On May 19, 2021, the Bitcoin market experienced its most significant liquidity event and price pullback since Black Thursday in March 2020. This sell-off came after months of consolidation above $50,000 and began after the market failed to sustain new highs and the highly anticipated Coinbase IPO.
The worst sell-off on May 19 resulted in the largest daily negative in Bitcoin history, with an intra-day price range of $11,506. In total, the bitcoin price has fallen 47.3% since May 9.
This dramatic price drop action surprised a large portion of the market, especially since it occurred during the longest bull market in Bitcoin’s history. As a result, it has left many wondering if the bull market has been cut off and if Bitcoin has returned to a long-term bear market structure.
In this article, we will investigate the indicators that describe market structure, including those that lead to sell-offs, as well as an assessment of future bull and bear market conditions. This article will explore.
Indicators that provide early warning of slowing institutional demand and the distribution of on-chain spending patterns.
Analyze the demand for exiting graceful liquidity for coins flowing into / out of exchanges and stablecoins.
Compare with previous cycles, sell-offs and holder behavior to determine if a future macro bull or bear market bias is more appropriate.
Changes in Institutional Demand
As the Bitcoin market grows and matures in valuation, it both attracts more capital and requires more capital and trading volume to sustain and reach new highs. One of the main drivers of this bull cycle momentum has undoubtedly been institutional inflows, primarily stemming from the COVID pandemic of sky-high monetary and fiscal policies.
The largest investment vehicle available to traditional investors is the Grayscale GBTC Trust product. For much of 2020 and early 2021, investors took advantage of strong institutional demand by physically arbitrage the ongoing GBTC price premium. This served a dual purpose as it removed the BTC cryptocurrency from circulation, creating a self-reinforcing supply cycle that fueled the growth of institutional demand.
By January 2021, inflows to the GBTC Trust reached almost 50,000 BTC, while GBTC was consistently trading between 10% and 20% of spot. late January, arbitrage began to drive premiums below 10%, and BTC inflows began to slow dramatically. In late February, inflows stopped altogether and GBTC began trading at a chronically deteriorating discount to the spot price.
GBTC prices have now been trading at a discount for over 3 months, reaching a peak low of 21.23% on May 13. the presence of a GBTC discount both eliminates the huge supply and provides advance warning that institutional demand has softened considerably since late February.
However, with the recent sell-off, the GBTC discount has begun to shrink to -3.8%. This suggests that institutional interest, as the bitcoin spot price has fallen, has risen.
tells a similar story, with Canada’s Bitcoin ETF receiving consistent capital inflows in late April and early May. Since then, outflows have begun to dominate as the market begins to show signs of weakness. However, similar to GBTC, demand flows appear to be recovering in a meaningful way following the price correction, with inflows starting to rise again as of late May.
Inflows into both GBTC and the Purpose ETF suggest that institutional demand has weakened from February through May, and both products could have an impact on the supply of liquid BTC. On the positive side, the recent sell-off appears to have motivated investors in both products, as discounts on GBTC have increased and inflows into the Purpose ETF have resumed.
Bitcoin stepped onto the world macroeconomic stage after March 2020 and this effect can be clearly observed in the balances held on the exchanges. Exchange balances have experienced a dramatic reversal from long-term accumulation to uninterrupted outflows. the volume of BTC is shifting from a liquid to illiquid state, creating a self-reinforcing change in supply as cryptocurrencies move from exchanges to institutional custodians and/or cold wallets.
The illiquid supply change metric shows how quickly cryptocurrencies have transitioned from a liquid to illiquid state in the last 30 days (green bar). The size of the accumulation has been significant over the past two years, however the size of the selling pressure in May was also significant. Investors were clearly spooked during this latest sell-off.
While it may take time for the dust to settle, if this indicator returns to accumulation, it would be a strong signal that conviction has returned. If not, it could indicate further distributions ahead.
In the months leading into the sell-off, a trend can also be seen where more and more Tokens are being moved off the exchanges. Conversely, as prices have fallen, an opposite trend has recently developed where more and more cryptocurrencies are entering exchanges as investors step in to buy the fallen cryptocurrencies.
The trend of declining total exchange balances has continued for over 434 days, however a significant rise in exchange inflows was observed on April 3. This is consistent with the re-entry of previously illiquid cryptocurrencies into liquid circulation in the chart above. Note that there are multiple explanations for this behavior, all of which may be occurring simultaneously.
Inflows from exchanges for the purpose of issuing and selling.
