On September 23, 2018, at the Baltic Honeybadger conference in Riga, Latvia, Nic Carter presented the concept of realized value (originally “realized cap,” but both terms are since then used interchangeably) that he had developed in collaboration with Antoine Le Calvez. By leveraging the Bitcoin timechain, which holds a public record of all Bitcoin transactions that were ever made, realized value looks to quantify the total United States dollar (USD) value of all bitcoin that existed at the last time those coins were moved on-chain. Figure 1 displays this realized value (blue) alongside the total bitcoin market value (black), which is the total market value of all bitcoin that exist at any point in time.
Figure 1: The bitcoin market value (MV) and realized value (RV).
Under the assumption that most on-chain transactions represent an actual transfer of value (e.g., buying or selling bitcoin against fiat money or using it to consume goods or services), realized value, therefore, represents the aggregated cost base of each bitcoin in existence. As can be seen in figure 1, this aggregated cost base appears to be well suited to estimate bottom prices during bear market conditions, as apparently most bitcoin holders are unlikely to realize losses on an asset that they feel has a lot of long-term upside.
Market-Value-to-Realized-Value (MVRV) Z-Score
This new concept of realized value was a breakthrough in the emerging field of on-chain analysis. On October 2, 2018, David Puell and Murad Mahmudov iterated on Carter and Calvez’s work by introducing the market-value-to-realized-value (MVRV) ratio. The MVRV ratio is calculated by dividing the total bitcoin market value (MV) by its realized value (RV). Therefore, the metric represents the extent in which the current bitcoin market valuation is overextended beyond (values >1) or actually at a discount (values <1) compared to the holders’ aggregated cost base.
A week later, on October 9, 2018, Awe and Wonder further interated upon the MVRV ratio by creating a metric called the MVRV z-Score. The MVRV z-score first calculates the difference between the total bitcoin market value and its realized value, and then divides that by the standard deviation of the market valuation — a common statistical procedure called “standardization.” The MVRV z-scores, therefore, represent the number of standard deviations that each bitcoin market valuation is increased or decreased against its realized value. Although the methodology behind this oscillator might be difficult to interpret for some, the visualization of this metric actually makes it much easier to compare how relative bitcoin market valuations compare to those of previous bitcoin market cycles.
Figure 2 displays the MVRV z-score over time. The colored horizontal lines represent MVRV z-scores of 0 (blue), 2 (green), 4 (yellow), 6 (orange), 8 (red) and 10 (brown).
Figure 2: The bitcoin MVRV z-score.
MVRV Bands
Based on the same methodology that was used in creating the Bitcoin Price Temperature (BPT) Bands on December 15, 2020, this article iterates upon the MVRV z-score by visualizing the price levels of the six colored MVRV z-scores that were highlighted in figure 2 on a regular (logarithmic) bitcoin price chart in figure 3. These “MVRV bands” represent the price that bitcoin would have if it were to reach those MVRV z-score levels.
Figure 3: The bitcoin price and MVRV bands.
Since the MVRV z-score divides the difference between the bitcoin market value and realized value by the (all-time) standard deviation of the market price, the metric is sensitive to changes in bitcoin price volatility. During times where the bitcoin market price rapidly increased, its all-time standard deviation also increases, causing the displayed bands to slope up, thus suggesting higher values are needed to reach those MVRV z-score levels, and vice versa during market downturns. This dynamic is better visible in figure 4, which zooms in on the last five years of data.
Figure 4: The bitcoin price and MVRV bands over the last five years.
The metrics and visualizations that were introduced in this article are free to be replicated, used and expanded upon by others. At the time of writing, there is no web-based version of the metric available yet, but the R code is available on GitHub.
Disclaimer: This article was written for educational and entertainment purposes only and should not be taken as investment advice.
This is a guest post by Dilution-proof. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Cycling On-Chain is a monthly column that uses on-chain and price-related data to better understand recent bitcoin market movements and estimate where we are in the cycle. This fifth edition first takes a brief look at factors that provided a headwind for the bitcoin price during September. We then zoom in on an array of on-chain metrics that saw a significant trend change around the January local bitcoin price top, which in hindsight also set a floor price for the recent downturn in the bitcoin market. This column closes off by reflecting on Bitcoin’s current on-chain supply dynamics and macro context.
September Headwinds
After two consecutive months of positive returns on bitcoin during the summer, September provided several headwinds that caused bitcoin’s price trend to mostly move downwards.
After an initial price increase at the start of the month based on positive market vibes related to El Salvador formally adopting bitcoin as legal tender, price crashed hard on “Bitcoin Day,” September 7, when the law went live. The intraday price range that day was -$10,352 (-19.56%), a steep decline that was partially caused by a domino effect of long liquidations that each triggered another forced sell-off that pushed the price down further, liquidating even more long positions. As can be seen in Figure 1, the funding rates (green) on September 7 weren’t as high as they had been in Q1 when market euphoria was still in full effect. However, open interest (blue) had increased quite a bit over the previous weeks and saw a steep drop due to the forced unwinding of over-leveraged longs.
Figure 1: Bitcoin price (black), perpetual futures funding (green) and open interest (blue), as well as the total short (red) and long (yellow) liquidations (source)
That event surely scared some market participants who had not experienced this before or did not understand the underlying mechanics. Subsequently, headlines that Chinese housing giant Evergrande might be on the verge of bankruptcy revived memories of Lehman Brothers collapsing at the start of the financial crisis of 2008. Equity markets saw a significant sell-off on September 20, which was also reflected in the bitcoin price (Figure 1).
Despite these headwinds, the bitcoin price closed just $3,302.45 (7.01%) lower than it opened the month of September, showing some resilience. The bullish on-chain supply mechanics that were described in Cycling On-Chain #4 are still intact, suggesting that patient investors with a low time preference are not selling at these prices. Of course these trends can certainly change, for instance if the current macroeconomic circumstances worsen, but based on on-chain trends, these dips can be considered potentially favorable buying opportunities.
To underline the last point, we’ll use this edition of Cycling On-Chain to zoom out a little and look at an array of on-chain trends that have been present since around the January local top, which was already pointed out in a Twitter thread in early May. We’ll then show that the price levels of that January local top actually also provided a technical price floor where the bitcoin price trend found support during the recent market downturn.
Cooled-Off Prices Since January
First, we’ll have a look at the Bitcoin Price Temperature (BPT). The BPT is a metric that essentially looks at the four-year volatility in the bitcoin price by calculating the number of standard deviations that the current price is from its four-year moving average. As can be seen in Figure 2, the bitcoin price increased rapidly in Q4 2020 (left grey arrow), which resulted in a local top on the BPT (black) at a temperature of 7 in early January.
Figure 2: Bitcoin price (grey) and the Bitcoin Price Temperature (BPT, black) (source)
Since then, bitcoin returns started to taper off (right grey arrow) and price temperature started to cool down as a result. This BPT cooling was then exacerbated by the mid-May price crash. Current prices are similar to those we saw during the January local top, but price temperature has cooled down to less than 2, illustrating that these prices are now much more normal on a four-year timeframe than they were in January.
Next, we’ll have a look under the hood and assess a series of on-chain trends that have significantly changed since that same January local top.
Declining Old Coin Movement
One of the trends that have changed since January is a decrease in the amount of relatively old bitcoin that is being moved on-chain, suggesting that sell pressure of experienced market participants is declining. This concept can be assessed using on-chain data in multiple ways.
Perhaps the purest approach is to simply look at the average age of each bitcoin that moves on-chain each day. This is done by a metric called “Average Spent Output Lifespan (ASOL)” that is illustrated in green in Figure 3. As can be seen, ASOL was increasing throughout the late 2020 bull run and clearly peaked around the January local top, after which it has been in a downtrend.
Figure 3: The bitcoin price (black) and the 7-day moving average of the Average Spent Output Lifespan (ASOL, green) and Dormancy (blue) (source)
However, not every on-chain transaction that moves necessarily holds equal weight when it comes to its potential impact on the bitcoin price. After all, a 1,000 BTC transaction has much more potential to influence price than a 0.001 BTC transaction does. This problem is solved by essentially correcting by the actual on-chain volume that was moved, resulting in a metric called “dormancy” that is displayed in blue in Figure 3. With he exception of a few outliers, dormancy has been in a steady downtrend since the January local top. Even more telling, it is currently at levels not seen since early 2017.
Remaining Long-Term Holders Are Now HODLing
Another way to utilize coin lifespan is to determine at what age an unspent transaction output (UTXO) becomes very unlikely to move again. Glassnode did so last year and found that at a coin age of above 155 days (roughly five months), unspent transactions are particularly unlikely to be moved again. As such, coins that haven’t moved for 155 days can be labeled “Long-Term Holder (LTH) Supply.”
