December 4, 2021

Continued Growth - Most Likely Scenario - Onchain Pulse of November 2, 2021

Bitcoin Consolidates After Recent Record High Refresh And Design Changes Fundamentals in both derivatives and spot markets indicate further gains are the most likely scenario, according to Glassnode analysts.

After an exciting week with the renewal of the all-time high for bitcoin, the price has pulled back somewhat and is consolidating in recent days.

Despite some market weakening aftersetting new highs and briefly returning below $ 60K, Bitcoin saw a 40% increase in October, driven in part by the excitement over the launch of the ProShares Bitcoin Strategy ETF ($ BITO). This is the highest one-month gain since December 2020. The total price range of the October candlestick (including the wicks) on the price chart was $ 23,205, which in dollar terms is larger than the entire price range of Bitcoin from its inception to December 2020.

Moderate levels of spending and profit taking

When new highs are reached, behaviorholders and how actively investors are taking profits can provide valuable information about the state and mood of the market. SOPR (Return on Exits Spent Ratio) tracks on a daily basis the return on bitcoins spent relative to their realized value. Here we use an adjusted version of the indicator, Adjusted SOPR (aSOPR), which ignores exits less than 1 hour old to filter out noise from day trading and intermediate transactions.

The current levels of profit taking on-chain look likequite moderately, considering that the price high was updated just 10 days ago, and is more reminiscent of the beginning of an early bull market. It seems that the current owners, by and large, do not want to part with their "coins" at these levels and expect higher prices. The aSOPR indicator being in positive territory during consolidation or price rallies is a constructive sign, as it suggests that the market can absorb selling pressure while maintaining important price support levels.

Adjusted SOPR (SOPR) (updated source)

It is customary to pay great attention to long-termholders, but the dynamics of the behavior of players with high time preference (short-term holders) can also tell a lot about the state of the market. The sustained level of profitability of short-term holders (STHs) over time is a reliable indicator of bullish / bearish market sentiment, as STHs are often high leverage sellers or buyers.

In the diagram below:

  • Values ​​greater than 1 (green areas) indicate that short-term holdersstart buying when the price approaches their average buy price (base price), which is manifested in the indicator bouncing off the black threshold line. Sellers find liquidity, and new owners keep the coins at breakeven or in profit.
  • Values ​​below 1 (red zones) reflect periods when short-term owners inkeep coins at a loss on average. When level 1 (black line) acts as resistance, it means that short-term holders on average fail to profit.

Profit / loss ratio for short-term holders (updated source)

Another interesting angle to evaluatethe profitability of market participants by on-chain indicators is given by the metric of net unrealized profit / loss (NUPL). In the chart below, the indicator is filtered to include only long-term holders (LTH). This metric reflects the overall level of profitability of all network entities holding coins for at least 155 days.

Indicator value zone between 0.50 and 0.75(means 50-75% of net income for LTH) has historically been a turning point for the market. When the NUPL for long-term holders tests this area and they hold their ground by not selling their stock, the price tends to rise in the coming weeks and months.

This dynamic was played out with a "double pump"2013–2014, as well as in 2017. In 2019, long-term holders did not show the same firmness and capitulated. And in 2021 LTH-NUPL is again looking for support above this key zone. In every previous case, when LTH-NUPL exited this zone to higher levels, the price broke through record highs.

LTH-NUPL adjusted for users (updated source)

High leverage longs write off losses

With the launch of ProShares Bitcoin Strategy ETF tradingin the same week as bitcoin's new price highs, the futures markets were intense and lively. Although ETFs exist in the traditional futures market, there has been a surge in activity in perpetual swaps, where premiums are determined by the funding rate.

A positive funding rate means thattotal leverage is distributed more towards the longs (buy side, upside bets), and these traders pay a premium to shorts (sell side, downside bets) for the privilege of holding their positions open. Differences between the funding rate and price movement can signal increased risks for traders taking the other side, especially at high levels of open interest.

  • If the funding rate is positive and the price continues to rise, then the premium is in line with market sentiment and, in essence, is simply the cost of being in the market.
  • If the funding rate is positive and the price is in a sideways trend or decliningthen high leverage longs held against market movements are particularly vulnerable to liquidations.

In the chart below, red arrows indicateepisodes of price decline immediately following an increase in the funding rate for perpetual futures (blue arrows), and subsequent episodes of “deleveraging” (orange arrows) that occur when unprofitable leveraged positions are closed. Funding rates are currently decreasing along with the price. This suggests that margin traders are generally taking a more cautious approach, which is a sign of a healthier and more balanced market condition.