Provision of collateral for loans, futures and margin transactions.
Capital transfers to other assets (particularly ETH, which we analyze here).
Speculation and trading led by retail investors, especially in relation to the Binance smart chain.
A closer analysis of this trend shows that outflows were actually sustained or net neutral on most exchanges except three. binance, Bittrex and Bitfinex. these exchanges saw accelerating inflows of BTC throughout 2021, with Binance in particular leading the majority of these shares. In the May sell-off, the total balance held by these exchanges expanded by over 100,000 BTC in 1 week.
Considering that these exchanges service non-US entities, this may indicate differences in market reactions and beliefs across international jurisdictions to the events that led to the sell-off.
In contrast, balances at US regulated exchanges Coinbase, Gemini, Kraken and Bitstamp continued to decline, with the trend having little meaningful impact throughout May.
The percentage of on-chain transaction fees used to deposit to exchanges has also accelerated recently. Similar to the macro top of 2017, the demand for deposits to exchanges accelerated throughout the bull market before reaching a new ATH, this time exceeding 20% of all on-chain fees. This suggests that there is an urgent need for cryptocurrency holders to prioritize deposits, whether out of panic or to re-collateralize margin positions during a correction.
Finally, on the exchange side, there has been a tremendous deleveraging of the derivatives market, resulting in a cascade of market sell-offs, margin calls and liquidations. From the peak of $27.4 billion in open futures contracts set in mid-April, more than 60% of open positions have been cleared from the books. It is worth noting that open futures contracts are only one form of leverage in the cryptocurrency market. Additional sources of margin are coming from cryptocurrency-backed loans, the options market, and increasingly, DeFi agreements, and we discuss the reaction to this sell-off further in this article.
Stablecoins have undoubtedly assumed the role of reserve assets in the industry, and each has a unique mechanism to maintain ‘stability’. As such, the price performance of a stablecoin relative to its $1 peg can provide insight into the need for exit liquidity. In particular, in March and April, the three largest stablecoins USDT, USDC and DAI all traded above their pegs for 1 month until Coinbase went public directly. This suggests that demand for exit liquidity from stablecoins may be strong, possibly in anticipation of a ‘sale’.
However, on the other side of this sell-off, the supply of stablecoins in circulation has since hit an all-time high. In the last 1.5 months since the adjustment began on April 14, the supply of stablecoins has increased by the following amounts.
USDT increased by $14.2 billion (+30%).
USDC increased by $9.72 billion (+88%).
DAI increased by $1.22 billion (+38%)
The Stablecoin Supply Ratio (SSR) compares Bitcoin’s market cap to the total supply of all stablecoins as an indication of the cryptocurrency’s native, dollar-denominated purchasing power. A lower SSR value implies a large supply of stablecoins relative to bitcoin’s market cap. As bitcoin valuations have contracted, and the supply of stablecoins has increased, the SSR ratio has now been driven to an all-time low of 7.5x.
This convincingly represents the largest cryptocurrency native dollar buying power in history.
Buying and selling behavior of HODLers
Finally, we will investigate the buying and selling and HODL behavior in the market. In particular, we will look at the balance between new investors, who may have relatively little exposure to the volatility of Bitcoin and the world of FUD (short-term holders, STH), and long-term holders, whose beliefs are shaped by years of trading thinking.
During the 2020-21 bull market, cryptocurrencies held between 6 months and 3 years (representing the last cycle of buyers) saw two periods of high selling.
December 2020 to February 2021, as profits were realized as market forces rallied from $10,000 to $42,000.
Late April to mid-May, as older BTC was sold, possibly through capital rotation (ETH prices doubled during this period), and possibly in response to the weakening of market structure discussed above.
However, after both periods, the selling of older coins slowed down considerably as the price corrected. This suggests that old hands sold before the major correction, and then they also tended to buy back (and possibly buy the dip) when prices became cheaper
If we compare the selling behavior of cryptocurrency coins to the macro tops of 2017, we can see that a somewhat similar pattern has played out, with older hands slowing their buying when the market was overheating. However, it was at the first rally that the percentage of old coin selling increased again as the probability of a bear market increased. Similar events occurred during most of the bear market rallies in 2018, as well as the final sell-off in November.
In the current market structure, this is an important indicator to watch, as it may indicate whether a similar mass exit of older coins will occur in any easing rally. Conversely, the absence of these older illiquid cryptocurrencies being distributed would indicate a more bullish outlook among battle-wounded HODLers still.
