September 23, 2023

(Big) analysis of the May sale on the crypto market

One of the most dramatic sell-offs in Bitcoin history is a significant test of conviction investors. In this article, Glassnode analysts examine market response using available on-chain metrics.

On May 19th, the bitcoin market underwent oneof the most significant liquidity and price dips events since Black Thursday in March 2020. The surrender followed a months-long consolidation above $ 50K and began after the market failed to maintain new price highs set by Coinbase's direct listing news.

The sale on May 19 formed the largest daily candle in Bitcoin history with an intraday price swing range of $ 11,506. In total, the price of BTC has dropped 47.3% since May 9.

Such a sharp drop took a largepart of the market, and now many are wondering if the Bitcoin bull cycle was interrupted by this event and if this is the beginning of a new long-term bear market.

In this article, we explore metrics that describemarket structure, paying attention to both their behavior on the eve of the sell-off and short and medium-term forecast with arguments in favor of bullish and bearish scenarios. We will cover the following topics:

  • metrics that signaled a slowdown in institutional demand and on-chain patterns of capital allocation ahead of a sell-off;
  • analysis of capital flows in exchange wallets and demand for liquidity to exit the market in stablecoins;
  • comparison with previous cycles, sales and past behavior of BTC holders to determine the more likely further scenario in a macro outlook - bullish or bearish.

Changes in institutional demand

As the price of BTC rises and the market matures, itat the same time it attracts more capital and requires more capital to maintain current levels and reach new heights. The main driving force behind this bull market was undoubtedly the influx of institutional capital, mainly in response to the extraordinary monetary and fiscal policy in the wake of the COVID pandemic.

The largest investment instrument based onThe BTC available to traditional investors is a GBTC trust product from Grayscale. For most of 2020 and early 2021, investors used strong institutional demand for BTC to arbitrate in kind the constant GBTC price premium. In this way, a dual purpose was achieved, as BTC was withdrawn from liquid circulation, creating a self-reinforcing supply squeeze that fueled growing institutional demand.

Until January 2021, the GBTC trust saw an influx of almost50 thousand BTC, while GBTC was trading at a constant premium in the range of 10-20% to the spot price. At the end of January, arbitrage started dropping the premium to below 10%, and in response, the flow of funds into GBTC began to slow down dramatically. At the end of February, the inflow stopped completely, and GBTC began to trade at a gradually increasing discount to the BTC spot price.

As of the end of May, GBTC is trading fromdiscount to spot for more than three months, on May 13, reaching a peak low of -21.23%. The presence of a discount in the price of GBTC simultaneously eliminates the colossal outflow of liquid BTC supply and may tentatively signal a significant slowdown in institutional demand from the end of February.

However, as the lastsale, discount at GBTC began to decline, reaching -3.8% on May 28. This suggests that institutional interest - or at least the confidence of large arbitrage traders - has increased with the fall in the bitcoin spot price.

Grayscale premium to BTC spot price (link to updated source)

A similar picture unfolded with the CanadianPurpose Bitcoin ETF, which received a stable capital inflow until the end of April - early May. After that, when the market began to show signs of weakness, capital outflows prevailed. However, as in the case of GBTC, after the correction, demand appears to be recovering to a large extent, and at the end of May, capital inflows began to rise again.

Purpose Bitcoin ETF Inflow / Outflow Ratio (link to updated source)

Capital flows in both GBTC and Purpose ETF,point to a slowdown in institutional demand from February to May, and both will have an impact on the volume of BTC's liquid supply. On a positive note, the recent sell-off appears to have motivated investors to return to both products as the GBTC discount began to decline and capital inflows into the Purpose ETF rebounded.

Dynamics of capital movement on exchange wallets

After March 2020, Bitcoin went globalmacroeconomic scene, and this phenomenon can be clearly seen in the balance sheets of exchange wallets. The balance sheets of the exchanges have undergone a sharp reversal from constant accumulation to continuous outflow. BTC volumes were transferred from exchanges to custody and / or cold wallets - from liquid to illiquid state - creating a self-reinforcing supply squeeze.

Metric of changing illiquid offershows the rate of this transition over the previous 30 days (green bars). The scale of accumulation over the past two years is impressive, but the scale of the selling pressure in May is also notable. Investors were clearly intimidated by this latest sell-off.

And although it will probably take some more timefor the dust to settle, the return of this metric to accumulation will be a strong signal of a return to investor confidence. If this does not happen, it may signal the continuation of distribution.

Modification of an illiquid offer (link to updated source)

In the months leading up to the sale, you canto see also a tendency to an increase in the volume of deposits on exchange accounts. Conversely, with the decline in the price of BTC, there has recently been an opposite trend towards increased coin withdrawals from leading exchanges as investors enter the market to buy back the fall.

The downward trend in the overall balance of exchangesremained for more than 434 days, however, on April 3, there was a noticeable increase in the inflow of funds to exchange wallets. This is consistent with the return of previously illiquid coins to liquid circulation as shown in the charts above. Please note that this behavior can be attributed to several reasons, apparently acting simultaneously:

  • inflow of coins to exchanges for the purpose of distribution and sale;
  • provision of additional collateral for loans, futures and margin transactions;
  • rotation of capital to other assets (in particular, ETH, which we discussed here);
  • retail speculation and trading, especially those associated with the Binance Smart Chain.

