Is the bitcoin binge at an end? See what the on-chain data says

A review of the first half of the year and a look at the second half of the market from on-chain data.

On-chain and price data can be used to predict where we are in the Bitcoin market cycle.

In this article, we’ll review the first round of the 2020-2021 bull market and the turmoil it caused in the market. After that, we will build a case to explain why the top of this market cycle is yet to come.

January’s Shift
The halving of 2020 reduced bitcoin supply and triggered an exponential rise in price. However, this time the cycle happened much faster compared to the previous 2016 halving cycle.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 1 Price temperature band for the Bitcoin halving cycle

As you can see, during each significant price increase (such as when the bitcoin price broke its highest price ever in December 2020), market participants began to take profits, and after the period in Figure 2 (since the market’s highest point began in January 2021), user gains decreased, although the price continued to rise further during this period.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 2 Dynamic average of spending margins over seven days

During the period of price index growth, long-term Bitcoin holders (green part) start shorting, while newcomers to the market (purple part) start taking a share of the market, until the market cycle reaches its top and the roles of old and new Bitcoin holders swap, with newcomers becoming long-term Bitcoin users.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 3 Bitcoin Circulating Supply vs. Total Supply of Bitcoin Long-Term Holders: Bitcoin Price (black part), Bitcoin Long-Term Holders (green part), Short-Term Holders Supply (purple part)

If we zoom in on Figure 4 to see the change in the net position of bitcoin holders (the sum of current open long positions held by users), we can see that long-term bitcoin holders are mostly selling until the price peaks in January 2021, after which the pace slows down and they start to shy away from selling during the price decline.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 4 Bitcoin price (black part) and change in bitcoin supply for long-term holders (green and red parts)

A similar trend can be seen in the change in net position of miners in Figure 5 (miners are another class of frontline participants with significant long-term market experience).

Is the bitcoin binge at an end? See what the on-chain data says

Figure 5 Bitcoin price (black part) change in net position of miners (green and red parts)

Accelerated Development
In March 2020, a macro-driven price crash freed the Bitcoin market from all leverage and created more organic market conditions, setting the stage for a bull market in 2020-2021. Since then, bitcoin reserves on exchanges have seen a significant downward trend, suggesting a massive supply shock is in the making. This trend accelerated on pure spot exchanges that do not offer derivatives trading after the bitcoin price broke through the all-time highs of 2017 (Figure 6).

Is the bitcoin binge at an end? See what the on-chain data says

Figure 6 Bitcoin Reserves on Spot Exchanges

However, when looking at exchanges that offer derivatives products, the opposite is true (Figure 7). Bitcoin reserves on these derivatives exchanges increased, especially after the bitcoin price started to adjust.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 7 Bitcoin Reserves on Derivatives Exchanges

Bitcoin reserves on derivatives exchanges are partially used as collateral for highly leveraged trades. Open positions in bitcoin futures more than doubled in the months after the bitcoin price reached a top in January 2021 (Figure 8), suggesting that market participants are increasingly willing to take risks, a possible sign that the market is starting to get excited.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 8 Open Bitcoin Futures Contracts on All Exchanges

As shown in Figure 9, the majority of open positions represent long positions (long positions: also known as long buys, generally refers to investors who are bullish in the futures market and then buy futures contracts and wait for the price to rise to make a profit). When the market is heavily leveraged in one direction, there is a clear incentive for large market participants to push the price in the other direction. When the price of bitcoin falls below the closing price of a long position, exchanges can force a sale of that position, creating even more downward pressure on the price, potentially creating a ripple effect of long-term close-out and an accompanying sharp drop in price, which is exactly what we saw on May 19, 2021.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 9 Funding Rates for Permanent Bitcoin Futures on All Exchanges

Changing Market Conditions
The shift in market conditions in Q1 2021 can also be seen in several other metrics.

For example, the Grayscale Bitcoin Trust’s (GBTC) bitcoin holdings grew significantly due to institutional demand and stopped growing in February 2021 (Figure 10), while its GBTC premium actually turned heavily negative.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 10 Bitcoin price (black section) and grayed-out bitcoin holdings (green section) and premium to spot market price (purple section)

During the first quarter of 2021, many market participants are watching the direct listing of Coinbase. Bitcoin prices (orange portion) and COIN prices (black and white) climbed in the months leading up to this event and reached their all-time highs on April 14, 2021 when the direct listing took place (Figure 11). The direct listing was accompanied by significant selling pressure from Coinbase executives, who sold off some of their positions, causing its share price to plummet.

(A direct listing is a direct access to the capital markets type of offering in which the company does not issue new shares throughout the listing process, but rather uses a third-party valuer to give the shares a pricing to get a pre-IPO company value.)

Is the bitcoin binge at an end? See what the on-chain data says

Figure 11 Chart of Coinbase (COIN, black and white parts) and Bitcoin (orange part) prices in USD

Another notable trend change that occurred after the January 2021 price peak was the rapid decline in bitcoin dominance (Figure 12). The decline in bitcoin dominance implies that cryptocurrency price appreciation is outperforming bitcoin, which could be attributed to the influx of retail market participants.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 12 Bitcoin dominance vs. cottage coins: Bitcoin dominance (black and white parts) and price (orange parts)

New big players break the frenzy
Since the bitcoin price peaked in January 2021, the impact of existing bitcoins on on-chain trading volume has declined significantly, as seen in Figure 13. This means that recent price movements have been increasingly influenced by market participants who have just entered the market.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 13 Adjusted Seven-Day Dynamic Average of Bitcoin Entering a Downturn

When we focus on the on-chain movement data for the largest players in the bitcoin market (the giant whales), it is also clear that most of the on-chain movement is from new bitcoin giants. Figure 14 is a visual example where the green circles highlight the addresses of the big players that traded on-chain during the bitcoin capitulation sell-off (capitulation event) on May 19, 2021. These on-chain changes are likely caused by several factors:

Triggering a price plunge.

