On-chain analysis of Bitcoin (BTC) – A short-term speculative risk?

Bitcoin retraces once again

The price of Bitcoin (BTC) stumbles below $50,000 and the MA200. Failing to break through these two levels of resistance, Bitcoin returns to its rangeidentified in previous analyses.

Despite BTC hovering around $40,000 again, however, on-chain data indicates strong demand on the market. Interest in Bitcoin does not seem to be waning although the price is correcting.

Figure 1: Daily price of Bitcoin (BTC)

This week we will study the downward dynamics of exchange platform reserves as well as demand caused by three major buyers of BTC before completing our trackingexposure to derivatives market risk.

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A diligent broad-spectrum accumulation

Let’s start this analysis by introducing a new metric: the Accumulation Trend Score.

This tool was designed by Glassnode, in order to measure overall accumulation investors’ portfolios. It lets you know when large entities (whales) and/or large portions of the market (shrimp, in large numbers) are accumulating or liquidating BTC, all while filtering miners and exchanges.

BTC ATS 120422

Figure 2: BTC Accumulation Trend Score

The metric oscillates between the values ​​0 and 1 with the following interpretation:

  • The values ​​close to 0 (yellow/orange) indicate that the market is operating Distribution or that there is little accumulation significant (bearish).
  • The values ​​close to 1 (purple) indicate that the market is in net accumulation and the balance of investors’ portfolios increases significantly (bullish).

This week, a steady stream of values ​​above 0.65 has been recorded, indicating that a general tendency to accumulate is in progress.

This information can be easily confirmed by the study of the total balance of the exchanges, which begins a new decline testifying to massive withdrawals.

After a stagnation in reserves between 2.5 million and 2.6 million BTC since the last quarter of 2021, the total sum of BTC available from centralized exchange platforms now represents only 13% of circulating supply.

BTC Reserves Exchanges 120422

Figure 3: Total Exchange Reserves

It should be noted that, since the March 2020 capitulation, this balance has started a structural downward trend, a sign of a paradigm shift market participants who today tend to massively accumulate BTC, in particular via DCA strategies.

This click is clearly visible on the graph below. Representing the monthly change in the total reserves of exchanges, it depicts the periods of deposits (green) and withdrawals (red) over a given period.

BTC ExNetPos 120422

Figure 4: Change in Net Position of exchanges

We can clearly see the amplitudes of the waves of withdrawals decreasing after March 2020, while withdrawals, which very rarely exceeded 50,000 BTC, have now become a new normal.

The current market structure is therefore part of a dynamics of accumulation and withdrawals of BTC from exchanges to cold stored wallets.

Indeed, the number of so-called “illiquid” BTC (held outside trading platforms and smart contracts) has been growing steadily since July 2021 and currently represents more than 75% of the circulating supply.

BTC Illiquid Supply 120422

Figure 5: Illiquid Supply

This last graph is impressive for the clarity of its interpretation: the BTC leaves the exchanges and is massively accumulated by various entities, drastically decreasing the liquidity of the BTC and creating a long-term bullish pressure on the price of bitcoin.

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Institutional demand is going well

That said, retail investors are far from the only BTC seekers and it seems that the year 2022 will be marked by the arrival of new institutional actors ready to get their hands on their piece of the pie.

One of the recently arrived public entities is the Luna Foundation Guard (LFG), which raises a total of 39,897 BTC to April 11, 2021 following a series of significant purchases.

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Figure 6: Reserves held by the Luna Foundation Guard

With an initial acquisition of 9,564 BTC at the end of January, valued at $358.6 million, the LFG balance increased by 21,163 BTC in nine days and then again by 9,625 BTC this weekend. The total value of the LFG balance is now greater than $1.6 billion.

The trend of “wrapping” BTC in a tokenized variant to deploy it on other blockchains has also been constant in recent years.

More than 1.45% of bitcoin supply (275,236 BTC) is now held by custodian BitGo, and issued as a WBTC tokenized version on the Ethereum blockchain.

BTC WBTC 120422

Figure 7: Reserves held as Wrapped BTC

Since the April 2020 high, the supply of WBTC has increased by an additional 132,451 BTC, indicating a increased demand for bitcoin collateral in the decentralized finance sector (DeFi), despite the uncertain macroeconomic and geopolitical conditions.

We can also accuselarge purchases by Canadian ETFsthe Purpose Bitcoin ETF receiving the largest share. Overall, the total holdings of all these ETFs increased by 6,594 BTC since the low in late January, reaching an all-time high exceeding 69,000 BTC (0.36% of the circulating supply).

BTC ETF CAD 120422

Figure 8: Reserves held by Canadian ETFs

Such strong withdrawals from exchanges, as well as large inflows into ETFs, DeFi applications and personal accumulation wallets signal thatstrong demand remains despite uncertainty global economy.

ATH of speculative risk in derivatives markets

However, it seems that the interest in Bitcoin has not spared the derivatives markets. While we warned about the significant return of risk-taking two weeks ago, it seems that speculators present on the derivatives markets still have their say.

Indeed, we can now observe a extreme risk takingincreasing the likelihood of seeing a squeeze (whether long or short) trigger.

The dominance of future open interest in BTC, calculated as the ratio of Bitcoin market capitalization to total funds allocated to future contracts, is currently at an all-time high, indicating that the influence of derivatives markets on the price of BTC is significantly increased.

BTC FAITH ratio 120422

Figure 9: Open Interest Leverage Ratio

Similarly, the estimated ratio of leverage deployed in perpetual contracts greatly exceeds its overheating threshold of 1.3 and currently exceeds 1.5. This means that the total funds allocated to this type of contract represent more than 5% of the market capitalization of BTC.

BTC FAITH Perp Ratio 120422

Figure 10: Perpetual Open Interest Leverage Ratio

This finding of excessive risk-taking present on the derivatives markets is explained in particular by a inflow of over $2.7 billion occurred on Thursday, April 7, when BTC began its decline.

BTC OI 1D change 120422

Figure 11: Weekly change in open interest

It is this discrepancy between the funds allocated purely to bitcoin and those allocated to speculation tools that caused a drastic increase in the value of the leverage ratio depicted above.

As BTC corrects, speculators are aggressive and seem ready to take risks which could leave the wider market uncertain about the direction of the next volatile move in price.

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Summary of this on-chain analysis

Ultimately, the current price correction does not seem to worry investors who are always accumulating more bitcoins with the aim of keeping them in their custody for the long term.

While exchange reserves begin a new structural declinethe illiquid BTC ratio now reaches 3 to 4. In other words: more than 75% of bitcoins in circulation have reduced probabilities of being spent in the short term, a sign of strong conviction and price insensitivity on the part of a broad spectrum of market participants.

Institutional investors, led this week by the Luna Foundation Guard, continue to induce buying pressure on Bitcoin by literally sucking up the supply still available for sale. Reflecting strong demand, these entities are demonstrating a diligence in their purchases of BTC which contrasts with the climate of global economic uncertainty.

Finally, it seems that derivatives speculators are also experiencing renewed interestboth the flow of funds to futures and perpetuals have been strong this week. As a result of this enthusiasm, excessive use of leverage bodes high volatility on the horizon. The scenario of a series of cascading liquidations thus becomes more and more plausible, whatever direction this volatile movement could take.

Sources – Figure 1: Coinigy; Figures 2 to 13: Glassnode

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About the Author : Teacher. Chain


On-chain analyst, fervent fighter of informational asymmetry.

My goal is to inform everyone about the state of Bitcoin (as an asset and a distributed network) through the prism of on-chain analysis.
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