A closer look at this trendit becomes clear that the outflow of funds from the exchanges actually continued or was neutral for most exchanges, with the exception of three: Binance, Bittrex and Bitfinex. These exchanges saw an accelerating influx of BTC during 2021, with the lion's share of it coming from Binance. During the May sale, the aggregate balance of these exchanges increased by more than ₿100k in a week.

Considering that these exchanges are operatednon-US companies, this could indicate a difference in market reactions and confidence in the reasons for the sell-off between different international jurisdictions.

Exchange address balances (link to updated source)

On the contrary, the balance sheets of exchanges in the US jurisdiction - Coinbase, Gemini, Kraken, Bitstamp - continued to shrink, and the May events had almost no effect on this trend.

Exchange address balances (link to updated source)

Share of fees paid for on-chain transactionsdeposit on stock exchange accounts has also increased recently. Similar to the 2017 macro peak, demand for deposits on exchanges accelerated throughout the bull market before hitting a new high, this time at over 20% of all on-chain fees. This speaks to the urgency of deposits for coin holders who found it important to prioritize their transactions - whether for panic selling or to provide additional collateral for uncovered positions during a correction.

Dominance index of commissions for on-chain deposits to exchange wallets (link to updated source)

Finally, on the exchange front, there was a hugea decrease in the share of borrowed funds in the derivatives markets, which led to a cascade of market sales, margin calls and liquidations. From the peak of open interest in futures of $ 27.4 billion, set in mid-April, more than 60% was washed out of the market. It is important to note that open interest in futures is only one form of leverage available in cryptocurrency markets. Additional sources of margin arise from cryptocurrency-backed loans, options markets and, increasingly, from DeFi protocols.

BTC futures open interest (link to updated source)

Exit liquidity and highly liquid reserves

Stablecoins have undoubtedly taken on a rolereserve asset of the industry, and each of them has its own unique mechanism for maintaining the "stability" of the exchange rate. Therefore, the behavior of the stablecoin rate in relation to $ 1 may provide some indication of the demand for liquidity to exit the market. In particular, in March and April, all three of the largest stablecoins - USDT, USDC and DAI - traded above the peg for a month, right up to the Coinbase listing. This suggests that there is strong demand for liquidity to exit, potentially in anticipation of a “sell on the news”.

Stablecoin rate (link to updated source)

However, on the other side of this salethe circulating supply of stablecoins has since reached new all-time highs. Since April 14, the day of the beginning of the correction, the volume of supply of stablecoins over the past 1.5 months has increased by the following amounts:

  • USDT - by $ 14.2 billion (+ 30%);
  • USDC - by $ 9.72 billion (+ 88%);
  • DAI - by $ 1.22 billion (+ 38%).

Stablecoin supply volumes (link to updated source)

Stablecoin Supply Ratio (SSR)correlates Bitcoin's market capitalization with the aggregate supply of all stablecoins and is a measure of kryptonative purchasing power in dollar terms. Lower SSRs mean that the supply of stablecoins (highly liquid reserves) is large compared to Bitcoin's market capitalization. With Bitcoin's declining market valuation and the rising supply of stablecoins, the SSR has now fallen to an all-time low of 7.5x.

This is a compelling representation of the largest kryptonative dollar purchasing power in history.

Dynamics of coin spending by hodlers

Finally, let's study the ratio of spending coins andhodling by market participants. In particular, we will focus on the balance between new investors, who may be relative newcomers to the volatile and fear-prone bitcoin market (short-term owners, or STH), and long-term owners (LTH), whose confidence has been shaped and hardened by years of battle scars.

During the 2020-2021 bull market, for coins from 6 months old. up to 3 years (representing buyers of the last cycles), there were two periods of growth in spending:

  1. December 2020 - February 2021: fixing profits in a growing market during a rally from $ 10,000 to $ 42,000;
  2. end of April - mid of May 2021: potential capital rotation (the price of ETH has doubled during this time), possibly in response to the weakening of the market structure, as mentioned above.

However, after both of these periods (and the pricecorrection), the consumption of old coins was significantly slowed down. This indicates that old hands are good enough to sell before a major correction occurs (their distribution contributes significantly to the liquid supply at resistances), but they also tend to return to hodling (and, apparently, buy back the fall) when the price falls. ...

Comparing the dynamics of spending old coins withAt the macro peak of 2017, you can see a fairly similar pattern with a slowdown in spending by old owners when the market enters the euphoric phase. However, on the very first bounce, a significant proportion of old coins began to move due to the increased likelihood of a bear market. The situation was similar in most of the 2018 bear market rallies, as well as during the surrender in November 2018.

This is an important metric to watch out for incurrent market structure as it allows you to see if there is a similar massive exodus of old owners from the market on price bounces. Conversely, the lack of distribution of these old illiquid coins may signal that old and experienced hodlers remain optimistic about the outlook for the BTC rate.

