JdB34 - EN : A moderate optimism
Nearing $50K resistance, the Bitcoin market is moving cautiously as on-chain activity seems curiously quiet.
The rise continues as the Bitcoin price approaches $50K. After bouncing off the MA21, forming a weekly low of $43,959, its price crossed the MA200 before realising a local high of $50,427 this morning.
As BTC is testing the $50K hard zone for the eighth time this year, the environment in which the market is evolving has some similarities with the context established in late 2020.
This week, I focus on metrics related to:
realized and unrealized profits/losses ;
derivatives markets;
on-chain activity.
A feeling of deja-vu
After 5 weeks of consecutive rise, the market seems to return to a state observed in November / December 2020. Back to a state of profitability, some holders have realized their profits without putting considerable downward pressure during the last days.
Indeed, after a massive profit-taking event in early August, the NRPL seems to be entering a new period of positive fluctuations. With realized profits bringing selling pressure, the market will prove its strength if enough players buy back the tokens sold at profit.
This will cause a consolidation of this metric above 0, mimicking the market environment of November/December 2020, when NRPL witnessed that a long period of profit taking begun even before BTC broke its previous ATH.
Moreover, a major part of BTC holders are profitable with 86.5% of addresses and 92.9% of UTXOs in profit.
As the NUPL approaches 0.6, it appears that a lot of profit taking is still latent. This fact could lead to a short-term price decline if some investors decide to cash in their gains as BTC nears a historical friction zone.
Here again, we see that the NUPL is back on a decisive zone. Personally, I would like to see this metric work the 0.6 zone before finally breaking out of it by the upside.
This would be an ideal sign that investors would prefer to hold on to their profitable chips in order to realize larger gains on a short - medium term target. Typical bull market hodler behavior.
However, there has been a slight trend of BTC deposits on exchanges since Saturday. Here, the behavior leading to a bullish scenario would be to see these BTC leaving the exchanges again, as was the case in mid-November 2020.
As accumulation favors a supply shock while reflecting the long-term investment bias of holders, a continued decline in exchange holdings could cause the price of BTC to repeat the bullish behavior experienced 9 months ago.
Conversely, a significant resumption of deposits on exchanges would signal the willingness of some market participants to take profit, resulting in potentially high downward pressure that demand will need to contain to maintain a positive sentiment.
Derivatives markets are waking up
Speaking of sentiment, let's try to the determine institutional investor behavior during this pivotal period. In the derivatives markets, interest in futures has risen along with price to new local highs.
After a drop of $10.8 billion during the May sell-off, interest in the futures markets has recovered $6 billion (+56%) from the lows of the recent consolidation.
This week in particular, futures contracts rose by $1 billion as traders began to use more leverage.
In terms of positioning, the funding rate for perpetual futures is moderately tilted to the long side. Funding rates have been positive since the end of July, a sign that investors are projecting a rising BTC price for the short to medium term.
Indeed, the magnitude of funding is far from the peaks seen in the first part of 2021. This may indicate that excessive leverage is not yet in play and that the uptrend remains healthy and reasonably spot-oriented.
Moreover, Dylan LeClair points out that, since the May correction, the collateral used to drive institutional leverage has largely been stablecoins.
This indicates that investors prefer to fund their positions from tokens that are independent of market volatility, implying a decrease in margin call risk.
In essence, we are still a long way from a global derivative market overloaded with risky bets that could lead to cascading liquidations if the price were to turn down.
Slow on-chain activity
Despite the optimistic market context, I would like to highlight a crucial point : Bitcoin blockchain activity remains surprisingly quiet.
A divergence documented by Checkmate, TXMC, William Clemente and CryptoVizArt is that on-chain activity is still not keeping up with rising prices. The number of adjusted transactions per entity is at historic lows, between 175K and 200K transactions per day.
These declines in activity have been seen a few times over the past 5 years:
During the 2016-17 bull market, the disbelief phase and retracements that occurred in the middle of the long-term trend;
During the 2018-19 bear market, as interest in Bitcoin waned and prices corrected 85% from the peak.
After the 50% correction in May and 10 weeks of consolidation.
Transaction volumes are similarly lackluster, with the Bitcoin network posting a daily volume of about $18.8 billion. That's 37 % less than at the peak of the 2017 bubble and 57.6 % less than the peak reached during the May capitulation.
Tthe volume is still 276% still higher than the $5 billion average recorded throughout 2020, although we must take into account that the price has risen from $10K to the current level of nearly $50K (+500%).
Curious... while everything seems to point to a very optimistic macro sentiment, it seems that Bitcoin network participants are not as active as expected.
Despite a market bak to profitability, long-term investors accumulating massively and cautious but present institutional investors, the Bitcoin blockchain does experience great demand for block space.
According to William Clemente and CryptoVizArt, it all depends on how we view the use of the Bitcoin network.
If one considers that Bitcoin must make its case as a disintermediated digital payment system, the number and volume of transactions seem far from ideal.
On the contrary, if the Bitcoin token is to stand out as a store of value, the recent accumulation of long-term holders tends to show that the use of this asset to store value is at a premium at the moment.
As the development of Bitcoin's Lightning Network (LN) reaches an encouraging phase, it is also possible that some network users are migrating to the L2 solution, reducing the number and volume of transactions measured on the Bitcoin network.
Knowing that the transactions made via LN are not accounted for by the Bitcoin blockchain, I tend to imagine that a part of the transactions will disappear from the charts in a hypothetical future.
To Sum Up
This week, Bitcoin's market structure has shown technical signs similar to those occuring in late 2020.
As the market has returned to a profitable state, an incentive to take profit could push some holders to sell their tokens in order to realize gains.
Meanwhile, interest is returning to the derivatives markets, while institutional investors seem to be both cautious and optimistic.
Finally, an unusual calm continues as the number and volume of transactions on the BTC network struggles to accelerate.