Sell-offs due to anxiety.

Closing out of long positions.

Buying back at a lower price to get a tax break (tax credit).

Is the bitcoin binge at an end? See what the on-chain data says

Figure 14 Bitcoin Bigs (whales) Chart: Bitcoin Outflows from Bitcoin Bigs Wallets, May 19, 2021

A track with no end in sight
The question that remains at the forefront of our minds is, is this bitcoin orgy at an end?

Predicting the future through historical data is unreliable because the data is constantly changing and may change in the future. Nonetheless, comparing current and historical on-chain data structures can determine the extent to which cyclical investor behavior echoes market psychology.

Figure 15 illustrates one such example. Unlike previous market cycles, which have been marked by exponential top breaks, where long-term holders sold off heavily when the market was active, neither has occurred so far in the current cycle. Of course, this cycle is not necessarily similar to previous cycles, but it would be an unusual market phenomenon if the current cycle ended in failure.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 15 Bitcoin Reserve Risk Indicator

Is New Hope Emerging?
As just noted, we cannot predict the future based on on-chain data; however, we can monitor bitcoin flow trends to help us understand recent market movements and speculate more deeply on where the market may be headed next. Despite the sharp price drop, some positive on-chain signals can still be seen.

During the recent market correction, exchanges saw significant net inflows from a large number of short-term Bitcoin holders (Figure 16). As prices fell, net transfers between exchanges declined and even became net negative again near the end of the price decline. This suggests that the lower prices triggered new demand, increasing confidence that buyers will continue to participate during the downturn.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 16 7-day moving average of net bitcoin transfers on exchanges

Over-the-counter (OTC) trading also saw significant outflows during this period (Figure 17). These OTC trading platforms facilitate transactions between large physical households that wish to buy and sell bitcoin without disrupting the market.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 17 Seven-Day Moving Average of Bitcoin Outflows on OTC Desks

Another possible indication of continued demand for bitcoin (spot) exposure is the continued rise in stablecoin reserves on the spot exchanges (Figure 18).

Is the bitcoin binge at an end? See what the on-chain data says

Figure 18 Stablecoin Reserves on Spot Exchanges

The price decline also appears to have triggered market participants to convert dollar cost averaging (DCA) into bitcoin positions based on the number of additional addresses that recently reached an all-time high (Figure 19).

Is the bitcoin binge at an end? See what the on-chain data says

Figure 19 Number of Bitcoin Cumulative Addresses

Finally, the recent spike in net user growth on the Bitcoin network suggests that more users entered than left during the price crash, which also suggests that the lower price induced some people to buy positions (Figure 20).

Is the bitcoin binge at an end? See what the on-chain data says

Figure 20 7-Day Dynamic Average of Net Bitcoin Network User Growth

While the Twitter poll is only a reference, the poll results shown in Figure 21 give us another signal that market participants still have positive medium- to long-term expectations for the bitcoin price. Respondents are generally bullish on weekly to monthly bitcoin price changes, but clearly remain very optimistic about a full year’s worth of bitcoin price changes.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 21 Twitter’s Bitcoin Market Sentiment Poll, May 31, 2021

Taproot Protocol Upgrade
In addition to the prospect of Bitcoin’s price attracting user engagement interest, the prospect of a Taproot protocol upgrade on Bitcoin may increase user market engagement for the rest of 2021. taproot improves some of Bitcoin’s on-chain privacy features and opens up new possibilities for scaling, smart contracts, and the Lightning network (Lightning). The protocol upgrade will activate in November 2021 after a successful lock-in activation.

(Taproot (BIP341) improves the privacy, efficiency, and flexibility of Bitcoin’s scripting capabilities, allowing developers to write complex scripts while minimizing the impact on the chain. In terms of scaling, significant transaction fees are saved for complex transactions, as data-intensive scripts no longer need to pay higher fees than standard “pay-to-public-key hash” transactions. (The more complex the transactions on the network, the greater the efficiency gains.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 22 Miner Signal Processing Status for Taproot Bitcoin Protocol Update, June 1, 2021

Stay Alert
The recent removal of leverage and changes in the environment due to mining provide a warning that the Bitcoin market may have entered a very volatile and vulnerable phase, regardless of where the market goes next.

Over the past year, Bitcoin’s gradual maturation has attracted more and more institutional investors to adopt it as a macro asset, bringing the asset into a whole new playing field. As a result, regulatory headwinds may have been overlooked and these factors may have triggered market anxiety.

Increased institutional holdings of bitcoin may cause bitcoin price developments to increasingly begin to follow the larger overall macro cycle. As we saw in March 2020, if the macro economy collapses, its price action could be affected.

Predictions for what happens next in 2021
There is no guarantee that the bitcoin price will necessarily mimic its previous halving cycle. Nonetheless, models such as S2F and S2FX, time-based models or simpler prior-cycle indices shown in Figure 23 may help us get a rough idea of what might happen in the future, assuming that Bitcoin’s four-year halving cycle does happen again.

Is the bitcoin binge at an end? See what the on-chain data says

Figure 23 Bitcoin Halving Cycle Roadmap (2020-2024)

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/is-the-bitcoin-binge-at-an-end-see-what-the-on-chain-data-says/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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