Understanding a Bear Market: The recent Bitcoin drop from a data-driven approach
Last week can be summarized in one word “Terrifying”. The US markets had their worst week since the financial crisis as Dow Jones and S&P 500 dropped more than 12% and 11.5% respectively. This time, the thread is known as Coronavirus or COVID-19, which has injected fear in all major economies like the Chinese, Italy, South Korea, Iran or even the US.
As the spread of COVID-19 continues, the number of Coronavirus Cases reached 93,000 and over 3,000 deaths, causing an intense selloff of stocks, negative impact on consumer sentiment, disruption in supply chains, geopolitical turbulence, major events and conferences being called off around the world and the governments being forced on taking extreme measures to fight this emergency.
And what happened regarding the crypto-asset market? Well, the total Market Cap dropped 13% as we saw a major price pullback in the top cryptocurrencies with Bitcoin dropping more than 11%, Ethereum dropping 18% and Bitcoin Cash 19%.
But at IntoTheBlock, we don’t focus on news or “correlations” with the financial markets. Here, we focus on data and analytics. So I’m going to give you a few key data points using some of the top IntoTheBlock’s indicators to explain the recent price drop of Bitcoin from $10,500 to $8,500 from a data-driven approach and where could we be heading now.
- Large Transactions have been decreasing steadily for the last month.
It’s important to learn what the big or institutional players at Bitcoin are doing, right? That’s why we have an indicator called “Large Transactions”, in which we track on-chain transactions larger than $100k.
During the week of Feb 24 to March 1, as the price of Bitcoin dropped 11% to $8680, the daily average volume in USD of the Large on-chain Transactions dropped to $4.11BN, representing a 19.7% decrease compared to last week.
Interestingly enough, as the price and large transactions of Bitcoin dropped last week, the number of transactions in Tether increased dramatically. This can be seen as a way for investors of trying to protect their assets against a bear market.
2. Open Interest for Bitcoin Perpetual Swaps decreased exponentially.
Yes, Bitcoin Derivatives were also affected, especially Open Interest for perpetual swaps. Just a quick explanation, Open interest is the total amount of outstanding investor positions, usually measured as the dollar amount of open contracts in the case of cryptocurrency derivatives.
After the peak of Feb 18 in which the outstanding amount reached $2.26b, and as the price of Bitcoin fell last week, using the IntoTheBlock’s open Open Interest Indicator, we saw that the total amount of Open Interest in Perpetual Swaps also fell to a monthly low of $1.85b on Feb.29, representing an 18% decrease. And what could have happened there? Possibly some of the open positions were closed, confirming the bearish momentum for that crypto-asset.
3. The Network Activity decreased.
Using the IntoTheBlock’s Active Addresses Ratio Indicator, we were able to spot that with the recent price drop, the percentage of addresses with a balance that had a transaction during the week of Feb 24 to March 1 saw an 11% decrease (similarly % as the price drop).
After reaching a peak of 1.88% during Feb 11 when the price reached over $10,000, the % of active addresses saw a steady decline to 1.42% on March 1. Does this mean that investors preferred to hodl during this bear market?
4. The Number of Addresses In the Money Sank below the YTD Average
The Historical In/Out of the Money indicator provides the distribution of in-the-money and out-of-the-money positions over time and this allows us to determine the number of investors that would have made a profit if they had sold their position at the price of that current date.
As the price of Bitcoin dropped, the % of addresses in the money saw a similar decrease, reaching only 67.34% or 19.82m addresses in the money on March 1. This % of addresses in the money is 10% lower than the year to date average of 74.38%.
Using these 4 data points we were able to see some patterns that point out to the recent drop in the Bitcoin price, but this brings us to a more important question:
Where is the Bitcoin price heading now?
Using the In/Out of the Money Around Current Price, we are to identify the ten most relevant clusters of investor positions at a range of +/- 15 percent of the current price. The analysis offers a very granular view of investor positions that are susceptible to near-term price movements.
We see that with the current price of $8,775.2, there’s a strong level of resistance between $8,700 and $9,000, where almost 800 thousand addresses are holding 550k BTC that previously bought at an average price of $8,869. If Bitcoin breaks the through that level, then it might experience a minor resistance between $9,000 and $9,260, where 590k addresses previously bought around 400k BTC.
Looking at the support levels, the IOMAP analysis reveals that Bitcoin has the strongest support level at the range between $8500 and $8700, where more than 1 million addresses previously bought more than 720k Bitcoin. From that perspective, Bitcoin could likely remain between that price range.
Like we always say, Crypto-assets are the richest asset class in history, and not using the data provided in the ledger is to not acknowledge the full value of these assets. Understanding and complementing the blockchain with other data sets allow us to do a much deeper analysis that is not available in other relevant asset class.