Funding rate for perpetual futures (all exchanges) (updated source)

Major long liquidations tend to followfor moments of high positive financing combined with a sideways trend or price decline. In turn, the likelihood of cascading short liquidations increases during periods of negative funding rates (indicating a predominance of short positions) in conjunction with rising prices.

In the diagram below, the red arrows have been moved fromSee the previous chart and highlight waves of liquidations following periods of divergence between the funding rate for perpetual futures and price movements. It is worth noting liquidations of $ 3.5 million per hour that occurred after the renewal of record highs on October 21-22. A certain number of traders rushed to open large longs immediately on the release of the BTC exchange rate into new pricing territories and were quickly punished by the market.

According to our observation regarding the ratefunding has slowed down in the last few days of liquidation, suggesting that margin traders are now more attentive to their positions and their level of risk.

Longs liquidation for futures (total volume, all exchanges) (updated source)

The latest futures chart for today isThis is the percentage of total open positions in crypto-margined futures, which has been declining since spring 2021. Collateral for futures contracts can be provided in two ways: in cryptocurrencies or in cash.

  • Cash Margin Futures imply collateral in the form of cashor their equivalents such as stablecoins pegged to the US dollar. Such collateral usually has a more stable value compared to cryptoassets.
  • Crypto-Margined Futures imply collateral in the form of crypto assets,such as bitcoin. In this case, the trader's risk and collateral are based on the same asset, and therefore on the same volatility (e.g. BTC). If both the position and the hedge lose value, the trader has significantly less room to maneuver before liquidations begin, which increases the risk, but also multiplies the potential profit.

From the peak values ​​of the spring bullish hyperally, the share in the total open interest of futures, marginalized by cryptoassets, declined, falling from ~ 66-69% to 46% today. This means that more than half (54%) of futures contracts today are collateralized in cash or cash equivalents, mitigating the potential effects of compounded volatility.

Percentage of cryptoasset-margin futures in total open positions in BTC futures (all exchanges) (updated source)

Optimistic dynamics of Bitcoin supply and network activity

RVT Ratio originally presentedCheckmate, a leading analyst at Glassnode, measures the dollar value of a network's on-chain transfer versus its relative valuation. RVT is calculated as the market capitalization of the network divided by the daily volume of on-chain transfers in dollar terms. It is a robust and reliable oscillator for identifying bullish and bearish market cycles.

  • Low RVT values mean that the dollar volume of the on-chain transferand hence, the utilization rate of the network grows relative to its realized capitalization (the aggregate base value of all coins in the network). This can be interpreted as a bullish factor.
  • Higher RVT values mean that the volume of on-chain transfer is decreasingrelative to the realized network capitalization, signaling that the network's valuation is ahead of the useful demand for it. This can usually be interpreted as a bearish factor.

The RVT is currently trading attheir historical lows. This suggests that the dollar volume of on-chain transfers in the Bitcoin network is quite high compared to the cost of capital allocated in it, which is a positive factor in the macro outlook.

RVT ratio (updated source)

Supply dynamics are oftena leading indicator of changes in Hodler moods. As the price rises to new highs, “old coins” come into motion in search of liquidity to fix profits. The Spent Volume Age Bands (SVAB) coefficient, filtered for coins older than one month (graph below), has recently entered bullish territory (> 6% of daily volume) - after September, marked by the lowest level of activity (<2% daily volume) for this cohort in recent history.

Volume Spent Age Coefficient (SVAB) (updated source)

For confirmation of an increase in daily consumptioncoins older than 1 month, let's turn to the indicator of the average life of the spent output (Average Spent Output Lifespan, or ASOL). Similar to the just mentioned “bullish” spike in the SVAB indicator, in ASOL there is also a rise above the 40-day average, which usually precedes a period of high price volatility in any direction.

Adjusted for users ASOL (7d EMA) (updated source)

An increase in the activity of old coins in combination withthe moderate level of profit-taking discussed above gives an optimistic picture of bitcoin's fundamental on-chain performance. If on-chain sales of bitcoin remain relatively low, then the market may soon return to price determination at higher levels that have not yet been explored.

BitNews disclaim responsibility for anyinvestment recommendations that may be contained in this article. All the opinions expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading on crypto markets involve the risk of losing the invested funds. Based on the data provided, you make investment decisions in a balanced, responsible manner and at your own risk.

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