Figure 4 displays the 30-day net position change of this LTH supply. As can be seen, coins that are more than five months old were increasingly being sold throughout the late 2020 bull run, as relatively experienced holders were selling into market strength. This sell trend peaked around the January local top, after which LTH sell pressure started to decline and has flipped to strong accumulation over the last few months — despite the steep price dip this spring and early summer.
Figure 4: The bitcoin price (black) and Long-Term Holder 30-day Net Position Change (green and red) (source)
Experienced market participants that were skeptical of Bitcoin’s price run towards and break of its previous $20,000 all-time high (ATH) sold heavily against market strength up to the January local top, whereas those that remained afterwards appear to have little intention of selling — again, despite the steep mid-May price drop.
Long-Term Holder Transaction Volume Is Declining
The LTH net position change that we dissected above illustrates the LTH supply dynamics, but it is also possible to assess LTH behavior by looking at their on-chain transaction volume. Figure 5 shows the transaction volume of coins that hadn’t moved in at least six months. The transaction volume of that cohort also peaked around the January local top and has been in a declining trend ever since, with the exception of a temporary spike during the July relief rally that likely consisted of previously trapped investors that were looking for exit liquidity.
Figure 5: Spent Volume Age Bands (SVAB) for coins with a lifespan of six months or more (source)
Bitcoin’s UTXO Set Is Aging
Besides the coins that are moved (“spent”) on-chain, it is also possible to look at the current status of all UTXOs that exist. This was first done by Dhruv Bansal, who divided Bitcoin’s UTXO set into brackets of different ages, creating a metric known as HODL Waves. This metric was later adjusted by @typerbole, who weighted each HODL Wave by the value each of UTXO when it was last moved on-chain, creating the Realized Cap HODL Waves that are basically a more expressive version of the original metric.
As can be seen in Figure 6, the Realized Cap HODL Waves of coins with an age of up to one month (red colors) trended upwards until the January local top, after which they have been in a steady decline. This shows that up to the January local top, older coins that were previously unspent were being moved on-chain, resetting their lifespan to zero and allowing the bands of the warmer colors in Figure 6 that represent relatively young coins to swell. Since January, these trends have cooled off considerably, allowing the bands of the cooler colors to recede, showing that Bitcoin’s UTXO set is aging again in aggregate.
Figure 6: Realized Cap HODL Waves (source)
Declining Miner Sell Pressure
On-chain data also allows skilled analysts to estimate which bitcoin are in the hands of miners. Throughout 2019 and 2020, this data showed that the bitcoin balances that were considered to be in miners’ wallets saw a steady uptrend. Right before the January local top, those balances declined steeply (Figure 7, green), which was followed up by relatively large amounts of bitcoin being sent from those miner wallets to exchanges (Figure 7, blue). Over the past six months, those trends have both reversed, suggesting that miner sell pressure is relatively modest again — despite the hard Chinese crackdowns on miners and resulting dramatic hash rate drop that we saw in May and June.
Figure 7: The bitcoin price (black), miner balances (green) and exchange deposits (blue) (source)
The May 19 Capitulation As The Next On-Chain Market Turnaround
The Chinese crackdowns on Bitcoin mining and Elon Musk’s tweet where he announced that Tesla would stop accepting bitcoin had a significant influence on the bitcoin price in the subsequent months. These events scared newer market participants and put an end to the overheated market conditions. This escalated on May 19, where a cascade of long liquidations introduced bitcoin’s first -$10,000 intra-day price move that ended the speculative mania and marked the next large turnaround in bitcoin’s on-chain market structure. The market was cleared from its excess leverage and speculation and the coins of these “weak hands” started moving into strong hands.
Where most of the on-chain metrics that we discussed before provided little to no warning of what was coming, Glassnode’s illiquid supply metric did. By applying algorithmic on-chain forensics, Glassnode estimates which coins are likely in the hands of the same entity. Since Bitcoin’s blockchain is a distributed ledger in which every single bitcoin transaction that was ever made is recorded, Glasnode can look at the spending history of those entities. Entities that flip their coins around all the time (e.g. active traders) are labeled “highly liquid,” those that do so in a slightly more relaxed fashion are labeled “liquid” and the remaining group that has little to no history of moving accumulated coins is labeled “illiquid.”
Figure 8 shows the 30-day net change of that illiquid supply. After the drop from the current $65,000 ATH in late April, a significant decreasing illiquid supply was reported, suggesting that previously illiquid entities were seeking exit liquidity during the early May relief bounce. Elon Musk’s tweet on May 12 and the consecutive Chinese crackdowns then put fuel on the fire, exacerbating a significant price drop that ended in a capitulation event on May 19, which had a similar cascading long-liquidation footprint as was seen in Figure 1.
Figure 8: The bitcoin price (black) and 30-day Illiquid Supply Change (source)
That May 19 selloff marked the capitulation of short-term bitcoin price speculators and flushed the market from its excess leverage.
Favorable Bitcoin Supply Dynamics Since May 19
The large amount of previously illiquid coins that were thrown on the market were gradually accumulated by more convinced investors with a lower time preference. A re-accumulation zone was born. Since the May 19 capitulation event, the percentages of all circulating bitcoin supply that are not held not on exchanges (Figure 9, blue) and that are illiquid (green) or are part of the LTH supply (red) are all in an uptrend.
Figure 9: The bitcoin price (black) and the percentages of the circulating supply that are not at exchanges (blue), labeled as illiquid (green) and labeled Long-Term Holders (red) (source)
With a market that is cleared from speculators and excess leverage, these underlying on-chain supply dynamics are the remaining elephant in the room when it comes to estimating where the bitcoin price moves next.
It is important to realize that the trends of these metrics can suddenly turn around and paint a very different picture, as we saw during the mid-May selloff. Therefore, it is not possible to necessarily predict future bitcoin price movements based on these historical trends.
However, the on-chain data is currently very clear in telling us that experienced market participants are in aggregate not looking to sell within the current market context. If these trends continue, it means that an increasing portion of the bitcoin supply is being held by investors with relatively strong hands. Due to Bitcoin’s inelastic supply, this means that if bitcoin demand does increase again, it will be increasingly difficult to buy bitcoin at current prices, as only a limited set of current holders are looking to sell. This is known as a supply shock.
If such a supply shock is indeed forming, it is a bit like holding a beach ball under water while it is being inflated. You can keep the ball under water for a while, but if you slip for just a moment or if the ball is inflated to the point where you can no longer hold it, the ball shoots out of the water. Time will have to tell if current on-chain trends are indeed indicative of the bitcoin beach ball currently being inflated while being held under water, where all dips at this point are being bought — or whether a change in context will (temporarily) deflate the ball and lower its thrust potential.
January Local Top Prices Setting A Technical Price Floor
As mentioned before, the bitcoin price levels related to the January local top and its correction provided key support and resistance levels during the recent market downturn (Figure 10). The May 19th capitulation and cascading long-liquidation event bounced exactly on the price level where the bitcoin market found support (~$30k) after its pullback from the January local top. The price levels of the actual January local top (~$40k) ten provided a clear resistance zone during the subsequent relief bounce(s).
After a supply squeeze was formed between the May 19 capitulation event and mid-July and some of the remaining trapped bears exited their positions during the late-July relief bounce (which we discussed in Figure 5), the $40,000 January local top resistance zone is now being tested for support.
Figure 10: The bitcoin price on Bitstamp and the zones reflecting the top (orange) and bottom (green) of the January local bottom (source)
Have enough STH speculators with weak hands and LTH that wanted to sell below the key $40,000 resistance zone done so for this level to now provide a key support zone?
Figure 11 shows the amount of bitcoin that was moved on-chain at each price level. We can see that a lot of coins moved around the $30,000 and $40,000 price levels, providing further evidence to the claim that these zones are potentially important levels to watch.
As mentioned several times throughout this column, while the on-chain trends that are described appear to be quite strong, they can shift the mid- to long-term perspective for the bitcoin price. Current uncertainties in the overarching macroeconomic environment may provide a direct cause for that.
Since June, the U.S. Federal Reserve started mentioning that they are considering, at some point in the future, to turn off some of their money printing presses. Some investors believe that they will not be able to do so without creating havoc in the economy, but the increasing dollar currency index (Figure 12, red/green) since then suggests that others have started to adopt a “risk off” mindset. The more recent uncertainties related to Evergrande, the Chinese housing giant that may be on the verge of bankruptcy, caused even more uncertainties in equity markets, increasing the rotation of money from equities into cash.
