October 19, 2021

Hodlers keep walking plus a welcome increase in on-chain activity

Fundamental on-chain indicators of the bitcoin market continue to form an optimistic, "bullish", the picture, and market sentiment remainspositive. Against this backdrop, we analyze the growth in leverage and futures premiums in the derivatives markets, the impressive growth in the share of long-term owners in the current BTC supply structure, and the long-awaited increase in the level of on-chain activity of Bitcoin users.

Increase in the level of on-chain activity of Bitcoin users

The beginning of October saw a welcome increase in Bitcoin usage as measured by on-chain metrics, raising the likelihood of new demand coming in Q4 2021.

Daily number of active subjects(members) of the network grew by 19%, reaching about 291 thousand. This roughly corresponds to the levels of the end of 2020, before the start of the last large-scale bull rally to date. Historically, such transitions to increased on-chain activity of market participants have been correlated with increased interest in the asset in the early stages of bull markets.

The number of active entities in the Bitcoin network (7d MA) (updated source)

Along with the growth in the number of market participants, thetypical transaction size (in BTC). Since mid-September, the median transaction size has increased to over 1.3 BTC, and peaked at 1.8 BTC. The previous time the Bitcoin network saw a median transaction size above 1.6 BTC in March 2020, during a liquidity crisis.

An increase in the typical size of a transaction is not in itselfmeans an inevitable price increase, but indicates the presence of large and, probably, even institutional capital flows in on-chain transactions. Generally speaking, the periods near the end of bear markets are when the smart money goes into massive accumulation. These periods are often characterized by low (but growing) levels of on-chain activity coupled with an ever-increasing size of on-chain transactions.

Transaction size (BTC) adjusted for users (updated source)

The dollar value of the BTC on-chain transfer is alsoincreased to significant levels. By presenting the transfer volume (in USD) as a percentage of the realized capitalization, we can directly compare the level of network activity with the value, capital, "enclosed" in the asset. The chart below shows the Realized Velocity metric calculated as the ratio of the volume (in USD) of on-chain transactions to the realized capitalization of Bitcoin. This gives an idea of ​​the level of demand volume in relation to the value of the total supply of coins in accordance with the price of each coin at the time of its last movement in an on-chain transaction.

  • Transfer volume above 3% of realized capitalization usually marks the beginning of a bullish market phase as the calculated utility of the network increases over the realized estimate.
  • Transfer volume below 3% of realized capitalization indicates a more bearish phase when the estimated utility of the network is low or declining compared to the realized estimate.

Now the volume of transfer has exceeded the threshold again3% of realized network capitalization, indicating the growing demand for on-chain settlements. This is a bullish factor to watch over the coming weeks, given the high significance of this signal on historical data.

Volume (USD) of on-chain transfer as% of realized Bitcoin capitalization (updated source)

Long-term owners continue to "walk"

Supporting a constructive agenda to increaseon-chain activity, the growth in the supply of coins in the hands of long-term holders (LTH, from Long-Term Holders) shows no signs of slowing down. Long-term owners gradually distributed their coins to the market from October 2020 to March 2021, when their combined holdings peaked at 10.91 million BTC.

In the last 7 months, dominant behavioramong the network participants there was "hodling" (long-term holding), as a result of which the 155-day threshold, conditionally separating the categories of short-term (STH) and long-term (LTH) held BTC, crossed 2.37 million coins. For comparison, only 186 thousand BTC were "mined" during the same period, that is, long-term holders in the last 7 months accumulated 12.7 times more coins than were issued by the network.

The volume of BTC supply in the hands of long-term holders (updated source)

Glassnode tools allow you to estimate the magnitudeaccumulation of coins by long-term holders relative to the current volume of BTC miners. Here we take the relationship between the 30-day change in supply volume in the hands of long-term owners (LTH) (blue line) and the 30-day change in the circulating supply of BTC (orange line), equal to the total issue volume.

This relationship is shown in pink in the graph below.color and represents the number of coins accumulated or distributed by long-term holders as a multiple of the monthly BTC issue. February 2021 saw a strong distribution of coins by long-term holders, 26.4 times the volume of BTC emissions. On the contrary, June was marked by a record relative accumulation, 27.7 times higher than the volume of emission.

Since July, the level of accumulation and hodling from the outsideLTH remained fairly stable in the range of 13.6-15.0x the volume of issue, that is, the number of coins withdrawn from active circulation significantly exceeded the number of issued BTC.

