to a new ATH in November. This opens the possibility of less risk in the short term, at least at current prices.
Mid- and Long: 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. 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 a Bitcoin node than ever before.
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