Figure 12: The S&P500 (SPX; black/white) and United States Dollar Currency Index (DXY, red/green) (source)
If macroeconomic circumstances do worsen during the upcoming period and the broader financial markets increasingly go “risk off,” causing an equities selloff, it is likely that the bitcoin price will drop alongside it. If that does happen, it will be very interesting to observe to what extent the on-chain trends that were described in this article remain intact, causing any bitcoin price dips to be bought up quickly. Or conversely, whether experienced market investors will actually start exiting their positions, potentially resulting in a more significant bitcoin bear market.
Current Market Sentiment
I hold a monthly bitcoin market sentiment poll on Twitter. Although the results of such polls always need to be interpreted with a grain of salt due to selection bias, this month’s poll suggests that a portion of the market still has high expectations for the bitcoin price development over the upcoming year (Figure 13).
Figure 13: Results of a monthly market sentiment poll on Twitter (source)
Halving Cycle Roadmap
As always, I like to close off this edition of Cycling On-Chain by looking at the Bitcoin Halving Cycle Roadmap for 2020-2024 (Figure 14). This chart visualizes the current bitcoin price, overlayed with the BPT that we discussed above and with price extrapolations based on two time-based models (dotted black lines) — the Stock-to-Flow (S2F) and Stock-to-Flow Cross Asset (S2FX) model (striped black lines) — and cycle indexes for cycles 1 and 2 (white lines) and the geometric and arithmetic averages of those (grey lines). All these models have their own statistical limitations, but together they give us a rough estimate of what may be ahead for the bitcoin price if history does turn out to rhyme once again.
Figure 14: The Bitcoin Halving Cycle Roadmap
Previous editions of Cycling On-Chain:
Disclaimer: This column was written for educational, informational and entertainment purposes only and should not be taken as investment advice.
This is a guest post by Dilution-proof. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Approximately 36 whales have joined the FTT network over the past three days.
Additionally, more than 1,400 addresses are now interacting with FTT tokens daily.
As the network grows exponentially, prices could soon catch up.
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The FTX exchange token FTT has seen an increase in network activity over the past few days after it was revealed that CEO Sam Bankman-Fried is welcoming regulation with open arms.
FTT Whales Buy En Masse
On Sep. 20, subsidiaries of the cryptocurrency exchange FTX in Gibraltar and the Bahamas received licenses to operate within both nations’ regulatory frameworks. FTX CEO Sam Bankman-Fried said that the company is “committed to maintaining a close working relationship with local regulators” to promote the growth of cryptocurrencies worldwide.
FTX’s token, FTT, saw a significant spike in network activity following the regulatory green light. It appears that large investors have rushed to add more FTT to their portfolios.
Santiment’s holder distribution chart shows that the buying pressure behind FTT rose dramatically over the past three days. The behavioral analytics firm recorded a significant increase in the number of addresses holding millions of dollars worth of FTT, colloquially known as “whales.”
The number of addresses holding 10,000 to 1,000,000 FTT rose sharply. Roughly 36 new whales have joined the ranks of the top FTT holders, representing a 30% increase in a relatively short period.
Source: Santiment
The recent increase in the number of large investors may seem insignificant at first glance. Still, when considering that the average whale hold between $560,000 and $56 million in FTT, a sudden spike in buying pressure can translate into millions of dollars.
Network Activity Explodes
Similarly, the number of active FTT addresses has surged exponentially in the last few days. Roughly 1,440 addresses have interacted with FTT tokens over the past 24 hours, representing a 172% jump since Sep. 19.
Such a sudden increase in the number of active wallets can be seen as a positive sign since it has led to rising prices in the past.
Source: Santiment
The bullish thesis is further corroborated by network growth, which has skyrocketed to a new all-time high.
This on-chain metric is often considered one of the most accurate price predictors. Generally, a steady increase in the number of new addresses that transferred a given token for the first time leads to rising prices.
Source: Santiment
These three on-chain metrics suggest that FTT might be preparing to resume its uptrend over the next few weeks. Even though prices have taken a 44% nosedive since Sep. 9, the rising activity on the network points to a v-shaped recovery toward new all-time highs.
This news was brought to you by Phemex, our preferred Derivatives Partner.
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While the bitcoin price has been dipping, those with the most bitcoin continue to add to their stack.
The below is from a recent edition of the Deep Dive, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox,subscribe now.
MicroStrategy’s Relentless Bitcoin Accumulation
Michael Saylor announced today over Twitter that MicroStrategy has purchased an additional 5,050 bitcoin for $242.9 million in cash at an average price of $48,099 per bitcoin, putting the company’s total holdings at 114,042 bitcoin.
Source: The Block Crypto
With 114,042 bitcoin and approximately 8.58 million shares outstanding, investors now own 1.3 million sats per MicroStrategy share, with the bitcoin per share up 2%. As MicroStrategy issues more common stock to fund their bitcoin buying spree, investors give up some of their ownership through the increased equity dilution. In return, they get more bitcoin per share of MicroStrategy stock.
Over the last few weeks in their August 24 and September 13 announcements, MicroStrategy has sold an additional 793,232 shares for a total $577 million to buy more bitcoin. As previously announced in July, their Open Market Sale Agreement allows them to sell up to $1 billion in new stock. So far, Michael Saylor is following through with his original plan to buy as much bitcoin as possible through any and every financial vehicle at his disposal. And it doesn’t look like he’s stopping anytime soon.
Since the company’s adoption of a bitcoin standard on August 11, 2020, MSTR shares have increased by 419.9%, outpacing the price of bitcoin, which returned 279.0% during the same period.
Source: TradingView
Whale Watching
Bitcoin supply held by whales is trending up in the month of September – up 67,195 bitcoin totaling 6.13 million. That’s up 3.1% from this year’s low back in July indicating increased demand from larger institutional buyers over the last two months. Supply held by whales includes entities that hold over 1,000 bitcoin, excluding exchange balances and other known holdings like GBTC. MicroStrategy’s latest 5,050 bitcoin make up 7.5% of this move.
Source: Glassnode
When adding up the bitcoin supply held by entities with a balance of 1,000-10,000, 10,000-100,000, or over 100,000 BTC, and subtracting exchange balances from the metric, a clear picture emerges. Since February, both the total whale balance started to decline as well as the number of whale entities (entities being a heuristic labeling of a cluster of addresses associated with one another on the blockchain); however the BTC per whale began to increase quite significantly.
In simple terms this means that a number of convicted whales continued to accumulate despite the upside and downside volatility since the month of February, and following the summer price drawdown of over 50%, aggregate BTC balance held by whales has resumed its uptrend.
TLDR: Both total BTC holdings by whale entities as well as the average BTC holding per whale are increasing. The big money is buying right now. The numbers don’t lie.
Source: Glassnode
Long-Term Holder Supply Continues To Break All-Time Highs
Source: Glassnode
The supply of bitcoin that is held by long-term holders continues to break all-time highs on a daily basis, with the total bitcoin held by the cohort being over 2 million more than it was on March 17, which was the low figure for 2021. This is without a doubt a bullish catalyst and shows how strong-handed HODLers have been accumulating through the volatility of 2021.
With the classification of long-term holders being 155 days (for reasons explained below), the current date for a UTXO to be considered a “long-term” holder is April 11, 2021, just three days before the local top of the bitcoin market. Despite this, there have never been more bitcoin held by long-term investors. Incredibly bullish.
Source: Glassnode
The time threshold for a bitcoin balance to be considered “long-term” is 155 days, and this is because of the statistical significance of the data when backtesting UTXO spend probabilities. For more information on the quantification of long-term versus short-term holders, read here.
Cycling On-Chain (COC) is a monthly column that uses on-chain and price-related data to better understand recent market movements and estimate where we are in bitcoin’s market cycle. This fourth edition briefly reflects on the recovering hash rate and then takes a more in-depth look at the relatively low on-chain transfer activity on Bitcoin. After introducing several contributing factors, we discuss to what extent low on-chain activity is reflective of market demand for bitcoin (the asset) or whether monitoring HODLing behavior is actually more useful in the context of bitcoin’s value proposition.
Two months ago, in COC #2 (July 1, 2021), we pointed out two important factors that needed a bit of time to settle, before potentially creating a favorable situation for Bitcoin from a fundamental perspective later this summer — which is now starting to unfold. One was the El Salvador government making bitcoin a legal tender in their country, which is now set to go into effect next week (September 7, 2021).
