That May 19 selloff marked the capitulation of short-term bitcoin price speculators and flushed the market from its excess leverage.
Favorable Bitcoin Supply Dynamics Since May 19
The large amount of previously illiquid coins that were thrown on the market were gradually accumulated by more convinced investors with a lower time preference. A re-accumulation zone was born. Since the May 19 capitulation event, the percentages of all circulating bitcoin supply that are not held not on exchanges (Figure 9, blue) and that are illiquid (green) or are part of the LTH supply (red) are all in an uptrend.
Figure 9: The bitcoin price (black) and the percentages of the circulating supply that are not at exchanges (blue), labeled as illiquid (green) and labeled Long-Term Holders (red) ( source )
With a market that is cleared from speculators and excess leverage, these underlying on-chain supply dynamics are the remaining elephant in the room when it comes to estimating where the bitcoin price moves next.
It is important to realize that the trends of these metrics can suddenly turn around and paint a very different picture, as we saw during the mid-May selloff. Therefore, it is not possible to necessarily predict future bitcoin price movements based on these historical trends.
However, the on-chain data is currently very clear in telling us that experienced market participants are in aggregate not looking to sell within the current market context. If these trends continue, it means that an increasing portion of the bitcoin supply is being held by investors with relatively strong hands. Due to Bitcoin’s inelastic supply, this means that if bitcoin demand does increase again, it will be increasingly difficult to buy bitcoin at current prices, as only a limited set of current holders are looking to sell. This is known as a supply shock.
If such a supply shock is indeed forming, it is a bit like holding a beach ball under water while it is being inflated. You can keep the ball under water for a while, but if you slip for just a moment or if the ball is inflated to the point where you can no longer hold it, the ball shoots out of the water. Time will have to tell if current on-chain trends are indeed indicative of the bitcoin beach ball currently being inflated while being held under water, where all dips at this point are being bought — or whether a change in context will (temporarily) deflate the ball and lower its thrust potential.
January Local Top Prices Setting A Technical Price Floor
As mentioned before, the bitcoin price levels related to the January local top and its correction provided key support and resistance levels during the recent market downturn (Figure 10). The May 19th capitulation and cascading long-liquidation event bounced exactly on the price level where the bitcoin market found support (~$30k) after its pullback from the January local top. The price levels of the actual January local top (~$40k) ten provided a clear resistance zone during the subsequent relief bounce(s).
After a supply squeeze was formed between the May 19 capitulation event and mid-July and some of the remaining trapped bears exited their positions during the late-July relief bounce (which we discussed in Figure 5), the $40,000 January local top resistance zone is now being tested for support.
Figure 10: The bitcoin price on Bitstamp and the zones reflecting the top (orange) and bottom (green) of the January local bottom ( source )
Have enough STH speculators with weak hands and LTH that wanted to sell below the key $40,000 resistance zone done so for this level to now provide a key support zone?
Figure 11 shows the amount of bitcoin that was moved on-chain at each price level. We can see that a lot of coins moved around the $30,000 and $40,000 price levels, providing further evidence to the claim that these zones are potentially important levels to watch.
Figure 11: Bitcoin’s Unrealized Transaction Output (UTXO) Realized Distribution (URPD) ( source )
Potential Macroeconomic Threats
As mentioned several times throughout this column, while the on-chain trends that are described appear to be quite strong, they can shift the mid- to long-term perspective for the bitcoin price. Current uncertainties in the overarching macroeconomic environment may provide a direct cause for that.
Since June, the U.S. Federal Reserve started mentioning that they are considering, at some point in the future, to turn off some of their money printing presses. Some investors believe that they will not be able to do so without creating havoc in the economy, but the increasing dollar currency index (Figure 12, red/green) since then suggests that others have started to adopt a “risk off” mindset. The more recent uncertainties related to Evergrande, the Chinese housing giant that may be on the verge of bankruptcy, caused even more uncertainties in equity markets, increasing the rotation of money from equities into cash.
Figure 12: The S&P500 (SPX; black/white) and United States Dollar Currency Index (DXY, red/green) ( source )
If macroeconomic circumstances do worsen during the upcoming period and the broader financial markets increasingly go “risk off,” causing an equities selloff, it is likely that the bitcoin price will drop alongside it. If that does happen, it will be very interesting to observe to what extent the on-chain trends that were described in this article remain intact, causing any bitcoin price dips to be bought up quickly. Or conversely, whether experienced market investors will actually start exiting their positions, potentially resulting in a more significant bitcoin bear market.
Current Market Sentiment
I hold a monthly bitcoin market sentiment poll on Twitter. Although the results of such polls always need to be interpreted with a grain of salt due to selection bias, this month’s poll suggests that a portion of the market still has high expectations for the bitcoin price development over the upcoming year (Figure 13).
Figure 13: Results of a monthly market sentiment poll on Twitter ( source )
Halving Cycle Roadmap
As always, I like to close off this edition of Cycling On-Chain by looking at the Bitcoin Halving Cycle Roadmap for 2020-2024 (Figure 14). This chart visualizes the current bitcoin price, overlayed with the BPT that we discussed above and with price extrapolations based on two time-based models (dotted black lines) — the Stock-to-Flow (S2F) and Stock-to-Flow Cross Asset (S2FX) model (striped black lines) — and cycle indexes for cycles 1 and 2 (white lines) and the geometric and arithmetic averages of those (grey lines). All these models have their own statistical limitations, but together they give us a rough estimate of what may be ahead for the bitcoin price if history does turn out to rhyme once again.
Figure 14: The Bitcoin Halving Cycle Roadmap
Previous editions of Cycling On-Chain:
Disclaimer: This column was written for educational, informational and entertainment purposes only and should not be taken as investment advice.
This is a guest post by Dilution-proof. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
