Identifying Trends and How Bitcoin Set a Floor During the Recent Recession – Part 1

After two consecutive months with the green candle closed all summer, September brought some headwinds, which largely pushed Bitcoin’s price trend down.

After rising earlier this month on the positive news that El Salvador officially recognizes Bitcoin as legal tender, the price collapsed on Bitcoin Day (September 7th) when the law came into force. The price range for the day was $ 10,352 (-19.56%), a sharp drop caused in part by the domino effect of long liquidations. As can be seen in Figure 1, the funding rate (green) on September 7th was not as high as in the first quarter, when the market euphoria was still prevalent. However, the open interest (OI – green) has increased significantly compared to the previous weeks and has fallen sharply due to an over-indebted long liquidation.

Figure 1: Bitcoin price (black), futures financing rate (green) and open interest (blue). Source: Glassnode

This event has certainly turned off some market participants who either had never experienced this before or did not understand the underlying mechanism. Then a flood of news that the Chinese giant Evergrande could be on the verge of bankruptcy awakened memories of the collapse of Lehman Brothers at the start of the 2008 financial crisis. As of September 20, this will also be reflected in the price of Bitcoin (Figure 1) .

Despite this turmoil, Bitcoin price closed just $ 3,302 (7.01 percent) lower than in September, suggesting some resilience. The bullish on-chain delivery mechanism remains intact, suggesting that investors who are patient with low time frame preferences will not sell at these prices. Of course, these trends can certainly change if, for example, the current macroeconomic situation worsens, but based on the trends in the chain, these declines can be viewed as buying opportunities that can offer potential benefits.

Let’s zoom out a little and take a look at a number of on-chain trends that have been around since early January, as detailed below. shown in a Twitter thread in early May. It can then be seen that the local highs in January actually also represent a technical floor at which bitcoin price trends found support during the recent market downturn.

Bitcoin price has been cooling since January

First, let’s take a look at Bitcoin Price Temperature (BPT) – a metric that examines the 4-year volatility of BTC price by calculating the standard deviation between the current price and its 4-year moving average. As can be seen in Figure 2, the price rose rapidly in the fourth quarter of 2020 (left gray arrow), resulting in a local high of the BPT (black) at 7 temperatures in early January.

Figure 2: Bitcoin (gray) and BPT (black) prices. Source: Glassnode

Since then, Bitcoin’s returns began to decline (gray arrow on the right) and as a result the price temperature began to cool. This situation was then exacerbated by the decline in mid-May. Current prices are similar to what we saw during the local highs in January, but with temperatures below 2, suggesting that these prices are much more normal now in a four year period than they were in January.

Next, let’s take an overview and evaluate a number of on-chain trends that have changed dramatically since the same local top date in January.

Old coins reduce movement

One of the trends that has changed since January is the decline in the number of relatively old bitcoins moving in the chain, which suggests that the long-time market entrants’ selling pressures are easing. This concept can be evaluated in a number of ways using on-chain data.

Perhaps the purest approach is to simply look at the average age of every coin that moves in the chain per day using the metric “Average Output Spending (ASOL)” shown in blue. The leaves are shown in Figure 3 rose at the end of 2020 and clearly peaked around the local peak time in January, after which it was in a downward trend.

Figure 3: Bitcoin price (black) and ASOL 7-day MA (green) and rest (blue). Source: Glassnode

However, not every on-chain transaction necessarily carries the same weight when it comes to its potential impact on BTC price. For example, a transaction of 1,000 BTC has much more potential to affect the price than a transaction of 0.001 BTC. This problem is solved by adjusting the actual volume in the chain, which leads to the “idle state” shown in blue in Figure 3, which is currently at a level that has not been seen since the beginning of 2017.

Long-term hodler continues

Another option is to determine the age at which the unspent Transaction Output (UTXO) is most likely not to return. Glassnode found that unused transactions are particularly unlikely to roll back if they are over 155 days (about five months) old. Therefore, coins that have not moved for 155 days can be called “Long-Term Hodler Supply (LTH)”.

Figure 4 shows the 30-day net change in position of this LTH offer. As can be seen, more and more coins older than five months are being sold during the bull run in late 2020 as the relatively experienced Hodler boosts sales. This sales spike peaked around the local January spike, whereupon LTH’s selling pressure eased and turned into heavy accumulation in recent months – although the price fell sharply this spring and early summer.

Figure 4: Bitcoin price (black) and LTH 30-day net position change (green and red). Source: Glassnode

Seasoned market participants skeptical that Bitcoin price will rise and break its all-time high (ATH), $ 20,000 previously sold heavily in the run-up to the local high in January, while the rest appear to have no intention of selling – despite the sharp decline in mid-May.

LTH’s trading volume is decreasing

The change in LTH net position analyzed above illustrates LTH supply dynamics, but it is also possible to measure LTH behavior based on the volume of transactions in the chain. Figure 5 shows the trading volume of coins that have not moved for at least six months. The volume of this group also peaked around the local high in January and has been in a downward trend since then, with the exception of a temporary spike during the decline in July.

Figure 5: Volume Spent Age Range (SVAB) for coins that have not moved for six months or more. Source: Glassnode

Bitcoin’s UTXOs are aging

In addition to the coins moved (issued) in the chain, it is also possible to display the current status of all existing UTXOs. Dhruv Bansal was the first to divide Bitcoin’s UTXO set into different age groups and create a metric called the HODL Wave. This index was later adjusted to Typerbolethat adjusted each HODL wave by the value of each UTXO when it was last moved in the chain, creating a real cap HODL wave that is a cleaner version of the original index.

As can be seen in Figure 6, the coin’s HODL waves with a one-month lifespan (red) tended to rise to the local high in January and then steadily fall. This suggests that by early January, older coins that were not previously used had been moved onto the chain and their lifespan reset to 0. The warmer bands in Figure 6 represent relatively young coins that have expanded more. Since January, those trends have cooled significantly, resulting in tighter cold bands, suggesting that Bitcoin’s UTXO suite as a whole is aging again.

Figure 6: Real Cap HODL wave. Source: Glassnode

Miners reduce the pressure to sell

On-chain data also enables professional analysts to estimate which bitcoins are in the hands of miners. In 2019 and 2020, this data shows that BTC balances, considered to be in miners’ wallets, are on a steady upward trend. Shortly before the local high in January, that balance fell sharply (Figure 7, green), followed by a relatively large amount of BTC sent to the exchanges from miners’ wallets (Figure 7, blue). In the past six months, both trends have reversed, showing that miners’ selling pressure has been relatively modest – despite China’s tough crackdown on miners and the resulting sharp drop in hash rate over the last six months of May and June.

Figure 7: BTC price (black), miner credit (green) and exchangeable deposits (blue). Source: Glassnode

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Disclaimer: This article is for informational purposes only, not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions.

Annie

According to Bitcoinmagazine

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