The other was the major crackdowns on bitcoin by the Chinese government, driving miners out of their country, potentially actually improving the geological distribution of bitcoin mining activity that was heavily concentrated in China up to that point. Some feared a hostile takeover (a 51% attack) of the network by the Chinese government, which has not happened (yet?).
Hash Rate Recovery
After reaching a low of 89 TH/s on July 9, 2021, the two-week moving average of Bitcoin’s hash rate has already recovered to 127 TH/s (+43%) since then, as Bitcoin’s difficulty needed to be increased three times in a row to account for the new hash rate. It is unknown to what extent this hash rate is miners that relocated from China or actual new miners, but it is a positive sign either way. Figure 1 displays the bitcoin price (black) and difficulty (green), as well as the 14-day moving average of its hash rate (red) and number of blocks mined (purple).
Figure 1: Bitcoin price (black), difficulty (green) and the 14-day simple moving average of its hash rate (red) and number of blocks mined (purple) (Source).
After the massive drop in Bitcoin’s hash rate during May and June, the hash ribbon indicator signaled severe miner capitulation. Now that the hash rate is recovering, figure 2 shows that the 30-day moving average of Bitcoin’s hash rate (green) has crossed the 60-day moving average (blue) to the upside. This bullish crossover on the hash ribbon indicator is interpreted as a buy signal, as this type of hash rate recovery after miner capitulation has historically preceded subsequent price increases.
Figure 2: Bitcoin price (black) and the hash ribbons indicator that consists of the 60-day (blue) and 30-day (green) moving averages of the Bitcoin hash rate (Source).
Block Space Galore
One implication of the rapidly rising hash rate during this recovery period is that many more blocks are being created than normally would be. After all, Bitcoin’s difficulty adjustment mechanism adjusts every 2,016 blocks (~two weeks), but if hash rate rises steeply throughout that period, Bitcoin block creation is like a runaway train. Logically, when more blocks are created, it means that there is more block space available to include transactions.
Besides this actual (temporary) increase in available block space, the adoption of several Bitcoin technologies that optimize block space usage (so effectively, scaling) means that every bit of block space is also starting to be used more efficiently. One example of this is transaction batching, where exchanges combine many transactions into one, limiting their claim on Bitcoin block space and thus also their own transaction fees.
Another example is Segwit adoption, which saw a large increase recently (figure 3). Segwit transactions segregate the signature data from bitcoin transactions, which effectively allows more transactions to be included within each block.
Figure 3: Bitcoin Segwit adoption (Source).
This recent surge is the result of Blockchain.com, a semi-custodial wallet and exchange platform that is under scrutiny within parts of the Bitcoin community, finally upgrading its software — four years after Segwit became available. Since Blockchain.com is estimated to account for ~33% of the bitcoin transactions, this action effectively takes away a large chunk of the market demand for Bitcoin block space, leaving more room for everyone else. (Fun fact: This also means that Blockchain.com has been overpaying for transaction fees for nearly four years, effectively subsidizing bitcoin miners all this time.)
Lightning Network Adoption
When it comes to optimizing the number of real-world transactions that can be fitted into a Bitcoin block, Layer 2 technologies like the Lightning Network are much more promising than any existing on-chain scaling solution. By using a smart-contract-like solution on Bitcoin, the Lightning Network allows users to open up a payment channel and send an infinite number of transactions (within the limitations of the available funds off course), limiting the used block space of all those transactions to just two on-chain transactions to open and later close the channel.
As can be seen in figure 4, Lightning Network adoption is absolutely soaring right now, as for example the number of public nodes, the number of public channels and the value within those channels are going parabolic. The Lightning Network is going to play an important role in El Salvador’s bitcoin adoption as well, which means that this Lightning Network adoption will likely continue to grow in the upcoming years.
Figure 4: Several Lightning Network adoption metrics (Source).
Finally, it should be pointed out that other Layer 2 technologies than Lightning exist. An example is Blockstream’s Liquid Network, but to some extent custodial solutions like those of large players like Square, PayPal and Visa that (plan to) allow their users to make BTC-denominated transactions. Skeptics would rightfully point out that using a custodial solution is not using bitcoin but a bitcoin IOU, but the existence of these services impacts the demand for Bitcoin block space nonetheless within the context that we’re discussing here.
Cooled Down Block Space Market
As a result of the hash rate recovery and lowered block space demand due to the recently increased adoption of Segwit and the Lightning Network, the supply of available block space has increased. At the same time, the bitcoin market saw a large price downturn that scared away a lot of speculators, also lowering the demand for block space as there are less entities looking to transact on-chain. During this period, the Bitcoin mempool (the queue of transactions that are waiting to be confirmed) has gotten a chance to clear — and has stayed nearly empty over the last couple of weeks (figure 5).
Figure 5: The Bitcoin mempool according to mempool.space (Source).
As with any market, a supply shock where an increase in the market-available supply is combined with a decrease in market demand, prices drop. This also applies to the Bitcoin block space market, where transaction fees have recently dropped to levels that are even below those of the 2018–2019 bear market (figure 6). This figure, therefore, also shows that it is not just demand for block space being lower after the price drop that caused the on-chain silence, as surely there are more entities looking to transact now than at the depth of that previous bear market.
Figure 6: The 14-day moving average of the median bitcoin transaction fee (Source).
This chain of events is quite unique in Bitcoin’s history, both fundamentally, in terms of actual scaling solutions being adopted, and in terms of the divergence between the trends in the bitcoin price, and Bitcoin’s underlying on-chain activity.
The low transaction fees are concerning to some, as Bitcoin’s long-term security model depends on transaction fees overtaking the block subsidy as the primary source of miner revenue. Although I agree with that statement, I do believe that we have a lot more time to find an appropriate equilibrium in Bitcoin’s block space market.
Mining Is Still (Very) Profitable
A short-term example for this is that the current (USD-denominated) miner revenue per hash is already close to the yearly highs again (figure 7). China’s hard crackdowns were painful for Chinese miners, but thanks to Bitcoin’s ingenious incentive structure, their pain was actually someone else’s gain. Thanks to the actions by the Chinese government in combination with the global chip shortages that are limiting opportunities of competing mining operations to come online, bitcoin mining is actually very profitable right now — despite only ~1.3% of their current revenue coming from transaction fees.
Figure 7: Bitcoin miner revenue (in USD) per hash (source)
When it comes to Bitcoin’s long-term security guarantees, we should zoom out, as the adoption of bitcoin (the asset), Bitcoin (the system) and related technologies such as the Lightning Network guarantee volatile times in bitcoin-related markets — both for the bitcoin market and the Bitcoin block space market.
Low Demand For Block Space Does Not Equal Low Demand For Bitcoin
When on-chain activity increases a lot within a short timeframe, it means that there is a clear increase in the demand to move bitcoin around on-chain. Since part of that demand could come from investors looking to buy or sell their position, such spikes could certainly be related to short-term price volatility, including increased demand for bitcoin.
However, the opposite is not necessarily true. As shown in figures 3 through 6, a decrease in on-chain transfer volume can also be the result of scaling technologies. To further support this claim, figure 8 shows that the total bitcoin transfer volume per entity on the network has been in a steady decline ever since Bitcoin’s infrastructure has seen significant maturation improvements (introduction of futures markets and many new exchanges, Segwit, Lightning, Liquid, etc.).
Figure 8: The 14-day moving average of the entity-adjusted total transfer volume on Bitcoin (Source).
The significance of this trend for the interpretation of transaction-related, on-chain metrics should not be understated. A popular example of this is the Network Value to Transactions (NVT) ratio that we’ll take a closer look at.
How Bitcoin Scaling Is Skewing The NVT Ratio
The Bitcoin NVT ratio was introduced by Willy Woo in February 2017 as a Bitcoin-alternative to the price-per-earnings (PE) ratio that is used in (value) stock investing. By introducing the NVT ratio, Woo not only introduced an interesting new metric but essentially started the on-chain analysis sector that has become very popular since then. The NVT ratio is calculated by dividing Bitcoin’s market cap by its daily transfer volume (USD) and is displayed in figure 9.
Figure 9: Bitcoin Network-Value-to-Transactions (NVT) Ratio (Source).
As was already discussed, since the introduction of this metric, a number of scaling solutions have been adopted that are lowering the amount of on-chain transfers per entity, and thus the “T” part of the NVT ratio. Figure 10 displays a 365-day moving average of the entity-adjusted transfer volume that we introduced in figure 8 (green), as well as the 365-day moving average of the NVT ratio (orange).
Figure 10: The bitcoin price (black) and 365-day moving averages of the NVT ratio (orange) and entity-adjusted transfer volume (green) (Source).
