Bitcoin and Ethereum started out of extreme oversold trends and rebounded after the positive news after the MOFC meeting in July. It is now worth watching whether this rally is a rebound in a bear market or the beginning of a new sustained bull market.
Bitcoin and digital asset markets reacted strongly to the Fed’s policy of raising interest rates by 75 points this week, with BTC closing up 5.7% and ETH up 7.6% this week. The market also responded positively to the FOMC. Fed Chairman Powell said that the current federal funds rate of 2.25% to 2.5% is appropriate, and the Fed’s main focus is the slowdown in economic development.
In many ways, the recent positive price action in Bitcoin and Ethereum has brought long-awaited good news for bulls after a nearly nine-month-long downtrend. The bear market of 2022 has a lot of adverse effects on the digital asset space. Whether the current rally is just a relief in a bear market or a harbinger of a bull market start has attracted a lot of attention after the market’s continued risk aversion .
In this article, we will discuss this concept using on-chain activity with digital assets as a benchmark, and we need to clarify whether the market is signaling a new entry, or this rally is just a flash in the pan.
Bitcoin Price Week 31
Bitcoin’s sideways move
Generally speaking, the influx of new demand into the blockchain network is supported and signaled by the continuously rising demand on the chain. So we can analyze recent historical data using on-chain activity and supply dynamics.
Bullish trends tend to come from an increase in on-chain behavior and users. Usually this increase in on-chain behavior comes from the resale of on-chain transactions—for example, old participants resell their tokens for profit, and these transferred tokens are bought by new participants. Such frequent on-chain transactions will prompt a bullish trend in the entire token market.
The bearish trend comes from a reduction in on-chain behavior, which often occurs when token prices take a sharp dive. The crowd holding tokens will be dominated by long-term and committed holders – as speculators sell their tokens. Bear markets tend to take longer to pass.
Many Bitcoin addresses remain firmly held within the descending channel (red). Also we need to note that the October-November ATH peak (blue) is much lower than the April 2021 peak ATH, indicating that there has been a lot of user churn and the demand for on-chain transactions is still there downturn.
Apart from some localized and temporary spikes in on-chain demand during this crash, the current influx of demand in the network is still minimal.
Tip: Active addresses (14-day simple moving average) above 95,000 would indicate increased on-chain activity, underlying market strength and a recovery in demand.
Bitcoin: Active Trading Account Volume (7-Day Moving Average)
The demand for on-chain transactions and block space presents similar results. The market structure last year was very similar to the 2018-19 period (shown in blue).
Following the slump in token prices and on-chain demand in May 2021 (red), transaction demand traded sideways but only marginally lower, indicating that a stable base of committed traders and participants remains.
Tip: A breakout of 3.0 in the transaction rate (14-day simple moving average) would indicate increased on-chain activity, underlying market strength and a recovery in demand.
Bitcoin: Transactions per second (7-day moving average)
On-chain transaction fees are in bear market territory (blue) due to sluggish transaction demand, with a total of only 13.4 BTC in total transaction fees paid per day. Similar to active addresses and transaction demand, the plunge in transaction fees (in red) is visible in May 2021, as fees begin to form a bear market baseline as network congestion conditions drastically decrease.
Bull markets typically maintain higher rates and are often the first sign of a recovery in market demand. While we have yet to see a significant rise in fees, we still need to keep an eye on this indicator as it could be a sign of a recovery in the market.
Tip: Transaction fees (14-day simple moving average) above 35 BTC/day will indicate increased on-chain activity and a recovery in demand in the market.
Bitcoin: Transaction Fees (7-Day Moving Average)
We can confirm our observations by looking at the average data (in bytes) of Bitcoin blocks.
Network congestion and full blocks (red) will make Bitcoin blocks larger as Miners fill blocks as closely as possible for maximum fee income.
Low network congestion and partially empty blocks (blue) will result in smaller blocks because Miner does not have enough transactions to fill all capacity.
Considering that in order to increase the maximum data capacity of Bitcoin blocks, Bitcoin has undergone a technical upgrade of Segregated Witness. Before June 2021, the adoption rate of SegWit-based blocks was less than 55%, which means that the maximum block size at that time was smaller than it is now. With the recent adoption rate of SegWit now over 72%, the current level of congestion is even lower than it was in May 2021, although the effective block space capacity is greater.
This shows that, overall, the Bitcoin network is still dominated by HODLers. From an on-chain activity perspective, there has not been any notable new demand emerging so far.
Bitcoin: Average block size (14-day moving average)
On a more positive note, however, Bitcoin Lightning Network (LN) public channel capacity continues to hit record highs. Despite still being in a bear market, LN’s total public capacity has now reached 4,405 BTC, a 19% increase over the past two months. This metric measures the liquidity that users can use to send value through public nodes, and at the same time is a good measure of scaling network effects. But the metric does not account for private channels between two counterparties that have not yet opened their nodes for public routing.
