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What On-Chain Market Data is Saying

Aug 18, 2021 · 5 min read

By Ashwath Balakrishnan, and Jeremy Ong

Market Update

BTC and ETH found a short-term bottom during the Asia session after hitting a block of bids around $44K. But the market has been pretty choppy since then. SOL, LUNA, and AR are the biggest winners today. All three coins set fresh ATHs with high-volume moves.

On-Chain Positioning Suggests Continuation

  • After a period of consolidation at a key support level, BTC has bounced hard in recent weeks. BTC is still up over 4x versus a year ago, which means the majority of HODL-ers and long-term investors are still in profit.
  • The recent move down did wipe out a lot of investors, but most of this was in the derivatives market. There wasn’t a ton of spot capitulation, so the percentage of holders in profit on spot BTC holdings didn’t budge much.
  • As we can see from previous cycles, BTC can remain at a high level of holdings in profit for months at a time. There are pullbacks during the trend that wipe out over-leveraged participants and shake out fickle investors. The current chart looks similar to 2013, where BTC made a new high and dipped hard, only to break that ATH and set a new one months later. That said, it’s impossible to ascertain if this will play out in coming months as the market is completely different beast today relative to 2013.

  • One year ago, ETH was around $400 per unit. Today it’s at $3,050 after setting an ATH at $4,300. Anyone who bought ETH before Mar. 2021 is still up massively, which means the overall level of spot holdings in profit is very high.
  • What’s potentially concerning here is the lack of shake-out. Usually, the market shakes out a lot of investors during downtrends. This creates demand to buy ETH when the trend eventually reverses. While this hasn’t played out on the chart below, it’s worth noting a lot of the risky activity has shifted to derivatives — and the wipe out on derivatives contracts between May and July was enormous.
  • There are two caveats to these charts. The first, which applies to both ETH and BTC, is that this metric only focuses on on-chain data, while all trading happens on exchanges. As a result, this data doesn’t reflect the true profit/loss of spot participants — only the ones who buy and send BTC/ETH to cold storage. The second caveat, which applies only to ETH, is that only Externally Owned Accounts (non-smart contracts) are included. So this data, while representing on-chain positioning, doesn’t account for the billions of dollars of activity happening on Uniswap, Sushiswap, Aave, and other DeFi protocols.

Exchanges are Losing Coin Supply

  • Since 2020, the amount of BTC that has left exchanges on a net basis has exceeded every other 20 month period (Jan. 2020 – Aug. 2021). Coincidentally, the recent burst of outflows began on June 26 — the day the UK’s financial market regulator told Binance it’s not allowed to operate in the region. Binance, the largest crypto exchange by virtually every metric, has had similar notices sent to them by regulators since then, causing concern for the exchange’s customers. So perhaps it’s not much of a coincidence after all.
  • This metric is fairly cyclical, which means the large outflows offer us a sign that we aren’t at the end of this cycle yet. When net supply change on exchanges flips positive and starts growing, it might be a sign that the top is nigh.

  • ETH’s exchange supply dynamics are a different world from BTC’s, precisely because Ethereum is home to the largest permissionless exchanges in the world. There has been virtually no net inflow of ETH to exchanges since mid-2020. We can see a burst of outflows in mid-2020, when DeFi summer began.
  • It’s important to note that despite coins leaving exchanges, liquidity is growing. For starters, the unit price of BTC and ETH have gone up so much since Jan. 2020 that you need far fewer coins to provide the same amount of dollar liquidity.
  • Secondly, a good amount of these outflows make their way to trading venues like Uniswap, which is basically a migration of liquidity from centralized to decentralized platforms. Even BTC makes its way to decentralized exchanges. 1% of BTC’s supply is wrapped on Ethereum, and Uniswap has over $180 million of wrapped BTC (WBTC) liquidity.

A New Epoch of Mining?

  • Bitcoin’s hash rate has started to recover in recent weeks. Hash rate tends to follow price, so this is an expected outcome. Some Chinese mining pools like F2Pool and Huobi, however, are still losing market share in the aftermath of China’s mining ban. The share of unknown pools, a lot of which is likely situated outside China (Kazhakstan and the US, for instance), has grown from 10% to 30% in the last year.
  • AntPool, ViaBTC, and Poolin are still the largest individual mining pools on the network. All three pools are based in China, but have operations outside the country too. With North America also gearing up to become a mining hub, this seems to be the beginning of a massive migration of hashing power from China to other regions.

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