Zooming Out of the Bear Market
On-chain metrics, developer activity and investor distribution improve despite price action
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
It is becoming harder and harder to argue we are not in a bear market. Prices for Bitcoin and Ethereum are down approximately 60% from their highs and many smaller assets have dropped over 80%.
Along with the price action, on-chain activity for most assets has also plummeted, which has left many investors concerned. However, this is a recurring pattern throughout previous bear markets.
This week we take a look at the big picture, covering key indicators from a long-term perspective and evaluating how this time may be different from other bear markets.
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees dropped slightly, while Ethereum fees increased 30% with NFT activity bouncing back
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Over a billion dollars worth of Bitcoin left centralized exchanges, coinciding with Bitcoin outperforming the broader market
- Ether, on the other hand, saw modest inflows of $200M into centralized exchanges
Zooming Out of the Bear Market
The past six months have been brutal for crypto investors with the total valuation of the space dropping $1.8 trillion as per CoinMarketCap. While these price swings can be dreadful, it is worth remembering crypto has previously had even deeper bear markets and emerged stronger a few years later.
These cycles tend to share common trends not just in price, but also in on-chain indicators, developer activity and investor distribution.
80% Drawdowns — A Thing of the Past? Crashes of 80%+ are a staple in crypto bear markets, but there are arguments to be made for less sharp losses in the future
- With crypto maturing as a technology, the chances of it disappearing decrease as it gains broader adoption
- For comparison, Amazon’s stock crashed 95% during the dotcom bubble burst when it was a nascent corporation; then in the financial crisis as a more established business it dropped “only” 65% from its highs
- This may apply to proven crypto-assets, but less so to smaller, more speculative assets still in their early days
Another potential indication of less steep corrections down the line is that fundamental indicators have dropped less than in previous bear markets.
Higher Lows — on-chain indicators have sustained at higher levels than in the previous bear market
- As a high portion of demand comes from speculation, it is normal for transaction fees to plummet severely as trading sentiment dwindles through bear markets
- Remaining at higher levels, however, suggests stickier demand
- Bitcoin has been averaging above $500k in daily transaction in May 2022, compared to $130k in May 2018
- Ethereum and other crypto-assets mirror this same pattern of less pronounced drops in on-chain activity than in prior bear markets
Perhaps more importantly, we continue to see leading indicators grow.
Development Activity Growth — Bitcoin and Ethereum both show consistent progress in their development activity regardless of price action
- Commits to the Bitcoin network have grown over 50% in the past two years as developer efforts consistently improve
- This has been one of the few leading indicators for growth in crypto since being an open-source ecosystem it relies on developers globally contributing for sustained improvement of these networks
Another leading indicator has been the changing distribution from short-term to long-term investors during bear market.
Hodlers Double Down — investors with long-term horizons grow their holdings during bear markets
- The percentage of Bitcoin owned by addresses holding one year or longer (green to blue colors) has expanded in previous bear markets
- So far we’re repeating this same pattern, with short-term traders also fading away as prices crash
While it is clear that crypto is not for the faint of heart, it shares similar patterns with other technologies in their early stage as was the case with internet stocks. It also has similarities within the industry’s cycles beyond just volatility. Overall, we observe a smaller decrease in on-chain metrics, continuous growth in developer activity and long-term investors doubling down yet again.
Upcoming Webinar
Sign up for our next webinar. Limited amount of free seats available.