Figure 10 also shows that since early 2013, the NVT ratio has been in a general uptrend, with a temporary decrease during the 2016–2017 bull market, where the NVT ratio decreased as Bitcoin’s on-chain transaction volume outpaced its market cap growth. During the 2020–2021 bull market, such a temporary decline did not happen, as the adoption of scaling technologies limited the on-chain footprint of the recent influx of new investors.
Under the assumptions that the adoption of the Lightning Network and infrastructure that has a similar impact in limiting the on-chain footprint per transaction will continue and the bitcoin price also keeps increasing, the NVT ratio can be expected to keep trending up over time.
In theory, the NVT ratio can still be a relevant metric to assess more short-term changes in the ratio between bitcoin market valuation and transaction volume, but within that context it is only stable on timeframes where the adoption of scaling technologies is also stable. Either way, analysts should be careful to still use the NVT ratio within the context of more long-term bitcoin price valuation strategies.
Does ‘Using’ Bitcoin Mean Transacting Or HODLing?
On a more philosophical level, one can also wonder if a ratio of the total bitcoin market valuation and its transaction volume is actually the right metric to look at within the context of Bitcoin’s overarching value proposition. Historically, there are two schools of thought regarding Bitcoin’s ultimate use case.
The first one considers Bitcoin to primarily be a censorship-resistant medium of exchange, and thus for transacting bitcoin to indeed be its ultimate use case. Within that frame of mind, the idea behind the NVT ratio indeed is quite reflective of Bitcoin’s relative valuation compared to its ultimate use case.
The second school of thought considers Bitcoin to primarily be a store of value — a dilution-proof money that is designed to maintain its purchasing power over time. Within that frame of mind, HODLing bitcoin is its ultimate use case, whereas transacting it is more of an occasional (yet still essential) functionality. Within that mindset, it is not transaction volume but investor time preference and hardiness to hold onto the asset that are central in its value proposition.
Looking at Bitcoin from that perspective, current “usage” does not look bleak at all.
HODLing Is On The Rise Again
Figure 11 displays the long-term holder (LTH) and short-term holder (STH) supply as a percentage of the circulating bitcoin supply. In this figure, any existing bitcoin is quantified as LTH supply when it has not moved on the blockchain in 155 days or more (~five months).
Figure 11: LTH and STH supply as a percentage of the circulating bitcoin supply (Source).
The supply that is in the hands of long-term holders has been fairly constant at around 50–75% of the total supply (excluding bitcoin that is estimated to be lost). The percentage of STH supply has been on a downtrend since bitcoin first received a market price, but temporarily increases during euphoric market conditions that attract new investors.
During the 2020–2021 bull market we also witnessed a clear decrease in LTH supply and increase in STH supply, which has almost completely retraced to pre-bull-market levels. This re-accumulation of bitcoin by long-term holders is, in itself, not necessarily a short-term signal for a market turnaround but has historically shown to often coincide with price levels that end up forming a price floor.
Using coin-aging as a mechanism to estimate HODLing behavior is useful but leans on some assumptions that make it a somewhat broad estimation. Due to the transparent nature of the Bitcoin blockchain, it is (unfortunately, from a privacy perspective) possible to track the actual on-chain flows and identify certain groups of addresses that belong to the same entity. By doing so, it is possible to estimate how much percent of the total bitcoin supply is not on exchanges (figure 12, blue) and how much percent of the total bitcoin supply is in the hands of illiquid entities that have no history of selling (figure 12, green). (For advice on how to improve your own Bitcoin-related privacy and limit your own on-chain traceability, make sure to check out @BitcoinQ_A’s awesome “Bitcoin Privacy Guide.”)
Figure 12: The illiquid and non-exchange supply as a percentage of the total circulating bitcoin supply (Source).
Figure 12 clearly shows that during the market sell-off in May 2021, a good chunk of previously illiquid supply suddenly became liquid again (drop in green line) and that coins that were previously not on exchanges were sent there (drop in blue line). However, both trends have already retraced close to their pre-sell-off levels. This shows that the bitcoin that was dumped on the market during market uncertainty have likely already been re-accumulated into the hands of investors that are less likely to be shaken out of their positions.
Overall market demand for bitcoin is likely not as high as it was during the euphoric times that we saw at the start of the year. However, the bitcoin market appears to be in a state where if something sparks new bitcoin demand, the relatively low amount of market-available supply means that it could spark a rapid price increase (supply shock).
On the flipside, if something does trigger a significant portion of these long-term holders with a relatively illiquid market behavior history to sell their coins, the bitcoin price could rapidly move down as well. Monitoring these metrics is, therefore, necessary to pick up possible trend changes that could signal a market turnaround.
Signs Of A Cooled Down Bitcoin Market
The market downturn over the last few months has given the bitcoin price a chance to significantly cool down on a relative basis. One metric that gives a rather direct estimate of this is the Bitcoin Price Temperature (BPT), which compares the current bitcoin price to its four-year moving average (figure 13, blue line). Price temperatures of two (green), six (orange) and eight (red) have historically signaled possible market turnarounds. At the start of the year, the price bounced off the BPT6 band multiple times before retracing. The current BPT is just above two, despite being at similar price levels to the much higher temperatures that we saw at the start of the year, illustrating how the bitcoin price has cooled off on a relative basis compared to its own four-year market cycle.
Figure 13: The Bitcoin Price Temperature (BPT) Bands.
A similar conclusion can be drawn when looking at the funding rates in perpetual bitcoin futures. These funding rates can be seen as a general proxy for the extent in which futures markets are long (funding >0) or short (funding <0). Figure 14 shows that, during the recent market downturn, funding rates went from extremely positive to extremely negative, illustrating a clear shift in market sentiment. The recent local bottom funding rates have turned slightly positive again, but they are very modest in comparison to what we saw around the start of the year, suggesting that the speculative markets are not as overextended as they were back then.
Figure 14: Funding and open interest in perpetual bitcoin figures (Source).
Whales Are Liking The Discount
This recent re-accumulation period appears to be particularly attractive for relatively large market players (whales). Figure 15 visualizes the bitcoin price, overlayed by blue bubbles that represent large (1,00010,000 BTC) bitcoin addresses that saw capital inflows at those price levels.
Figure 15: Large bitcoin address (1,000–10,000 BTC) inflows (Source).
Two things stand out in figure 15: (1) the 2020–2021 cycle has more large wallet (1,000–10,000 BTC) inflows than the peak of the 2017 cycle, and (2) inflows during the recent price bounce over the last month have been fairly high in comparison to the rest of this cycle.
Current Market Sentiment
I hold a monthly bitcoin market sentiment poll on Twitter. Although the results of such polls always need to be interpreted with a grain of salt due to possible selection bias, this month’s poll suggests that (a portion of) the market still has high expectations for the bitcoin price development over the upcoming year (figure 16).
Figure 16: Results of a monthly market sentiment poll on Twitter (Source).
Halving Cycle Roadmap
As always, I like to close off this edition of Cycling On-Chain by looking at the Bitcoin Halving Cycle Roadmap for 2020–2024 (figure 17). This chart visualizes the current bitcoin price, overlayed by the BPT that we discussed above and with price extrapolations based on two time-based models (dotted black lines), the stock-to-flow (S2F) and stock-to-flow cross asset (S2FX) model (striped black lines) and cycle indexes for cycles 1 and 2 (white lines) and the geometric and arithmetic averages of those (gray lines). All these models have their own statistical limitations, but together they give us a rough estimate of what may be ahead for the bitcoin price if history does turn out to rhyme once again.
Disclaimer: This column was written for educational, informational and entertainment purposes only and should not be taken as investment advice.
This is a guest post by Dilution-proof. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
HODL Waves have been around for a few years but are still relatively new. They were first introduced in an article by Dhruv Bansal at Unchained Capital, a bitcoin-native financial services company. The interesting part about having a transparent blockchain is you can see all sorts of insights within the data. In particular, price is just one granularity of bitcoin, i.e., what the free market will pay for the asset though buyers and sellers. By mixing data science with a transparent blockchain, you can find out much more from the market and look under the hood. This is not possible with the traditional markets that claim to be free and open. In particular, the Federal Reserve Board has never been truly audited in a transparent way, which leaves much to be desired.
Bitcoin was made transparent with an unspent transaction output (UTXO) accounting structure and is audited every ten minutes by every single contributor in the network (nodes). This is what makes it possible to see on-chain data and insights. This is what makes bitcoin such a powerful base layer.
HODL waves are built off of UTXO data. In very simple terms, there is a trail of breadcrumbs or “dust” that is left behind with each transaction. These dust UTXO particles have a date and timestamp on them that allows us to peer into the history of Bitcoin’s blockchain. Unchained Capital went more into detail on UTXOs here in their blog post. Today I will just focus on three different groups that show up in HODL waves.
