Will Clemente breaks down the volatility from this week using on-chain metrics to separate the signal from the noise. You can follow Will on Twitter or sign up for his email by clicking here. Here is Will’s analysis:
Due to recent events, I am assuming there are a lot of folks out there feeling a bit unnerved after Wednesday’s price dump. Therefore, I decided to put together a deep dive into what actually happened from an on-chain perspective and how the bull market remains intact. I still stand 100% on the claim that the bull market still has a long way to go. Hope you enjoy.
There are several key takeaways from this letter:
Exchange flows flipped bearish following the recent FUD
Coins that sold were young, many of which were sold at a loss
The sudden price drop was driven by liquidations
Leverage is now wiped out
Coins sold are now in process of accumulation, exchange flows are no longer bearish
The bull market remains intact
Wednesday’s price drawdown was one of the largest capitulation/liquidation events in Bitcoin’s history. Looking at historical price drawdowns, this correction has been deeper than any of 2017, and is the largest bull market correction since the consolidation period between the 2013 double pumps.
This is the second biggest stock-to-flow model deflection (to the downside), only topped by the largest correction of the 2017 bull market.
This is also the first time that Bitcoin’s price has ever hit its energy value in a bull market, a model created by Charles Edwards.
Play-by-play of the Dip
In the time following the recent FUD surrounding Bitcoin, it appears many newer market participants got freaked out and decided to sell. In the 4 days leading up to the dump, exchange flows turned clearly bearish, with exchanges having +59,313 BTC in just 4 days.
Soon after, we began to see the descent down from the mid $50,000’s to the low $40,000’s. The problem was every time the market went lower traders kept stepping in with leveraged longs in attempt to time the bottom. Going to bed Tuesday, around 38k-39k, I tweeted out “Let’s see a big liquidation wick”, this was precisely why. Although I obviously didn’t see the dip coming, (I have been bullish the past few weeks) I think it was somewhat obvious that we were going to see a big liquidation wick once those traders kept trying to leverage long each dip. This was viewable through funding rates staying positive throughout the descent, (until Wednesday morning) but since the huge flush funding rates have stayed negative.
By the way, the fact that funding rates are still negative means majority of traders are short right now, and given that we haven’t seen any major short liquidations, it is very possible that we are setting up for a pretty big-short squeeze… If spot can push us up to initiate the cascade of course.
During the flush, over $300M in longs got liquidated within 10 minutes. This cascade of liquidations, aka the flush, was why the price drop was so rapid.
In total, $9,408,072,338 of leverage has been wiped out peak to trough.
During the dip, we saw real capitulation for the first time since March 2020. When a market capitulates it tends to be an attractive time to buy at a discount.
Similarly, profit taking has rest on every major timeframe. The last time SOPR (7d moving average) reset below 1 was during the dip in September of last year.
A lot of selling seemed to have come from young whales. Let’s break that down. First, how we can conclude that the coins sold were young. Throughout the dip ASOL, the average spent output lifespan, or average of coins being sold, trending down. In other words, the average age of the coins being sold throughout the dip got younger and younger.
We also saw a downtrend in dormancy. This is another metric that can be used to gauge the age of coins being sold. Lower dormancy means younger coins selling, which is what we saw throughout the price decline.
We also saw realized cap trend down. This is probably the best way to illustrate the capitulation that took place. We have mentioned realized cap before, which is the capitalization of Bitcoin based on when coins were last moved. Realized cap going down through the dip shows that coins last moved at higher prices now sold at lower prices. If we had seen an uptick in realized cap, it would show that OG’s and older market participants had been doing the selling, as their coins would have last moved at far lower prices.
By age, the cohort I saw that had the largest uptick in selling was from coins aged 1 week to 1 month old.
By size, the cohort I saw the most selling from was entities with at or over 100,000 BTC. This cohort was reduced by 89,000 BTC on Wednesday.
The cohort that did the most buying throughout the dip was entities holding 10k-100k BTC. This cohort added 122,588 BTC to their holdings in aggregate on Wednesday. One interesting note: a lot of buying was coming from the west. (US) I say this because at one point during the bounce Coinbase was trading at a $3,000 premium to other exchanges. This means western buyers on Coinbase were spamming the green button.
Since Wednesday, exchange flows have normalized and are no longer bearish. OTC desk outflows spiked during the dip, showing strong buying from high net worths/institutions.
Also, stable coin flows exchange flows have turned bullish. In just the first hour after the dip $530M of Tether
was sent to exchanges. Although there have been higher single day inflows, this zone of inflows to exchanges is very dense compared to all of Tether’s existence.
Zooming out on stablecoin flows, one metric that is worth looking at is SSR, or the stable coin supply ratio. This is a simple ratio of market capitalization of Bitcoin divided by the market capitalization of stable coins. This metric has been trending down since the end of January and has dropped a lot during this price dip. This is showing a lot of new capital flowing in to BTC through stable coins. This paints a picture of new capital flowing in along with realized cap and URPD as well.
None of the major bull market indicators have turned overheated and are all cooling off. To me, this shows that we are just consolidating and this bull market isn’t over yet.
The first one is reserve risk. This is a ratio of price / hodl bank. When reserve risk goes up, price is going up while confidence from hodlers is going down. We are currently seeing the opposite, price is going down while confidence from hodlers is going up. Without yet reaching the overheated zone, we are cooling off and confidence from hodler’s is rising.
Another metric to look at is MVRV. This is a simple ratio of realized capitalization to market capitalization. This metric is cooling off as market cap goes down and realized cap has grown over the last 2-3 months.
The last and arguably most important metric to fundamentally see why this is not the bottom is looking at pure on-chain volume at different price levels. At the end of bull markets when there is a blow-off top, there is very little volume distribution. Over the last 2-3 months there was a ton of volume in the 40k-60k range, especially between 53k-58k. Over 25% of supply has moved above 40k in total. Let’s compare current distribution to 2017’s top.
This is what current on-chain volume distribution looks like:
This is what distribution looked like at the top in 2017:
This is what distribution at the top of 2013 looked like:
As you can see, distribution currently resembles nothing of a top, quite the opposite. I still strongly believe we are in a mid-bull run consolidation.
In conclusion, this event was unexpected from my perspective but became obvious we were going to go further after seeing traders try to leverage long each dip. We have a large leverage reset and wipeout of weak hands. At this point it’s just going to take some time for those young coins recently sold to find a new home. Still bullish for the remainder of the bull run. Until next time. Take care guys, all the best, cheers. - Will
That is it for today’s analysis. Hopefully you found this helpful. I highly suggest you subscribe to Will Clemente’s email where he breaks down on-chain metrics multiple times per week: Click here
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