The HODL wave that achieves the cap provides a view of what percentage of the active supply is in cryptocurrencies held for different time periods. A typical cyclical pattern is.
Coins with longer holding times rise in bear markets as accumulation restarts and wealth shifts from speculators to long-term holders.
Shorter held coins rise in bull markets as holders allocate expensive cryptocurrencies to new, softer handed speculators.
In the current market structure, we have seen the first major impulse in cryptocurrencies less than 3 months old as new speculators enter the market. This coincides with the initial bull market rally where old coins were spent after a breakout from $10,000 to $42,000. What is noticeably different about this cycle is that we can see a declining share of new speculators. There are several explanations for this phenomenon.
Increased access to derivatives and instruments to complete risk hedging without interacting with the blockchain at all.
A preference and/or single preference of retail speculators for crypto assets other than Bitcoin, and similar access to derivatives and off-chain leverage.
Increased cryptocurrency maturity and dodging behavior by institutional buyers who accumulated early in the bull cycle and who were not swayed by volatility, leading to earlier expansion within the older cryptocurrencies (cryptocurrency maturity).
Looking at the flip side of this chart, we can see two observations about the percentage of old coin holders.
The supply held by LTHs has actually returned to accumulation, which supports the argument that cryptocurrency maturity and institutional HODLing is still in play. If this happens, it will resemble the beginning of a bear market, but will also facilitate an eventual supply squeeze.
Long-term holders currently hold 10% more active supply than they did in all previous market cycles.
This second point can be interpreted as both bullish, as it implies that HODers are distributing less cryptocurrency. However, it can also be considered bearish as it suggests that there is not enough demand to absorb this relatively small supply of sold cryptocurrencies.
At the end of the day, during a sell-off, the ultimate financial pain comes from investors watching unrealized gains evaporate, either by returning to a cost basis or by selling into unrealized losses. The net unrealized profits and losses metric calculates the extent of the total profits or losses held by the unused cryptocurrency supply as a percentage of market capitalization.
If we filter this metric by STH (coins <5 months old), we can see that the May sell-off competed in size with the bear markets and largest sell-offs in the entire history of Bitcoin. 2021 has a large number of buyers who are currently holding underwater coins. This supply could become a headwind for the bulls as the price tries to recover with a pressure order overhead.
If we also filter by cryptocurrencies held by long term investors, we get a chart that shows the market is standing on a historical knife edge. Long-term investor holdings of unrealized PnL tend to be less volatile and more cyclical due to Bitcoin’s tremendous long-term price performance.
However, unrealized PnL held by long term investors is currently testing the 0.75 level, which has been the defining level between bull and bear cycles in the past. Only in the ‘double pump’ scenario of 2013 has this metric seen a recovery. If LTHs continue to see their paper earnings fall, this could also create a new source of overhead supply. On the other hand, a supply squeeze from higher prices and falling buy-in would begin to resemble the 2013 ‘double pump’ scenario.
In this article, we explored some of the indicators and indices that describe the market structure before, during and after the most horrific sell-offs in Bitcoin. In summary, there are a number of bull and bear market scenarios that can be interpreted from the available data.
For the bears
Institutional demand softened significantly from February onwards and the resulting supply sink / squeeze largely dissipated.
Balances on exchanges increased, and a large number of cryptocurrency selling transactions must now be re-accumulated.
Prior to the Coinbase IPO, stablecoin allocations reflected that veterans had sold off prior to the crash.
A large number of short-term holders are still underwater, while long-term holders are on the knife’s edge of history with unrealized gains, coinciding with past bear markets.
Despite the price crash, institutional products G BTC and Purpose ETF are showing signs of recovery, providing an early indication of renewed institutional interest.
While exchange balances have increased, a more nuanced view suggests a discrepancy between U.S. regulated exchanges and offshore exchanges. There may be a jurisdictional bias at play.
Stablecoin output has expanded dramatically, creating the largest role in the purchasing power of cryptocurrency-native dollars in history.
Most of the selling appears to be by short-term holders, while long-term holders appear to be buying declining cryptocurrencies with increasing conviction.
Few claim that buying bitcoin is easy, and for many, the volatility seen last week was all part of the cryptocurrency. What is clear is that the size of the sell-off was significant, with a large number of buyers currently underwater. How the market recovers from here will undoubtedly be a test of faith in the market, which remains a favorable macro backdrop for digital scarcity.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/twenty-on-chain-data-charts-analyzing-cryptocurrency-market-structure-changes-before-and-after-5-19/
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