March 28, 2024

The Calm Before the Storm - Onchain Pulse from July 17, 2021

In the new survey, the analyst Will Clementebreaks down the current situation in the Bitcoin market withon-chain metrics, separating signal from noise.

Dear readers, I hope you have a successful week. Key points of the review:

  • On-chain activity in a horizontal trend.
  • Reduced volatility.
  • 9.94% of Bitcoin's money supply moved between $31K and $35K, 17.55% of Bitcoin's money supply moved between $31K and $40K.
  • The divergence of the price chart from on-chain flows continues as re-accumulation continues:
    • continued growth in the ratio of liquid supply;
    • exchange balances continue their downward trend (-4859 this week, -44,883 from May highs);
    • miners accumulate BTC.
  • A horizontal trend in the balance sheets of whales after a significant increase in the last week (in the last week, there were no large sales or purchases from the whales).
  • The influx of new users continues to update record highs.

Already 8 weeks in a fairly narrow range.Volatility and trading volumes have dropped significantly. With the help of my good friend John Wick (pseudonym), a graphic volatility squeeze indicator, you can see a significant narrowing of the Bollinger Bands, accompanied by an orange indicator signal (see chart below). This signal foreshadows massive movement. Two previous similar squeezes occurred in July 2020, before moving to record highs, and in April 2021, before they fell. It took 1 to 3 weeks to resolve these volatility squeezes each time, so in theory you can expect a big price move to start in the next few days, although it can take up to a full three weeks (I doubt it personally). What useful can we learn from this? And what will be the direction of this movement? I think it's best to look for clues in on-chain metrics.

But for a seed, I will also give a graph of the historical volatility index of bitcoin, which also looks quite ripe for an upward momentum.

Bitcoin Historical Volatility Index

An on-chain way to track exchange activity,the metric of commissions for transferring funds to exchange addresses continued its downward trend. Trading volumes in the futures market have been volatile and trending lower, with futures open interest rising slightly from the low of $600 million recorded on June 28, although the overall trend in this measure has remained sideways since May.

Commissions for transactions to exchange addresses (7d MA)

BTC futures open interest (left); BTC futures trading volume (right)

So what are some directional clues?potential big movement we can find in on-chain metrics? Let's start with capital flows in exchange addresses - historically they have served as a good indicator of the dynamics of BTC accumulation. One of the main trends at the beginning of this bullish rally was the reduction in the supply of coins on exchanges. The trend changed between April and mid-May, when coins began to return to exchanges in waves for sale and as additional collateral. Exchange stocks then increased by 144,001 BTC. Since May 18, the total balance of exchange addresses has decreased by 44,883 BTC, with most of this decrease occurring in the last 3 weeks. This is a clear trend that has been going on for almost two months. Including this week, exchange balances decreased by 4859 BTC.

BTC balance on exchange addresses (all exchanges)

To look at accumulation more qualitatively(as opposed to quantitative assessment), it is possible to analyze the historical dynamics of the spending of coins for those network actors to which these coins flow. To do this, I regularly pay attention to the metric of changes in liquidity supply (over the previous 30 days) from Glassnode. The supply ratio chart below helped me create Willy Woo (data from Glassnode, of course). This version of the indicator turned out to be somewhat more reactive and in real time reflects the movement of coins from liquid to "illiquid" network entities or vice versa. Continued growth indicates an increase in the flow of coins from speculative traders to long-term investors over the past week. The supply shock scenario, in my opinion, is still valid.

Liquidity supply ratio

Next according to plan is the indicator of “liveness”(liveliness) Bitcoin. This is a great metric for identifying broader trends. It reflects the ratio of coin days destroyed to created. Here's a simple illustration of the concept of ruined coin days (you can read more here): 2 BTC goes into a wallet and doesn't move for 5 days = 5 coin days accumulated. They are then consumed = now 5 coin days are destroyed. The Bitcoin liveness chart shows a downward trend, indicating accumulation. Previously, such episodes of liveness coefficient occurred in parallel with several market structures. This marked the beginning of bear markets after 2011, after 2013 and after 2017. However, this picture was also observed between the “double pump” of 2013, as well as before the start of the bull rally last year.

User-adjusted Bitcoin liveliness and BTC / USD rate. A = accumulation; D = distribution.

Another way to take a closer look at the accumulation that is taking place is to analyze changes in the balances of miners. Miners continue to increase their holdings, +3280 BTC from June lows.

Miners wallet balances (all miners)

And this is what the UTXO distribution profile looks like:various price levels. Between $31K and $35K, 9.94% of Bitcoin's money supply was moved, and in the broader $31K-$40K range, 17.55% of Bitcoin's money supply moved. A huge capital base continues to be built at current levels.

Distribution of UTXOs by selling price

Finally, we can observe a net increase in the numberBitcoin users (network entities, not addresses). This indicator is storming new highs - the exact opposite of what happened earlier in the transition from a bull market to a bearish market (sheer drop). There has been a lot of talk lately about active addresses. Yes, their number is decreasing because wallets create new addresses when they make transactions. Accordingly, with a decrease in on-chain activity, the number of active addresses, by definition, decreases. But subjects and addresses are not the same thing. Analyst companies, including Glassnode, use all the on-chain analysis methods available to them and specially developed algorithms to cluster addresses and identify unique users.

The influx of new users and the BTC / USD rate

In conclusion, it should be noted that the divergencebetween the dynamics of accumulation, observed by on-chain metrics, and the price against the background of the bearish sideways movement of the price continues to increase. After eight weeks in the re-accumulation range, I suspect that we are now nearing the end of this process. We will soon see how the current decline in volatility resolves.

That's all for me. Have a great weekend everyone and good luck!

 

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.

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