Above, you can see that there are different colors. Each color shows the age of the UTXO groups. 10 years is the oldest, and 24 hours is the smallest. You can almost see the waves forming if you look at the peak of each cycle. Follow those up and to the right, and there you have the original HODL Wave.
Lost Coins
The first HODL wave group we can look at is the “lost coins”. These are coins that have been visibly inactive for 5-10 years. There have been a number of different analyses done that have come to an answer on lost coins, usually estimating that between 3-4 3 million to 4 million mined coins are lost. For context, Satoshi had an estimate of about 1 million bitcoin, all of which have never been moved, and are considered “lost.”
Both Unchained Capital and Chainalysis have done more precise measurements on the lost coins and have come out with at most 3.8 million coins lost. These estimates were done in 2018 and 2017 respectively, and have held up very well. Over time, we can assume there will be fewer and fewer coins being lost. As wallets and security get better and the technology matures, bitcoin will become considerably harder to lose.
Looking at the lost coins group above we can see that with about 18.5 million coins mined, 22% of them are between the age of 5 and 10 years. There are few changes in the group, but for the most part, they are untouched. That means currently, out of all coins mined about are 22% lost, possibly forever. This is very important to note, because not only is Bitcoin’s cap 21 million, but this number is also immutable. If someone loses their coins, they are gone forever. There are no bailouts or do-overs. This is also true with gold. If you were to lose all of your gold in a boating accident (oh no!) that is gone forever. This makes bitcoin even more scarce, and in turn more valuable.
Luckily, the ease of use for bitcoin is growing each day, and we are seeing more safe and secure ways to hold your keys. Between multi-sig, new wallets, estate solutions, and encrypted backups, bitcoin has become harder to lose. Not to mention the importance and dollar value is exponentially higher than it was in the early days, so of course most people are taking greater efforts to preserve their bitcoin long term, than in the early days. It’s not just magic internet money anymore.
Long-term Holders
The second group is the “long-term holders.” It is categorized by grouping UTXOs between six months and three years. This usually manifests between bull markets or quick rises in price on the lower-end time frame. This wave tends to show up after the bull market is over. These UTXOs seem to get drained as the bull market intensifies.
Although not perfect, you could use this as a tool to see where we are in the bull run. In relation to 2015-2017, there was one clear rise in long-term holders that peaked at the start of the bull run. Once the price started rising, long-term holders started selling. The low point was at the exact peak of the 2017 bubble.
In the 2012-2014 bull run, there was a short-term accumulation phase shown in the spike at the end of 2013. These waves are not predictors, but seem to be laggards and just a history book of what happened throughout the phase.
Short-term Holders
The third group is the “short-term holders.” They are grouped between the ages of one day and one month. These look to peak at huge price surges in bitcoins history. If you look carefully you can see three large price surges for each bull run. Currently, we are only on the first price surge. It looks like this could be retail coming in, and short-term speculators.
In 2012 we saw the first big price surge, which turned into consolidation, then a run-up. This repeated in 2016 but was a continual price surge that was more smooth landing in a single blow-off top rather than a double bubble. This short-term HODL wave will be interesting to watch in the coming months.
Visualizing Bull And Bear Markets
Putting them side by side you can see a clear distinction between when we were in a bull market and when we were in a bear market. The long-term holders give way to the short-term as price rises, eventually ending the bull market when there is no one left to buy. Since an increase in price is simply more buyers than sellers, this makes sense. I won’t make any price predictions here, but it seems that UTXOs and HODL waves are evolving or maturing. As wallet/security technology improves, and Layer 2 solutions mature, these UTXOs will start to look different. Bitcoin is evolving at a rapid pace, so this could be the last year we see these types of signatures in the blockchain.
Realized HODL Ratio
Finally, looking at the difference between long-term and short-term holders, you can come up with a ratio. Glassnode has made this visual and it seems to track the boom and bust cycles of the past pretty well.
“The Realized HODL Ratio is a market indicator that uses a ratio of the Realized Cap HODL Waves. In particular, the RHODL Ratio takes the ratio between the 1 week and the 1-2 years RCap HODL bands. In addition, it accounts for increased supply by weighting the ratio by the total market age. A high ratio is an indication of an overheated market and can be used to time cycle tops. This metric was created by Philip Swift.” – Glassnode
By this metric, the bull market is far from over and seems to be acting more similarly to the 2014 bull market. Although this is not a predictor of future success, we can infer something from this data.
On-chain data is still relatively new but it has given us many insights and will continue to show new and exciting things inside the Bitcoin blockchain. This is all possible because of the UTXO structure in the Bitcoin network and the transparent nature of its transactions. Ultimately Bitcoin will continue to evolve and mature, leaving different metrics behind as layers are built on top and transacting migrates from one layer to another. There is no way to tell what the future holds, but being able to watch the journey through data is more exciting than ever.
This is a guest post by Mitch Klee. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
But the change-adjusted volume transfer of the network in dollar terms shows just how effectively bitcoin is scaling.
The below is from a recent edition of the Deep Dive, Bitcoin Magazine‘s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
Bitcoin on-chain volume (change adjusted) has touched a five-year low in bitcoin terms, currently at 329,226 BTC per day over the last seven days. Low on-chain volume has been a short term bearish indicator, as it demonstrates low demand to use the network.
There are a few reasons for this development, one of which is the explosive growth of the Lighting Network, coupled with the secular trend over the last decade of an increasing BTC/USD exchange rate. The same chart in U.S. dollar terms looks quite different.
Looking at the change-adjusted volume transfer of the network in dollar terms shows just how effectively bitcoin is scaling as a monetary network. Currently, the total change-adjusted transfer volume (seven-day moving average) on the Bitcoin network is $15.2 billion, off from a high of over $50 billion this April, in part because of the rebounding hash rate and faster-than-average block times.
Similarly, fees as a percentage of bitcoin mining revenue has fallen sharply, and is currently at 1.46%. With the block subsidy trending to zero over time as supply issuance is programmatically reduced in quadrennial fashion over the next 120 years, fees will eventually make up 100% of miner revenue. However, currently, with miner profit margins extremely large, this is not a worry and competition is extremely strong as miners are pulling in near-record revenue across 2021 (in dollar terms).
Cycling On-Chain is a monthly column that uses on-chain and price-related data to better understand recent market movements and estimate where we are in bitcoin’s larger market cycle. After providing a broader look back and forwardin the first edition, and discussing how Bitcoin has entered the geopolitical stagein the second edition, we’ll now take a look at the current, ongoing supply squeeze that recently led to a short squeeze in the bitcoin market that drove prices up steeply.
The last three months have been pretty rough for bitcoin from a price perspective. You could make a good case that, fundamentally, things have never looked better. But a period of over-leveraged speculation and (mostly irrational) fear in the markets have left their mark — particularly on the newer market entrants. Those times might be scary but are actually where the wheat is separated from the chaff or, in bitcoin terms, the weak hands are shaken out and the bitcoin ends up in strong hands. These HODLers of last resort don’t budge when price drops a double-digit percentage, but rather see it as an opportunity.
When life gives you melons, make lemonade –Elbert Hubbard, 1915
Lemonade. That is what this third Cycling On-Chain is all about. Times have been tough, but there are currently all kinds of squeezing going on that ensure that much of the available bitcoin supply will end up in strong hands in preparation for the next micro-, meso- or macro-cycle.
Squeezing Supply
A supply shock, sometimes also called a supply squeeze, is an event where the supply of a product or commodity that is actively being traded on the market changes and causes a price move. In Bitcoin, the halving events that occur every 210,000 blocks (roughly every four years) are the most famous supply shocks. During a halving the new supply issuance via the block rewards that miners receive when creating a new block is halved, triggering a large price increase in the subsequent year that is known as Bitcoin’s four-year cycle.
Bitcoin’s halvings are programmed into the software, but a supply shock can also occur when previously illiquid supply becomes liquid or vice versa. It is therefore interesting to assess to what extent supply is in the hands of entities that are or are not selling.
Using the data in the Bitcoin blockchain, it is possible to look at the ages of all the unspent transaction outputs (UTXOs) that have ever existed. Glassnode analyzed these “coin ages” and found that roughly 155 days is a historic cut-off point when the probability of a UTXO being spent becomes very low. Based on this, they created metrics for the short-term holder (STH) and long-term holder (LTH) supply.