The ratio of LTH supply to BTC emission volume (updated schedule)

This observation is again confirmed by the metricRevived Supply (coefficient of reactivated supply) for coins older than a year, reflecting the volume of coins older than 1 year spent in on-chain transactions per day.

  • For bull markets is characterized by a gradual distribution (ascendingthe trend in the indicator, highlighted in pink) of coins on the market from the side of long-term holders, which ultimately leads to the formation of a local or global maximum, when supply begins to exceed demand.
  • After establishing global vertices spending on the part of long-term holders is slowing down (downtrend in the indicator, highlighted in blue); now they are waiting for cheaper prices in order to resume accumulation.
  • After a significant price decline “Smart money” is again moving to accumulation, whichcharacterized by low levels of reactivated supply (horizontal trend in the indicator, highlighted in green), since old coins remain motionless, while relatively young ones change hands.

In the current market structure, the Revived Supply ratio assumes that the market remains in a zone of relative accumulation: only very small volumes of coins older than 1 year are returned to circulation.

BTC Revived Supply Ratio (updated source)

As the price rises, a very large part of the UTXO-set alsoreturned to profit, and now the share of coins in profit is 95.7% of all Bitcoin UTXOs. This is an increase of about 11.3% from the September lows. Note also that, despite the depth of the May correction, it did not lead to a drop in the share of profitable UTXOs to the lows of 40-60% observed in the 2018-2019 or March 2020 bear market. And note that in strong bull markets, the share of profitable UTXOs can hold above 90% for months on end.

Percentage of UTXO in profit (7d MA) (updated source)

Leverage in the derivatives market is on the rise again

Positive market sentiment and constructiveprice movements have found expression in derivatives markets as well - in the sum of open positions, healthy contango in the futures markets, and rising funding rates for perpetual swaps. Open interest in futures rose 5.6 billion (+ 45%) from September lows. Please note that the current values ​​of open interest are similar to the levels of early September and mid-May, and in both cases were accompanied by a significant long squeeze.

Open interest in BTC futures (in billions of dollars) (updated source)

Constructive future prices can also be seen inthe temporal structure of futures. In the chart below, the consensus price ranges between exchanges are highlighted in blue. On most exchanges (except Huobi), traders value bitcoin at the end of the year at about $ 58.5K (12.4% annualized premium). At the time of writing, the price of futures for delivery in March 2022 on FTX and Huobi stands out noticeably, trading at a premium of $ 800 and a discount of $ 3.1 thousand, respectively, relative to the consensus price of $ 60.1 thousand.

Time structure of futures (updated source)

3-month annualized futures basisin early October it also rose to + 12.4%. May-July was a particularly bearish period, with futures exchange premium to spot price for three months at only 2-5% y / y. In late September, futures premium returned to this + 5% low on the back of relatively bearish market sentiment. However, according to the experience of 2020 and 2021. a relatively low futures basis has proven to be a strong indicator for counter-trend rallies.

3-month Bitcoin futures basis (updated source)

The perpetual swap markets in early October alsoare becoming increasingly bullish, with funding rates ranging from +0.01 to +0.02 across all exchanges. At the time of writing, funding rates are dropping towards the lower end of this range, suggesting that traders are obviously using leverage, but in a more controlled manner compared to previous periods. However, the likelihood of short-term volatility and a relatively aggressive long squeeze amid rising funding rates and rising open interest is indeed increasing.

Bitcoin Perpetual Swap Funding Rate (updated schedule)

In conclusion, let's turn to the options markets, atwhich also saw an increase in open interest by $ 3.6 billion (+ 64%) from the beginning of October. Options markets still account for a relatively small share (usually <1 billion) of total trading volume, but their growth reflects the increased maturity of the market, providing new opportunities for hedging risks, financial instruments for miners and traders.

Open interest on BTC options (billion%) (updated source)

Growth of open interest, exchange rate premiumfutures contracts and positive financing rates often coincide with price increases. While this factor does increase the likelihood of excessively leveraged positions being squeezed out of the market, for a holistic view it should be considered in conjunction with fundamental factors observed in spot markets and blockchain metrics.

What we can observe is that in manyRegarding, the current upward price momentum is supported by very healthy trends in the accumulation and hodling of bitcoins, as well as an increase in on-chain activity and network usage.

BitNews disclaim responsibility forany investment advice that this article may contain. All the opinions expressed express exclusively the personal opinions of the author and 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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