Below is the weekly write-up from bitcoin analyst Will Clemente, where he uses on-chain metrics to explain what is happening in the bitcoin ecosystem. Hope you enjoy it.
Happy Friday, hope you all had a great week. At the time of writing, Bitcoin currently sits just above $53,600. Last week we described how price was either at a bottom or within days of reaching one based on the metrics that we looked at. Two days after the newsletter was sent out, price reached a local bottom on Sunday, retesting the key on-chain volume support zone of $47,000 before aggressively shooting back up. Let us take a look at the latest developments in on-chain data structure to develop an understanding of market participants’ behavior.
Leverage Wipeout/Price Correction Recap
Throughout the last week we have seen a total wipeout of leverage from the Bitcoin derivatives markets. (Something also discussed in the podcast Pomp and I recently put out on Wednesday) Since all-time highs two weeks ago, futures open interest has declined by $8,912,806,107 across all major exchanges.
In addition, we have seen a huge decline in funding rates. Funding rates are used to peg the perpetual swap to Bitcoin spot price. The perpetual swap is unique to Bitcoin, as it is a non-expiring future’s contract. The ease of access to leverage for these contracts make them very attractive to speculative traders. The way these contracts are pegged to Bitcoin price is through funding rates. When the majority of traders go long, funding rates rise, meaning longs are paying shorts to take the other side of the trade. This works the other way around as well, meaning when funding rates go negative, shorts are paying longs. In last week’s newsletter we discussed how funding rates going negative was a buy signal. Interestingly, throughout the recent price rally since Sunday’s bottom, funding rates have remained low. This means that the rally is likely driven from spot markets and not by speculators. In other words, this price rally has come from organic spot buying, making it very healthy. This is also supported by massive stable-coin flows seen on-chain.
The sell-off was also healthy for the market for another reason aside from the leverage wipeout; coins were washed from weak-hands to strong-hands. This can be illustrated by looking at metrics that describe the age of the coins being sold. These metrics showed a pattern of young-coins, AKA new market participants selling, as older market participants held strong throughout the dip and continued to accumulate.
One metric to illustrate this is dormancy. Simplified, older coins hold more dormancy and as they are sold, dormancy rises. Throughout the drop in price, we actually saw dormancy go down, meaning old coins were not being sold and more experienced market participants held tight as they are accustomed to these huge price corrections in Bitcoin bull markets.
Another metric to visualize this is Glassnode’s Spent Output Age Band metric. This clusters coins together by age and stacks these cohorts together to understand which types of market participants are driving selling. Throughout the drop in price, we saw a sharp spike from younger cohorts, with minimal movement in older cohorts. In this regard, the sell off was bullish, as coins were moved to stronger hands.
Throughout the sell-off we also saw miners accumulate very heavily, scooping up cheap coins and taking advantage of the dip.
On a final note regarding the sell-off, we have seen hash rate rebound dramatically, showing the resiliency of the Bitcoin network.
More and more of Bitcoin’s supply is being locked up every day in the hands of investors that have no history of selling. This can be illustrated by Glassnode’s liquid supply metric. Glassnode clusters together addresses through blockchain forensics to determine different entities. They are then able to evaluate the selling behavior of these entities and separate them into 3 cohorts: highly liquid, liquid, and illiquid. Since the March liquidity crisis last year, there has been a strong trend of coins becoming illiquid, AKA being scooped up by strong-hands with no history of selling.
In fact, 78.3% of Bitcoin’s supply is now considered illiquid by Glassnode, a number which has steadily increased throughout the asset’s lifespan.
The final metric I would like to present this week is URPD (UTXO Realized Price Distribution). This metric determines on-chain volume at different price levels. After rallying back above the trillion-dollar market cap threshold, (currently $53,500 but increasing as supply grows) over 14% of Bitcoin’s money supply has now moved at these levels. This shows strong validation of BTC as a legitimate macro asset and that is here to stay. This is also the strongest zone of volume seen on-chain since $11,000 last year.
Hope this was helpful. Enjoy!
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