As is evident, the STH and LTH supply fluctuate over time. An easier way to view the historical data is to divide the LTH supply by the circulating supply, which then represents the portion of the circulating supply that is estimated to be in the hands of LTH.
This Long-Term Holder Supply Ratio is displayed in the green line in Figure 2. The green color overlays represent periods in which the LTH Supply Ratio rises, which usually occurs during market downturns where price (black line) decreases or bottoms. The red color overlay shows the opposite: LTH Supply Ratio usually decreases when price rises, illustrating that long-term holders tend to sell against market strength and accumulate during market weakness. Long-term bitcoin holders are therefore usually seen as “smart money.” Being able to follow their economic behavior via the blockchain may hold valuable information about the state of the bitcoin market.
Figure 2: Bitcoin Long-Term Holder (LTH) Supply Ratio (green) and price (black) over time (source)
The LTH Supply Ratio also allows us to compare how current values for the portion of the total supply that is held by long-term holders compares to historical values. Figure 3 illustrates that the lowest LTH Supply Ratio reached during this latest $65,000 market top was not as low as those reached during previous market cycle tops. Of course it does not have to reach these levels, but shows that if $65,000 does end up being a larger macro market cycle top, it was characterized by lower LTH sell pressure than previous market cycle tops.
Figure 3: Bitcoin Long-Term Holder (LTH) Supply Ratio (green) and price (black) over time (source)
Since the Bitcoin blockchain is a public ledger, it is also possible to forensically assess to what extent unspent transactions come from or move to certain types of entities, such as exchange wallets. While this is unfortunate from a privacy perspective (make sure to check out @BitcoinQ_A’s privacy guide to learn how to optimally deal with this yourself), it allows Glassnode to improve upon the STH and LTH supply metric.
Using a proprietary algorithm to apply clustering based on forensic analysis of Bitcoin’s UTXO set, they created metrics for the illiquid, liquid and highly liquid supply. For the remainder of this column, the latter two are combined as “liquid supply” to keep the analysis simple.
Figure 4: The bitcoin price (black), circulating supply (blue), illiquid supply (green) and sum of the liquid and highly liquid supply (red) (source)
If you compare the original STH and LTH supply (Figure 1) with this illiquid and liquid supply chart (Figure 4), you’ll see that the changes in the latter are much more nuanced. This is likely the result of the applied clustering, as young UTXOs can still be held by illiquid entities with little to no history of selling.
Therefore, it is more helpful to look at the monthly net changes within these metrics, which is what Glassnode offers in their “Illiquid Supply Change” and “Liquid Supply Change” metrics. Figure 5 displays the illiquid supply change over time. The large amount of previously illiquid supply that became liquid around early May is clearly visible here, as well as the illiquid supply increases that have returned since the May 19 capitulation event.
Figure 5: The monthly (30-day) net change of bitcoin supply held by illiquid entities (source)
Because the bitcoin supply is increasing by every block and these increases are changing over time due to the halving-based supply issuance schedule, these values cannot be accurately compared to historical values. After all, a 200,000 bitcoin illiquid supply decrease was much more impactful when there were only 2 million bitcoin circulating (10% of the total) than it would be when there are 20 million coins circulating (1%).
This problem can be solved by dividing the illiquid supply by the circulating supply, creating a metric called the circulating supply-adjusted illiquid supply changes,” which is displayed in Figure 6. During the early years, the illiquid supply increased massively, a lot of which was likely related to coins being forgotten about or lost, as well as some of the early HODLers stacking sats before that became a thing. The relative illiquid supply decrease seen during the recent market downturn was the largest since the 2017 market cycle top, which was preceded by two more similar episodes during that bull run. The current illiquid supply increase is also the largest since mid-2017, before that cycle reached its final blow-off top.
Figure 6: The bitcoin price (black) and 30-day illiquid supply changes (green), adjusted for bitcoin’s circulating supply (source)
Recently, Will Clemente and Willy Woo introduced the “illiquid supply ratio,” a metric that is calculated by dividing Glassnode’s illiquid supply by liquid and highly liquid supplies. An alternative version that is best labeled as “illiquid supply percentage” can be calculated by dividing the illiquid supply by bitcoin’s circulating supply. The latter metric therefore represents the portion of the circulating supply that is currently labelled as illiquid by Glassnode. Likewise, the liquid supply percentage can be calculated by dividing the liquid supply by the circulating supply, representing the inverse of the illiquid supply. Both metrics are displayed in Figure 7.
Figure 7: The bitcoin price (black), circulating supply (blue), illiquid (green) and liquid supply (red) percentages (source)
Next we’ll zoom in on the illiquid supply ratio percentage, which is visualized in figure 8. After Bitcoin’s genesis almost all of the bitcoin supply was considered illiquid, as network participants were CPU mining on laptops and desktops and mostly just toying around with the new software. When bitcoin started getting a market price and saw some early adoption as a neo-money, a larger portion of the supply started to become liquid, as these coins could now actually be spent. During the earlier years miners also may have been selling their newly mined bitcoin to cover overhead costs — especially after the introduction of GPU mining and later ASIC mining.
Figure 8 also shows that after each Bitcoin halving (vertical black striped lines), the rate of contraction in the illiquid supply slows — even turning into a positive growth rate immediately after the last two halvings. More simply put: as the bitcoin supply issuance declines and it becomes scarcer, its holders appear to become less and less inclined to part with their bitcoin. Will the low 70% illiquid supply ratio percentage that we saw during the previous bear market be the lowest ones that will ever be reached in Bitcoin’s existence?
Figure 8: The bitcoin price (black) and illiquid supply ratio (green) over time (source)
Figure 9 shows this same illiquid supply ratio percentage, but zooms in on the last year. Since the start of July, the illiquid supply ratio percentage increased drastically, as coins were being scooped off the market at a discount by holders with a history of being strong hands. Current illiquid supply ratio percentage values haven’t been seen since the bitcoin price was hovering just below all-time highs at around $55,000. This short-term trend suggests that the recent dump is now over and a new supply squeeze may be underway.
Figure 9: The bitcoin price (black) and illiquid supply ratio (green) over time (source)
Squeezing Shorts
The supply wasn’t the only thing being squeezed recently. Since the May 19 capitulation event, the bitcoin price has been in a downward consolidation and market sentiment was predominantly bearish. Bitcoin Twitter was actually so salty that you could mine salt by scrolling through the responses under the tweet of any on-chain analyst. This was also noticeable in the funding rates of bitcoin perpetual futures contracts that were mostly negative since then, which means that shorting bitcoin was so popular that you would basically need to pay a premium to go short. The increasing open interest since the May 19 capitulation while funding stayed negative further substantiates this.
These circumstances lined up to be ideal for a short squeeze to occur. A short squeeze happens when a relatively large portion of the futures market is going short with inappropriate risk management and a sudden price increase causes the collateral under these positions to become insufficient, triggering exchanges to liquidate these positions. This is particularly troublesome if a large portion of the open positions are naked shorts, which means that they use a different form of collateral to borrow the asset they’re shorting against. In the case of bitcoin, when fiat currencies or stablecoins are used as collateral for a short position that is then liquidated, the fiat or stablecoin collateral is used to buy the bitcoin that is needed to pay off the debt, which actually drives its price up further.
This is exactly what happened over the last two weeks. Figure 10 illustrates that since the May 19 capitulation event, price declined (black) while open interest (blue) increased, as funding remained negative (light green). When price resiliently bounced off the recent $30,000 lows, open interest actually increased further at increasingly negative funding, showing that the bears were basically doubling down. However, the bitcoin price just kept surging, liquidating a large number of these naked shorts, creating an over $10,000 price move over the course of about a week.
Figure 10: The bitcoin price (black), perpetual futures funding (light green), perpetual futures open interest (blue) and short liquidations (red) (source)
Squeezing Out The Weak Hands
During this recent bounce off the lows, the Average Spent Output Lifespan (ASOL) per entity on the network remained low, which means that the coins that moved on the bitcoin blockchain throughout this period were mostly relatively young. The Spent Output Profit Ratio (SOPR) per entity on the network did increase though, illustrating that the coins that were moved did so at a profit. This combination of trends is visualized in figure 11 and suggests that younger market entrants that were sitting on underwater positions might have jumped on this opportunity to sell some of their positions at a profit. This is once again an example of coins moving from weak-handed entities with low conviction to strong-handed new owners.