Ages of outputs spent (link to updated source)

Realized Cap HODL waveson realized capitalization) give an idea of ​​what proportion of the active supply is contained in the coins of a particular "age". A typical loop looks like this:

  • Share "Old" coins in total supply increases in bear markets as accumulation and capital flow from speculators to long-term hodlers resumes.
  • Share "Young" coins overall supply increases in bull markets as long-term owners sell coins at higher prices to new speculators with weaker hands.

In the current market structure, we see the firsta large impulse in the number of coins under three months, indicating the arrival of new speculators on the market. This is consistent with the first bull market rally, in which old coins were spent after breaking from $ 10K to $ 42K. The difference between the current cycle and the previous ones is the decline in the share of new speculators. There can be several explanations for this:

  • increasing the availability of derivatives and instruments for gaining exposure in the market without any interaction with the blockchain;
  • retail speculators' preference for crypto assets other than bitcoin and similar access to derivatives and other off-chain leverage options;
  • increased maturation of coins and hodling withInstitutional Buyers who have accumulated BTC at the start of the bull cycle and have not been shaken out by volatility, leading to earlier expansion in older coin categories (coin maturation).

By inverting this graph, two observations can be made regarding the share of owners of older coins:

  1. The volume of supply held by long-termowners actually returned to growth, confirming the thesis that coin maturation and hodling on the part of institutional investors remain valid. The development of this scenario will resemble the beginning of a bear market, but may also contribute to a potential squeeze in supply.
  2. Long-term owners currently hold 10% more active supply than in all previous market cycles.

This second point can be interpreted as bullishsignal as it means fewer coins have been distributed by the hodlers. However, it can also be considered a bearish signal, indicating a lack of demand to absorb this relatively smaller supply of coins.

After all, the biggest financial pain in the world issell-off time arises from the evaporation of unrealized profits, whether it be a return to cost or surrender to unrealized losses. The Net Unrealized Profilt and Loss metric calculates the cumulative gain or loss on unspent coins in proportion to the market capitalization of an asset.

Filtered this metric by short-termowners (coins <5 months old), you can see that the last sale in May is comparable in scale to bear markets and the largest capitulations in Bitcoin history. An extraordinary number of 2021 buyers are now holding coins at a loss. This offer can still be brought to the market in an attempt to recover the price and become a significant obstacle for the bulls.

Net unrealized profit / loss of short-term owners of BTC (link to updated source)

By filtering out coins in the same way,held by long-term owners, we get a graph showing that the market is on the verge of a long bearish trend historically. The unrealized gains and losses (PnL) of long-term investors tend to be less volatile and more cyclical due to bitcoin's tremendous long-term price performance.

However, the current degree of net unrealized PnLlong-term owners are testing 0.75, a critical level that separated previous bullish and bearish cycles. Only in the 2013 “double pump” scenario did this metric see a recovery from this level. If paper profits for long-term holders continue to decline, this could create an additional source of supply, ready to go to market in the next attempt at price recovery. On the other hand, higher prices and reduced supply as a result of buying in the fall combined will begin to resemble the 2013 double pump scenario.

Net unrealized profit / loss of long-term owners of BTC (link to updated source)


In this article, we have covered a number of metrics andindicators describing the structure of the market before, during and after one of the most impressive (and intimidating) sell-offs in Bitcoin history. To summarize, from the available data, several arguments can be deduced in favor of both bullish and bearish scenarios:

For bears

  • Institutional demand has clearly slowed since February, and as a result, the effect of supply cuts has been largely dissipated.
  • Exchange balances increased significantly, resulting in large volumes of highly liquid coin supply that must now be re-accumulated.
  • Stablecoin rate behavior ahead of the direct listing, Coinbase says the distribution was in full swing and the old owners were actively spending BTC just before the sale.
  • A huge number of short-term owners remain at a lossand unrealized gains for long-term owners are at a historically significant level, a break below which coincided with the start of past bear markets.

For bulls

  • Institutional Products The GBTC and the Purpose ETF are showing signs of recovery despite the depreciation, which may serve as an early sign of renewed institutional interest.
  • Despite the overall increase exchange balances, a closer look reveals a significant difference between the trends in the US jurisdiction and offshore exchanges. Apparently, the factor of jurisdiction can play a significant role here.
  • A sharp increase issue of stablecoins, which creates the largest base of not yet invested cryptonative dollars in the history of crypto markets.
  • Most of the sales seem to have come from short-term ownerswhile long-term holders appear to be buying back the fall with growing confidence.

Few people said that BTC hodling is a processeasy and painless, and for many, the volatility of recent weeks is only part of a larger story. It is only clear that the scale of this sale is very significant, and a large number of buyers are at a loss today. How and to what extent the market will recover from this decline will undoubtedly test the conviction of its participants against the background of the macroeconomic situation, which is still favorable for digital technology deficit.

The article does not contain investment recommendations,all the opinions expressed express exclusively the personal opinions of the author and the respondents. Any activity related to investing and trading in the markets carries risks. Make your own decisions responsibly and independently.