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What Is Happening on Blockchain

Please note that before coming to any conclusions or offering any market outlook, the author will analyze the information objectively and unemotionally. Here is a short-term analysis plus an analysis zoomed out to help readers remember the macro-on-chain setup.

The question was raised two weeks ago regarding a volatility squeeze that was forming and how they often break in a direction to seize liquidity from breakout traders and then reverse. It has now occurred for the fourth consecutive time and should be monitored accordingly in the future. The current pullback has been driven by spot sales more so than by liquidations, particularly on Bitfinex which has been trading at a discount to other exchanges for a good portion of the last few days. 

On Tuesday, when prices dropped but funding went up, this pointed to a potential downward trend. Although funding has reset a bit, it would be nice to see a final leg of funding go negative.

The next step will be to examine our SOPR metrics. (spent output profit ratio) Short-term holders SOPR can be used to identify opportunities to buy the dip or fade the rally: Having established the broader trend using other metrics**If there is a full reset of this metric, meaning that if it is correct about the broader market structure being bullish, this would mean being close to bottoming out if that hasn’t already happened.

Weekly SOPR paints a similar picture. There is a bull trend confirmation at the end of September, but it wouldn’t hurt to get another reset/retest of 1 if there would be one last leg down. Just for reference, bad would be to see a break below 1 and then failed underside retest of 1.

Short term holder profit/loss ratio is another oscillator similar to SOPR, but just compares the amount of profit/loss that short-term holders are currently sitting in, rather than what they are realizing. SOPR only takes into account the coins that are being spent on each given day.

Similar to weekly SOPR, there is a bull confirmation in late September, but would be great to have the opportunity to buy along the 1 threshold if given. Note in late 2020 there was two retests of the 1 threshold before continuation.

Using all 3 of these metrics paints the best picture, confluence is always key.

Next up here is a look at short-term holder realized price, or cost basis. This is essentially an on-chain VWAP, or volume-weighted average price of entities that have been active in the market for less than 155 days. Interestingly, this has served as a bull market support band historically. Note in 2017 the numerous failed underside retests of the band, leading it into the bear market. After reclaiming and bouncing off this in September (notice the confluence across all these metrics at the end of September), this would mean returning to bull market territory. This currently sits at $53K, which coincides with technical support as well as the $1T market cap threshold. Author of this artilce at Blockware started averaging in buys sub $60K (not financial advice) but wouldn’t be surprised to see us go as low as $53K. No need to be concerned as long as we are closing* above $53K in my humble opinion.

TLDR from looking at some of these shorter-term metrics: the end of this correction is likely near if we haven’t seen it already. Probably see some sideways consolidation afterward.

On a similar note of the realized price, or cost basis, readers should look at the on-chain cost basis ratio. This compares the realized price of short-term holders to the realized price of long-term holders. Running the ratio of the two offers an interesting macro oscillator. Whenever STH cost basis blows out and overextends LTH, it’s time to be cautious. When LTH cost basis crosses below STH, it’s time to accumulate. Note that never was reached the “overheated” zone earlier this year and reset similar to 2013. It took 3 months to go from resetting between the 2013 double pumps to reaching the overheated zone, so even though the market is currently far from that it can come quickly.

MVRV z-score, which compares realized price to market price and then adjusts it for volatility, paints a similar picture. The idea here is that whenever the speculative bid overshoots the actual amount of new capital inflows to the network the market is in a state of exuberance or if “overheated”.

Looking at the illiquid supply shock ratio, still no sign of concern. This compares highly liquid and liquid entities to illiquid entities, in laymen’s terms weak to strong hands. Currently strongly at 2021 highs and climbing. It is seen a strong decline for a week or two to become cautious: this is what happened at the 2017 peak as well as the early 2021 peak. This was also a leading indicator over summer as it painted a clear bullish divergence; climbing while the price was dropping. Note the similar signature in the two “peaks” to 2017; the only difference is now ISSR has made new highs versus in 2017 it didn’t, so back then the possibility of opinion or make the argument of a slight bear div would be possible.

Long-term holders have continued to distribute, as per natural bull market behavior. Remembering, long-term holders scale into weakness and scale out into strength. Last year they started distributing in late October. Upticks in old coins being spent also reflected in coin days destroyed, dormancy, the average spent output lifespan, spent volume age bands, spent output age bands, etc.

Here is a dormancy flow, which compares the market cap to the USD value of annualized dormancy. Dormancy is coin days destroyed divided by volume, which just gives the result of the adjusted amount of coin destruction. Currently this is far from any exuberant signature.

Bitcoin-related Equities (written by Blake Davis):

Another tough week of price action for holders of Bitcoin and the equities exposed to it. With the continued pullback in BTC there was seen the same in our crypto-exposed names. This pullback looks to be getting long in the tooth, at least in the short term.

It has been interesting to watch how price behaves around different levels in a correction. Noticed, BTC would usually find support around key levels and moving averages, and then later be overwhelmed with sellers to take out those levels. At the time of writing, the BTC holds a key moving average, the 65-day exponential moving average. Bitcoin has respected this moving average before so it will be interesting to see what it does here. It wouldn’t be surprising to see us undercut it on a daily close Thursday or Friday and then rally, at least as an oversold bounce.

There are two key levels of support seen on the chart of Bitcoin. Below there are seen two trend lines in white. These two support levels line up at the previous resistance near $53000. This could be seen as a floor for prices in the short-term. But instead of trying to guess price levels, it’s much safer to see them play out in real-time and then react accordingly. At the end of the day, this could be just a pullback before continuing higher in a bull market. The opportunity on the other side will be great for investors as long they remain convicted on the way down. Hedge fund manager Jim Roppel always says investor needs to be able to sit to the 50 day. Conviction in the fundamentals, everything Will has written over the last few months, makes it easier to sit through volatility.

Regular growth stocks are holding up very well through this. The equal-weighted S&P 500, RSP, gives a good look at how the best stocks are behaving right now. Below it is seen that RSP held the blue 21 exponential moving average on Thursday. Whether or not this will continue to hold is up in the air but this is a strong sign of strength for now. The strongest growth stocks look even better, holding at or above their 10EMAs. It feels like the crypto correction certainly has an overall effect on the rest of the market, but the degree a stock is affected depends on the individual name’s relative strength.

The most exciting and interesting thing for anyone to be watching is the process of decoupling beginning to occur in the crypto-exposed market. As written numerous times, crypto-exposed stocks generally just follow this price of BTC. Institutions appear to have weaker convictions in this market versus the traditional stock market. This is why companies who profit regardless of Bitcoin’s price are still sold on days when BTC is down. What begins to be seen now is names begin to decouple from the spot price of Bitcoin.

 Coinbase, for example, has had positive price bars and consolidated sideways the last 6 sessions before Thursday while BTC corrected downwards. COIN is showing it’s hand as a stock being aggressively accumulated institutionally. As firms begin to understand the value of a company like COIN, the price of BTC on that day is somewhat irrelevant. Coinbase has lots of projects they are working on to expand the accessibility of their products to the crypto customer base. NFT’s, internet 3.0 and DeFi are a few of the ways that Coinbase is changing the world and it is clear that financial institutions are becoming aware of it.

Below is a price chart of BTC displayed on top of a chart of COIN. It can be clearly seen the divergence in price action. Thursday COIN pulled downwards alongside BTC, it will be interesting to see what happens Friday.