Long-term > 60 days, Sentiment: Bullish with Caution - Despite recent periods of short-term volatility, the long-term on-chain perspective remains bullish. Long-term holders (LTH) who are generally considered the “smart money” investors of Bitcoin, changed from net accumulation to net distribution of their holdings in early November. It should be noted that even though LTH has begun to sell, the outflow has been very low compared to other bull market distributions. This combined with the fact that BTC miners continue to accumulate provides us with a bullish narrative. Smart money, while beginning to sell, are likely expecting higher prices later in the cycle.
Mid-term > 14 days < 60, Sentiment: Bullish with Caution - The price of Bitcoin began to surge during the last weeks of 2020 scaling up from $18,000 to $63,000 USD in just four months. Since then, we have seen the price climb to nearly $70,000 USD with dips reaching as far down as 52% from local ATH throughout the year. Volatility, therefore, should be expected this year with the degree and direction of that volatility being the main question. On-chain supply and demand dynamics between short- and long-term holders confirm a slow exchange from LTH to STH (short-term holders). Fewer coins for sale at exchanges should cause the price to rise and foster bullish conditions. Conversely, if STH demand slows while at the same time greater distribution from some LTH increases, prices will dip downward in the mid-term.
Short-term < 14 days, Sentiment: Neutral with Caution - BTC price action has stalled, battling headwinds of bearish sentiment coming from paused ETFs, potential future regulations, and the uptick of the COVID Omicron variant. This off-chain news combined with the large recent flush of long leverage from crypto derivatives markets has muted market sentiment in the short term. With the end of 2021 eminent, a sharp increase in demand is needed to reactivate retail markets. Futures' open interest is slowly recovering and there is a healthy amount of stablecoins available in exchange wallets to buy the current dip.
Long-term > 60 days - Sentiment: Bullish
Bitcoin on-chain data gives us an insightful view into the economic activity of its’ holders, specifically providing information such as cost basis and when a Bitcoin was purchased. Supply and demand dynamics have the greatest long-term impact on the price. Whereas, short-term factors like unexpected news, regulatory events, and sentiment can drive Bitcoin pricing to spike in either direction in the short run.
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.
LTH are defined as wallet addresses that have held 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.
Mid-term > 14 < 60 days - 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.
The above metric shows us the total supply of BTC in profit and loss separated by long- and short-term holders. Interestingly, whenever STH’s supply goes completely into loss, as you see marked by the black circles, the price of Bitcoin begins to appreciate in the short- and mid-terms (green arrows).
Currently, about 80% of STH supply is being held at a loss. Historically, If the above pattern holds and more loss is realized by STH, we should eventually see a peak followed by a gradual STH recovery and a commensurate price action to the upside.
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 < 14 days, Sentiment: Bullish
Over the last month, liquidations occurred in derivatives markets flushing out over $10bn USD of long leverage backed largely by crypto-margined accounts. This combined with other negative news factors such as a recent uptick in the Omicron variant of COVID has sent prices sideways in the near term.
The price of BTC has dipped over recent weeks losing over $20,000 USD, in a relatively short amount of time with the current price hovering in the high $40,000 USD range.
Potential for growth in the short-term
Market sentiment is relatively calm with Bitcoin trading sideways with short-term indicators slowly trending towards a bullish recovery in the near term. Futures Open interest on exchanges is increasing slightly, funding rates are just above positive, and have remained low throughout the fall. Stablecoin Ratio represents buying power, meaning that there are plenty of coins like USDT (Tether) and USDC on exchange wallets available to be used to buy Bitcoin.
Short-Term: Neutral with Caution
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. Additionally, large amounts of stablecoin provide the buying power to fuel the bull market in the coming year. Some volatility is expected as we close out 2021, and while BTC continues to consolidate in the high $40,000 USD levels we could also see prices dip by 20% in the short term.
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 Bitcoin nodes than ever before.
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