The past few days have been difficult for financial markets as bitcoin (BTC), the stock market, foreign exchange (or forex) and bonds have all experienced volatility and a general devaluation.
The euro once again lost its parity to the US dollar as the European energy crisis worsens and the DXY Dollar index reached 109.30 — its highest in 20 years.
As US Federal Reserve Chairmen continue to signal a hardline stance on inflation in Jackson Hole, bitcoin, as a developing index for global liquidity, has reacted accordingly.
Its price turned lower in the last week, moving from a high of $21,781 to a low of $19,611.
In this issue, Glassnode will continue its assessment from last week, exploring how short-term weakening remains visible across a number of Bitcoin’s fundamental metrics.
This creates a condition where prices are trading at a lower price, even with little additional on-chain selling pressure (by checking movements recorded on the blockchain itself).
It continues to signal continually weak demand, as well as an investor base that is willing to take whatever exit liquidity offered by the market to “get your money back” at cost.
🔔 alert ideas will be presented throughout the analysis to help identify levels of interest that could represent significant variations in market/network performance. Any Glassnode member can set up an alert directly in Glassnode Studio.
falling with the breeze
The analysis will start through the lens of lifetime metrics, which generally describe the age of coins being spent on the blockchain:
– Lower lifetime values indicate that newer currencies dominate transactions. They are usually encountered as the bear market drops further and speculators are driven out of the market.
– Higher lifetime values suggest that older coins dominate transactions. They usually exist during bull markets as profits are taken, but also during capitulation events (withdrawal of gains by selling positions due to falling price) due to pure panic selling.
Average Spend Lifetime (or ASOL) tracks the average duration per outgoing transaction spent, but ignores coin volume. It has recorded a macro decline since January 2021, coinciding with the current bear market.
This metric has climbed higher in recent weeks as a group of older coins has been spent. However, this only happened for a brief moment.
Weak price action without a continued uptrend at ASOL means available demand barely sustains daily selling pressure, plus additional spending by profit takers and/or capitulation events that happen.
You can analyze this by analyzing “dormancy”, which is the average life per unit of currency moved. This metric counts the amount of currency spent.
You can see that the average duration per coin is approaching its lowest levels in several years, i.e. the rally in ASOL was likely very light in BTC volume, fueling the observation of very weak demand for bitcoin.
If prices were rising, it would be a very positive sign as it would show that older coins remain dormant.
However, it indicates the opposite, as prices are having trouble holding their position even as currencies remain stagnant in investors’ portfolios.
On a macro scale, the Coin Destroyed Days (or CDD) metric continues to fall, hitting a relatively sizable low.
This metric adds up to the total lifespan destroyed (in years) over the last 365 days, and like dormancy, lows are usually positive and common in late-stage bear markets.
It remains acceptable that bitcoin is trading in what could become a very long-term fund formation pattern. However, it has become evident that the market is only hanging by a thread at this point and is not out of the woods yet.
To really reinforce this fundamental weakening point, you can complete it with the “active entities” chart below. This metric can be compared to the Bitcoin network’s “daily active users” and is currently testing the bottom of the protracted Bear Market Channel.
This indicates that there is little growth in the active user base and the network currently has the minimum user base that can be considered to be within “historical limits”.
Should “active entities” drop further, it would suggest a nasty deterioration of the user base and enter a zone of total weakening that hasn’t been recorded in years.
🔔 alert idea: if active entities (seven-day moving average) drops below 230K per day would signal a deterioration in blockchain activity while a break below 250K per day would signal an influx of new user demand.
On the positive side, it was evident that there was not much damage done to the conviction of HODLers.
The drop in lifetime metrics is a good sign for the long term as it indicates that old coins are stalling and falling prices have little psychological impact on the conviction of this group of investors.
While the decision of the “diamond hands” investors remains rock solid, it simply appears that their flow of available demand has not yet fended off the “bears” that drove the “bulls” back to $20,000.
Selling at equilibrium prices
In the section above, it was determined that the performance of Bitcoin’s current user base is, at best, weak and that price action is greatly weakened even as spending on older coins drops.
To make matters worse, the psychology of investors seems to be to simply “get my money back” as a high level of spending is happening close to their cost base.
In total, bitcoin investors are taking net losses of around $220 million a day. On a relative scale, this is quite modest in magnitude, particularly in relation to multibillion-dollar capitulation events.
However, even with this relatively light capital outflow of $220 million a day, the bulls are facing an uphill battle.
🔔 alert idea: If the net realized profit/loss (30-day moving average) above zero, it would signal that net spending returned to profit, suggesting possible market strength and demand recovery.
By analyzing the adjusted profit metric by outgoing transactions that were spent (or aSOPR), you can see the average profit (or loss) multiple per coins spent. In general, an aSOPR value close to 1.0 is of most interest:
– aSOPR from 1.0 in an uptrend 🟢 often acts as a support as investors buy in the fall and add to your position at or near your cost base. It also means profitable currencies prefer to go dormant, reducing the pressure to sell at low prices.
– aSOPR from 1.0 in an uptrend 🔴 usually acts as resistance, as investors sell high and get rid of their position at or near their cost base. Psychologically, this reflects a “get my money back” mentality to whatever exit liquidity the market offers.
The recent sell-off started after a convincing 1.0 retest on the downside just as the price topped $24K.
Rejecting this level strongly confirms the weakening that would follow as investors took out liquidity and spent currencies close to their acquisition cost base.
🔔 alert idea: If the aSOPR (30-day moving average) exceeding 1.0 would signal that total spending has returned to profit, suggesting possible market strength and demand recovery.
Long-term bitcoin holders are also feeling the pinch, as their profit values for outbound transactions that have been spent (SOPR) have been between 0.60 and 0.65 for several consecutive weeks.
It indicates that investors who have stored their coins for about five months and are statistically less likely to spend them are reporting losses between -35% and -40% on average.
Buyers from the 2021-2022 cycle continue to close their positions at a significant loss.
While not as severe as the -50% losses in 2018 (so far), the current bear market strongly competes with the worst bear markets of the past in terms of damage.
A significant rally in SOPR from long-term holders above 1.0 would be a positive sign. But historically, it took several months to reach that refuge speed.
🔔 alert idea: if the profit per outgoing transactions that were spent (SOPR) by long-term holders (7-day moving average) exceeding 1.0 would signal that long-term spending by holders returned to profit, suggesting possible market strength and demand recovery.
Finally, a full overview of recent blockchain losses will be provided, where it can be seen that the scale of capital outflows in the last month was historic.
Surpassed only by the 2018 capitulation, the relative magnitude of investor losses in recent weeks is enormous, reaching 0.28% of market capitalization per day.
Given this reality, it should come as little surprise that investors are willing to take whatever rally in price and profit they can get.
The 2022 bear market continues and clearly affects the total bitcoin investor base.
Despite not recording a total loss of conviction among HODLers, as signaled by the drop in lifetime metrics, the bulls still fail to define a significant uptrend.
The psychology of investor spending patterns remains largely in bear market territory as currencies bought at the high are sold and exit liquidity is taken close to cost basis levels.
Given the extremely low active user base, it might be surprising that the $20K level has continued so far.
It remains plausible that bitcoin is in a bottoming range and would historically be similar to all past bear markets. However, the price of bitcoin is hanging by a thread and any increase in fundamentals would be a nice change.
About the author
Glassnode is the largest blockchain intelligence and data provider that generates on-chain metrics and tools for anyone who really wants to understand the cryptocurrency market.
*Translated by Daniela Pereira do Nascimento with permission from Glassnode.
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