On-chain signs of bottoming for Bitcoin
With the Bitcoin price being lacklustre and inflicting fear in investors, many are looking for signs to determine whether we are close to a bottom and will move up soon or further downside is due to come. Here are 3 on-chain statistics and what they mean for the price of Bitcoin and other cryptocurrencies.
Exchange Net Inflows/Outflows and Supply:
The first picture shows total Bitcoin Supply on exchanges. This is at an all-time low right now.
This graph is perhaps more familiar to most people as it is a widely utilised tool to get a glimpse of what institutions and big money individuals (whales) are doing to their Bitcoin. The left y-axis indicates the supply of Bitcoin moving in or out of exchanges. Green denotes Bitcoin moving onto exchanges while red indicates Bitcoin moving out of exchanges into other mediums of storage (hard wallet etc.).
Usually, Bitcoin inflows into exchanges paint a bearish scenario as institutional investors are probably looking to sell their Bitcoin for cash. This is why inflows are usually coupled with drops in the price (most recently the May 2021 crash).
On the other hand, outflows signify that the big fish in the market have a bullish outlook on Bitcoin as they are taking Bitcoin off exchanges to store in cold storage, which is more secure and shows that they are not looking to sell their Bitcoin anytime soon.
As of right now, the outflows of Bitcoin supply off exchanges is increasing, with previous outflows of such magnitude coinciding with the start of numerous bullish movements in price. The last time the outflows were this large was in September of 2021, which coincided with a bullish move from $42,000 to Bitcoin’s all-time-high of $69,000. With Bitcoin Exchange supply at all-time lows, new investors who want to own Bitcoin have less and less Bitcoin available for purchase, which will only drive the price up in the long run. Overall, these indicators paint a bullish view on the Bitcoin price that may be overlooked due to boring price action.
Bitcoin HODL Waves:
This indicator indicates what proportion of the Bitcoin supply has been held for a certain period of time. The dark purple portion on top shows the proportion of Bitcoin supply held for more than 10 years and the holding period decreases as we move down.
Looking at the >10y and 7y-10y part of the chart, almost 20% of all Bitcoin supply has not moved for more than 7 years. For short-term holders (less than 1 year), the percentage has dropped from a local high of about 40% in early 2021 to less than 30% at present.
Evidently, the supply of Bitcoin held by long-term holders is increasing recently while the proportion of short-term holders (less than 1 year) is decreasing (see that the orange and red parts of the HODL Waves are getting narrower). This indicates that most of the “weak hands” (short-term traders who want a quick profit), are driven out of the market due to the recent price action and long-term holders are still holding on.
Interestingly, the proportion of Bitcoin held for 1–2 years (the light-yellow part) has doubled over the last 2 months. Take note that one year ago was when Bitcoin reached its peak and was almost about to dump from $64,000 to $29,000. This shows that buyers then are not selling and are actually waiting for the price to go up in the future.
However, it is also evident that short-term holders are absent. This shows that new investors are not entering the market, which shows a lack of new demand for Bitcoin. Therefore, there is definitely room to improve on the demand side of things for Bitcoin to show more bullish price action.
Short-term Holder Cost Basis:
The short-term Holder Cost Basis denotes the average cost-basis of investors who have bought Bitcoin within the last 5 months (the average price of all Bitcoin buys in the last 5 months). This is represented by the purple line which is currently at $47,000.
As of right now, we are below the line (Bitcoin is currently at $40,800). Essentially, short-term investors whom do not have a long-term horizon are probably under water, and thus will likely sell Bitcoin as soon as the price moves back to their initial costs to break even. This explains the numerous rejections that we see at the line from January 2022 to the present day.
A bullish sign is if we manage to clear the line, as this signals that buyers are in profit and overall market sentiment is bullish. Therefore, buyers are likely to buy whenever prices dip below their initial purchase price, which allows the line to act as support (like we’ve seen in the September 2021 dip. Therefore, it is useful to use this indicator as a target for the Bitcoin bulls to break through before we can get more bullish in the markets.
Conclusion:
Overall, the on-chain indicators show a number of things. First off, present investors have a bullish sentiment on Bitcoin and are not selling. Secondly, the supply of Bitcoin available for purchase is dwindling, meaning that future bullish price action is imminent. Unfortunately, the demand-side is not as bullish, with the Short-Term Holder Cost Basis painting a technical resistance for the Bitcoin price and the short-term HODL waves showing a lack of new investors into Bitcoin. Therefore, for the price of Bitcoin to move, it is paramount that more demand comes into the space. However, it is important to realise that the fundamentals of Bitcoin and cryptocurrencies are improving day by day, which is why now may be a great opportunity to accumulate before prices start moving higher.
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