Bitcoin: Lightning Network Capacity
Ethereum’s brief burst
Over the past 12 months, the Ethereum network has experienced many of the same trends as Bitcoin, such as consistently lower network usage and worsening congestion. Despite Ethereum’s strong price action over the past few weeks, Ethereum network congestion is actually at its lowest level in some time, manifested in multi-year lows in gas fees required to pay.
Ethereum transaction demand has been gradually declining since the sell-off in May 2021, with only brief bursts of activity in recent weeks. But if this breakout trend can continue higher, it could signal a continuation of Ethereum’s uptrend.
Tip: The number of transactions (14-day simple moving average) above 1.25 million would indicate increased on-chain activity, underlying market strength and a recovery in demand.
Ethereum: Number of Transactions
Compared to Bitcoin, Ethereum tends to have a larger transaction pool in the memory pool (mempool), and its block space capacity market fills to over 99%. Therefore, we can judge the congestion of the network by the gas fee of Ethereum. Likewise, the gas fee can be used to measure the urgency of the user to seek a transaction, as a more urgent transaction will push the user to pay a higher gas fee.
The figure below shows:
- Green: Average Gas Limit, which is the maximum Gas that Miner can hold in a block (currently 15M, but can be expanded to 30M under the EIP1559 protocol).
- Red: Average block gas consumption is the actual usage of gas fees relative to the gas fees online.
- Blue: The median gas fee (measured in Gwei) increases during periods of high demand and decreases during periods of low demand.
Ethereum: Average Gas Fee per Block
The 7-day median price of Ethereum gas fees recently dropped to just 17.5 Gwei. This is the lowest network congestion and gas price since May 2020 (i.e. DeFi Summer and before the start of the last bull market).
This shows that, despite the recent positive price action of Ethereum, no new users have joined. So overall, Ethereum’s relative activity is at a multi-year low.
Tip: Median gas fee prices (7-day simple moving average) breaking through 30Gwei would indicate increased on-chain activity, underlying market strength and a recovery in demand.
Ethereum: Median transaction gas fee (unit: Gwei, 168-hour moving average)
As a result of low Ethereum activity, the ETH burn rate under the EIP1559 protocol is now at an all-time low. The total amount of ETH burned now accounts for only 11% of the total issuance. In the history of Ethereum’s issuance, it has experienced only 3 deflations in the past.
And this actually means that relatively more ETH is in circulation than after the EIP1559 protocol went live.
Ethereum: Burning Fees vs. Total Issuance
To derive the conclusions of this article, we will evaluate the market structure of Bitcoin and Ethereum through the Spend Output Profit Ratio (hereinafter SOPR) metric. SOPR is used to measure the average profit (> 1.0) or loss (< 1.0) realized by the market on the traded tokens. Generally speaking:
- Green: A high value (> 1.0) indicates an increase in profit and the market is strong enough to take on more demand.
- Up arrow: Bull market support is characterized by a SOPR value of 1.0 as support as participants buy tokens based on their cost price during the pullback.
- Red: Low values (< 1.0) indicate a loss of profit, with participants selling their holdings below their cost on average.
- Downward arrow: Bear market resistance is characterized by a SOPR value of 1.0 as resistance, as participants sell tokens based on their cost price during a rally.
In the Bitcoin market, its SOPR value is attempting to breach the 1.0 level for the second time since early June. Often the market needs several attempts to outpace the SPQR’s rise rate. The ideal bullish scenario would be a breakout of 1.0, after which the market would repeat the upward process, finding support at higher levels.
Tip: Bitcoin’s SOPR (7-day simple moving average) breaking above 1.0 and staying at that level will indicate that profitability is returning and the market may be showing signs of recovery.
Bitcoin: SOPR (7-day moving average)
Compared to Bitcoin, Ethereum had better luck, its SOPR value successfully broke through 1.0, and found the first high point as support. However, only using the SOPR discussed above as a measure cannot fully determine its market trend. For the sake of prudence, we will observe the trend of Ethereum in the period of weak SOPR (<1.0) to make a comprehensive judgment. This is very similar to the brief high before the decline when the SOPR value was greater than 1.0 during the bearish period.
Tip: SOPR (7-day simple moving average) below 1.0 indicates lower profitability and indicates underlying market weakness.
Ethereum: SOPR (7-day moving average)
Both bitcoin and ethereum have rallied this week, spurred by the FOMC meeting in July, even in an extremely oversold cycle.
However, looking at the entire market through the surface of the rising token price, we must note that the demand for on-chain transactions is still lackluster, and this rebound has not produced an optimistic follow-up for the time being. In this rally, we can observe that Bitcoin blocks are not all filled with transaction data, Ethereum’s gas fees are at multi-year lows, and Ethereum’s burn rate is still at historic lows under the EIP1559 protocol.
Of course, on-chain activity is only one indicator of the market, although early signs of SOPR profitability returning are encouraging. We still need to see if the upward trend in token prices can be sustained to gauge whether this is just a simple bear market relief or a more exciting market structural shift.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/a-rising-indicator-in-the-crypto-market-is-the-bear-market-really-coming-to-an-end/
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