On-chain analysis, an overview of 10/22/21–10/29/21
Hope all is well and you had a great week. Following last week’s letter, we saw continued downside, retesting the $56K-$58K range. (The dynamics behind this move will be discussed below.) This previous resistance zone has been flipped to support. (for now)
Let’s dive in. First, we’ll start with the immediate term price action/market dynamics and then zoom out to the bigger picture throughout the letter.
On Wednesday we saw another leverage flush out, with a very similar set-up to the one we discussed last week.
We saw open interest rising, particularly crypto margined contracts. We also had funding rising as BTC price was decreasing.
Pairing those factors with some tight liquidation levels, it wasn’t surprising to see longs get liquidated. Positive funding in itself isn’t always an immediate term bearish sign, as in a trending market that can just be the cost of doing business.
Where funding has a real signal IMO is when the price is diverging from an aggressive move it is making. It’s all about putting it into the context of other factors.
You can also take an even more granular look by comparing funding rates amongst individual exchanges.
Another factor that added to my conviction of there being a flush was the fact that more retail-driven exchanges like Bybit and Binance had very high funding (55–70% APR) meanwhile exchanges such as Deribit and FTX had much lower funding.
With the launch of the ProShares Bitcoin Futures ETF ($BITO), we’ve seen CME futures open interest soaring over the last few weeks.
CME is now the leading futures exchange, with open interest now over $4.7B; 77,090 in BTC terms.This must be kept in mind moving forward when looking at measures such as market cap/OI, because the CME is not nearly as levered as exchanges such as Binance or Bybit.
Another very key dynamic in the derivatives market, which I have been trying to push lately is the percent of open interest margined by crypto.
This is important because as this metric rises, it means the futures market is prone to more convexity to the downside. If you’re longing for Bitcoin with Bitcoin collateral, it’s great when the price is rising.
But as soon as the market starts to move against you, not only is your PnL declining, but also your margin, leaving your contract less collateralized and you more susceptible to getting liquidated.
If short and margined with USD or stablecoins, you also no longer have the inadvertent hedge you do by being margined with BTC/crypto. Seeing this metric continue to decline means less potential convexity on a down move, and a higher likelihood of shorts being squeezed.
Next up we have the entity adjusted version of our good old friend SOPR, spent output profit ratio. This looks at the value of all the BTC trading on each given day based on the profit they’re realizing.
We got our bullish confirmation last month.
Looks like we are starting to tick down again, so now watching to either set a higher low or at a minimum bounce off 1 again if we retest it to maintain a bullish market structure. Nothing to worry about right now.
A few weeks ago we mentioned that whales had been taking profits after accumulating since late July. Over the last 2 weeks, we’ve actually started to see them accumulate again. The green line looks at all the entities Glassnode has identified on-chain with more than 1,000 BTC, filters out known entities such as exchanges, and then applies a 14 day moving average to filter out any noise in the labelling algorithms.
In addition minnows (blue line) have been stacking, as always.
Zooming out, minnow’s holdings are just up and to the right throughout all of Bitcoin’s history; showing the relentless belief in the asset from retailers DCAing around the world.
Now on to the macro picture.
First, we have the long term holder supply shock ratio, which we’ve looked at several times here before. This compares the amount of supply in possession of short term holders versus long term holders.
I think trendlines are just as valid in the on-chain analysis as they are in technical analysis because at the end of the day we’re all just visualizing human behaviour.
After retesting the lower trendline (AKA long term holders have locked up a record amount of supply), I would be looking to be cautious as the ratio moves back towards the upper trendline.
Next up we have the entity adjusted rolling 90-day sum of coin days destroyed with a 90-day moving average run over it.
As you can see, destruction in a broader sense is very low, especially relative to where we are in terms of price.
This paired with long term holder supply, the average spent output lifespan, dormancy, destruction, spent volume age bands, and hodl waves are just another way to show how strong holding behaviour has been.
Last but not least, we take a peek at what’s going on with miners.
We’ve had 7 straight positive difficulty adjustments in a row, which is just a reflection of how relentlessly hash has been coming back online.
With this, revenue per hash in BTC terms continues to decline, but rising dollar prices have kept revenue per hash in BTC terms at levels comparable to earlier this year.
As far as miner balances go, have seen some slight accumulation this week.
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