Bitcoin On-Chain Market Wrap Up
Is a Bitcoin supply shortage incoming?
It has been some time since I have written a longer article on the state of the Bitcoin market from an on-chain perspective. The underlying fundamentals have changed by quite a bit since then. My previous article from June 18 is titled “Bullish underlying on-chain trend and a short-term sceptical outlook for Bitcoin”, and looking back rightly so. While underlying on-chain trends have been positive at that time, not all on and off-chain data has shown positive trends, as I pointed out in the article. Around that time, the price was at $38k. In the following weeks, the price kept mainly going sideways, hitting a new low at roughly $30k almost exactly a month later on July 20. From there onwards, the price started its recovery, with Bitcoin’s price today shooting above $54k.
Whereas at the time of the writing of the last article, the 7-day fund net inflows of Bitcoin have been somewhat bearish and mainly so over the following months, funds have shown net-inflows since mid-September. In the grand picture, the amount of net-inflows is not that significant of course. However, the trend is positive and this is what matters as long as it stays that way.
The Coinbase Pro Bitcoin Exchange Balance has also been showing some more volatility in the last months after a period of calm from mid-May until mid-July. It increased right before the price low on July 20 and has hit a new low since then. Overall the trend as in the first half of that year is not as visible. As the Bitcoin market evolves quickly and underlying shifts happen (e.g. Grayscale not buying substantial amounts of Bitcoin on Coinbase Pro anymore), it is questionable if we will see this kind of pattern again.
More interestingly, the aggregate Bitcoin balances on the exchanges as captured by data from cryptoquant.com has been declining since the end of July. Bitcoin exchange reserves are now at new lows below what we have observed at Bitcoin’s ATH. It might go too far to talk about a supply squeeze on exchanges, but fewer Bitcoin on exchanges and those Bitcoin leaving exchanges hopefully being put into self-custody is a very positive development.
Overall the shifts in exchange balances suggest that there has been an increase in demand for Bitcoin in the last two months.
With price picking up in the last few days, network activity in terms of the number of active addresses has also been picking up again and generally, the trend has been upwards since July. Albeit it remains relatively low compared to the first half of the year. One factor here might be the increasing importance of the lightning network that has reached a capacity of over 3,000 Bitcoin by now and keeps on growing. The big question remains how big of arole the lightning network and other developments play in the drop of this measure. While it certainly plays a part, I believe that we are still in a period of relative calm. I think we will see network activity increase substantially again once we break the price all-time-high of this year and when with that retail keeps coming back in more significant numbers.
The most notable chart is the HODL Waves chart provided by Checkmate, which shows that since the beginning of this year Bitcoin have been increasingly moved into the hands of HODLers. At the beginning of the year 30% of Bitcoins supply has moved within the last three months. As of October 04, 2021 that number has gone down to 16%. In the meantime, the coins last moved within the previous 3–6 months increased from 7% to 13% and that last moved within 6–12 months increased from 9% to 22%. This means that a big part of the coins that have been bought at the beginning of the year are locked up and not being sold.
Outstanding here is the historic low of the percentage of coins last active within the previous 3-months (see Graph 7 green dotted line). A low that we have never seen before. Might this be an indication that people are waking up to the idea that Bitcoin is not just a speculative asset that you flip short-term but something to hold onto long-term? With shifts in the macroeconomic environment, institutional money coming in, and Bitcoin arguably establishing itself as a potential safe-haven asset, this seems plausible. If this is true Bitcoin might be in for some exciting moves in the coming months if increasing demand is confronted with a limited supply of coins. It does of course, not mean that there won’t be any more corrections due to e.g. shifts in the macro-environment or simply because prices can’t move up in a straight line. Still, overall, in my opinion, the situation since the last article has improved considerably.
For more regular updates follow me on Twitter: @JanWues
Disclosure: The above article references an opinion and is for information purposes only. It is not intended to be investment advice.
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