Figure 11: Entity-adjusted Spent Output Profit Ratio (SOPR) and Average Spent Output Lifespan (ASOL) over time (source)
When using terms like “smart money” and “weak hands,” we tend to consider institutional players to be the former and retail investors to be the latter, but this is not necessarily the case. Figure 12 displays the bitcoin supply that is held by entities with balances up to 1,000 bitcoin and shows that entities with balances of up to 1 bitcoin have been rigorously stacking sats throughout this entire bull run and never had a significant selloff. Entities with a balance between 1 and 100 bitcoin were selling portions of their stack since bitcoin broke its prior $20,000 all-time high until the May 19 capitulation event. But these smaller entities have been accumulating again since then. Entities with a balance of 100 to 1,000 bitcoin were mostly stacking when the bitcoin price neared its recent all-time high and have mostly sat on their positions ever since.
Figure 12: Bitcoin supply held by each entity tier, up to 1,000 bitcoin (source)
By definition, whenever there are buyers there are also sellers. On average, entities with balances up to 100 bitcoin were accumulating throughout the recent market downturn. They were therefore slowly depleting the highly liquid supply that was actively being traded on the markets, as we already saw in the illiquid supply changes. Since this last bounce off the $30,000 lows, almost 112,000 bitcoin have been withdrawn from exchanges (Figure 13), adding fuel to the fire that we may be in the midst of another supply squeeze.
Figure 13: Bitcoin balances on exchanges (source)
A Not-So-Sour Sentiment
The recent market turnaround seems to have had a noticeable impact on the market sentiment as well. In an informal monthly market sentiment poll, respondents were very clearly bullish on all timeframes, as can be seen in figure 14.
Figure 14: Bitcoin market sentiment poll, ending on July 31, 2021 (source)
These poll results appear to align with the Fear & Greed Index that scrapes multiple social media platforms and algorithmically assesses the sentiment in bitcoin-related posts. Throughout the recent downwards price consolidation it consistently signaled very high levels of fear and anxiety, but has now actually flipped to greed for the first time in a while (Figure 15).
Figure 15: The Crypto Fear & Greed Index (source)
During the last few months, an often-heard criticism of on-chain analysis was that it does not predict the future. While this is true, increased insight into what is happening under the hood of the system certainly helps us understand how the bitcoin market functions. Relatively unexpected events such as Elon Musk or Tesla suddenly speaking negatively on Bitcoin or China suddenly cracking down hard against it can impact the market at any point. However, these types of events occur during each four-year halving cycle, so zooming out and looking at the larger picture may be helpful in navigating the larger trends.
Several models have been developed to do so and use statistical approaches to predict the global direction of where the bitcoin price is headed, such as the S2F and S2FX models. Other indexes extrapolate price increases throughout previous halving cycles over the current period. Each of these approaches have their own methodological limitations, but together they provide a nice overview of where price may be heading if history either repeats or rhymes (Figure 16). On average, the bitcoin price was following those anticipated courses nicely throughout the current halving cycle, but has dipped below most of these models during the recent market downturn. Will this cycle end up being the one that breaks down several of these models to the downside or will the apparent ongoing supply squeeze drive up this cycle’s price in line with its predecessors?
Figure 16: The Bitcoin Halving Cycle Roadmap (2020-2024)
Previous editions of Cycling On-Chain:
Disclaimer: This column was written for educational, informational and entertainment purposes only and should not be taken as investment advice.
This is a guest post by Dilution-proof. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
On-chain analysis shows huge Bitcoin outflows from crypto exchange Binance. BTC might keep the rally up and break $40k.
Huge Bitcoin Outflows On Binance
As pointed out by a CryptoQuant post, the crypto exchange has observed huge outflows of BTC on Monday.
The Binance Outflows indicator shows the amount of Bitcoin transferred from the Binance exchange wallets to personal or other exchange wallets.
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On the other hand, the inflows show how many BTC were sent into Binance wallets from other types of wallets.
The indicator of most interest here is the the Binance Bitcoin netflow, which is just the inflow minus the outflow.
Binance BTC netflow = Inflow – Outflow
Here is a chart for the Binance Bitcoin netflow that shows the trend in the value of the indicator over the past couple of weeks:
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BTC netflow on Binance shows deep negative for 26 July | Source: CryptoQuant
As the above graph shows, the crypto exchange is showing two huge outflows right now. One of them was more than 10k BTC, while the other one was around a whopping 31k BTC!
There also seems to be an inflow of about 10k, similar to the value of one of the outflows. A look at http://chain.info shows that, yes, this inflow and outflow is actually the same transaction between Binance internal wallets.
Related Reading | Investing In Bitcoin Mining Businesses Is Also A Sign Of Institutional Acceptance
The 31k BTC outflow, however, isn’t part of any internal transaction. Usually negative netflows mean there isn’t much selling pressure in the market. Hugely negative netflows, like this one, can make the price go up.
BTC Price
At the time of writing, Bitcoin’s price is floating around $39k, up 26% in the last 7 days. The increase compared to last month is about 22%.
Here is a chart showing the trend in the price of the crypto:
BTC's price suddenly surges up | Source: BTCUSD on TradingView
Bitcoin has finally broken through the $35k resistance level. Earlier, the crypto was stuck in the $30k to $35k range-bound market for quite some while as its market volatility reached yearly lows.
Now, however, the rumors regarding Amazon opening up to BTC and crypto payments has helped drive up the coin’s price.
Related Reading | Bitcoin On Track To $100K, Why The Bull Cycle Could Be Just In Its Early Days
It’s looking likely that the price of BTC will continue to rise to $40k. Though, it remains to be seen if the digital currency can break past that level.
The Bitcoin rise could very well stop after hitting the $40k resistance level, and the market could become range-bound below this level. Or perhaps it will carry the bullish momentum and break past the range to continue further beyond.
The “total amount of coins transferred on chain,” metric is equivalent to 70% of the United States Gross Domestic Product.
Bitcoin, the world’s most valuable cryptocurrency, recently saw its total transfer volume exceed $15.8 trillion for the first time in less than seven months of this year.
This means bitcoin’s total transfer volume currently represents 70% of the United States Gross Domestic Product of approximately $22 trillion.
Furthermore, bitcoin transfer volume has already surpassed the world’s largest economy’s entire 2010 and 2011 GDP of $15 trillion and $15.5 trillion, respectively.
Indeed, bitcoin transfer volume will soon cross the United States Gross Domestic Product for 2012 and 2013, which was standing in the range of $16 trillion.
The massive growth in bitcoin price is among the major reasons for a durable growth in bitcoin transfer volume. Bitcoin transfer volume hit $2.99 trillion in April when bitcoin’s price peaked around $64,000.
Interestingly, the bitcoin price fell more than 50% from its April all-time high, but its transfer volume didn’t plunge with correlated intensity. Bitcoin is still settling $236 million worth of transactions per day, equivalent to the December level when bitcoin was trading in the $20,000 range.
This means that investors’ interest in bitcoin remains intact despite the gigantic price volatility, and reinforces the fact that the most valuable cryptocurrency is a viable alternative to the current economic system.
Why Is Bitcoin Transfer Volume Surpassing U.S. GDP?
Bitcoin is not only turning out to be an alternate investment vehicle, it is also becoming an alternate to the U.S. dollar and the entire economic system.
In 2021, the uptick in institutional interest along with significant growth in retail investments helped to bring bitcoin transfer volume to $15.8 trillion in less than seven months of this year.
Moreover, U.S. corporations’ strategy of holding bitcoin on their balance sheet to reverse the impact of inflationary fiat dollars and rising consumer costs added to bitcoin transfer volume.
Further bolstering bitcoin fundamentals is the fact the cryptocurrency is seeing wider acceptance across the financial system, a phenomenon that will fuel its transfer volume in the days ahead.
Bitcoin Is Just Beginning To Penetrate The Financial And Economic System
If the velocity of transfer value continues at its current rate, over the next five months Bitcoin will surpass the entire GDP of the world’s largest economy. At the same time there are currently eight Bitcoin Exchange Traded Funds filings pending before the Securities and Exchange Commission, seven of them filed this year. Several Bitcoin ETFs — such as Purpose, Evolve and CI Galaxy — are already trading on Canada’s Toronto Stock Exchange.
“The complications of not approving [a Bitcoin ETF application] become stronger, because people are looking for other ways to do the same kinds of things that they would do with an exchange-traded product,” asserted SEC Commissioner Hester Peirce.
“Bitcoin now is so decentralized. The number of nodes that are involved in Bitcoin is large, and the number of people who have an interest in keeping that work decentralized is very large,” she said.
Furthermore, U.S. representatives like Mayor Scott Conger believe that Bitcoin is the ultimate hedge against the inflation of fiat. The Federal Reserve itself has stopped recording the increase in the M1 and M2 money supply after recording an increase of 450% in one year.
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This is a guest post by Portfolio Insider. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
