From on-chain data analysis, where are we in the encryption cycle?
Original compilation: AididiaoJP, Foresight News
Original compilation: AididiaoJP, Foresight News
After a crash in the second quarter, the crypto market rebounded in July: the Bitwise 10 Crypto Index fell 63% before gaining 37%. While the broader market outlook remains uncertain, we could see some signs of exhausting selling pressure.
This article attempts to use on-chain data for the two largest cryptoassets by market capitalization, Bitcoin and Ethereum, to assess where the crypto market is currently in its cycle. Specifically, starting with three key trend indicators: geographic flows, investor types, and market sentiment.
All transactions in cryptocurrencies are anonymously recorded on the blockchain, and by combining on-chain transaction data with other indicators, it is possible to infer market trends in a way that is not possible with traditional asset classes.
geographic mobility
The decisive trend of this round of cryptocurrency bull market is the accumulation of North American entities, but the accumulation trend fell and stagnated in the second quarter.
A particular function of on-chain data is to track to some extent the geographic origin of buying and selling pressure in cryptocurrencies. Using blockchain transaction data, known addresses of specific crypto entities, and network traffic, one can estimate which countries are sending and receiving assets.
One of the defining trends of this bull market has been the continued accumulation of cryptocurrencies by North American (mainly US) entities, while the outflow of cryptocurrencies has continued in Asian markets. According to Chainalysis, between Jan. 1, 2020, and Nov. 9, 2021, when cryptocurrency market caps reached all-time highs, North American entities saw net inflows of over 645,000 BTC and 4.5 million ETH, more than 50% of each asset’s total supply. 3%.
However, as can be seen in the chart below, this trend has not only gradually weakened since then, but also reversed slightly during the crash in the second quarter. Cumulative net inflows in bitcoin and ethereum have fallen by 9.6% and 9.9%, respectively, since May, while indicators for Asian and European entities have risen over the same period. In a recent report by Coinbase, the leading cryptocurrency exchange in North America, most of the trading volume in the second quarter occurred on offshore exchanges, while the share of the total market capitalization of cryptocurrencies held on its platform fell from 11.2% in the first quarter to 9.9% in the second quarter.
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Cumulative net inflows for specific regions from January 1, 2020 to July 25, 2022. Source: Bitwise Asset Management, data from Chainalysis
Changes in investor types
Flows from larger entities to flow into smaller entities.
Another way to analyze on-chain data is to determine whether an entity is an investor or a speculator based on the amount of open interest in a crypto asset. Zooming in on entities with relatively low turnover, we can see cumulative inflows to entities holding 0 to 0.1 BTC or ETH, 0.1 to 1, and so on. In this section, we will focus on entities with relatively low turnover, which are more likely to be investors than traders, and will exclude entities with significant asset holdings, which are more likely to be exchanges.
As cryptocurrency prices began to fall sharply in May, larger entities saw outflows while relatively smaller ones saw inflows, a trend more pronounced for bitcoin than ethereum. Smaller investors have amassed around 2 percent of bitcoin’s total supply since May, but less than 0.5 percent of ethereum’s.
The trend also marks the complete end of the bull market of the past two years, in which larger entities shed the lion's share of cryptocurrencies, a trend more pronounced in bitcoin than ethereum. Ethereum is getting more and more attention due to upcoming mergers and scalability roadmap.
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Accumulation trend by investor size from May 1 to July 18, 2022. Source: Bitwise Asset Management, data from Chainalysis
market sentiment
The implied unrealized losses suggest that the worst is over.
The third and final factor to consider is the implied unrealized profit, or the current profit or loss of each holding position in the entity holding Bitcoin, Ethereum.
The metric has been the most useful contrarian indicator: the higher the percentage of holders with unrealized losses, the more likely the market is near a bottom and thus the better the timing for potential buyers. As the saying goes in the stock market: "Buy at the sound of the guns, sell at the sound of the trumpets"
The chart below shows unrealized losses as a percentage of total Bitcoin and Ethereum supply, broken down by loss size
The percentage of Bitcoin currently in the red is just under 50%, while Ethereum is over 60%. Even more striking is the fact that 40% of entities holding Bitcoin and Ethereum lost more than 50%.
Since 2017, such a ratio has only been seen during the market crash due to the new crown outbreak in March 2020, the market correction period in 2019, and the worst part of the crypto market performance in 2018. While further demand shocks cannot be ruled out, history suggests that reversals can happen relatively quickly when investor sentiment is this negative.
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in conclusion
in conclusion
It should be noted that the data on the chain is not perfect. Geographic traffic can only be estimated for entities known to be located in a particular location and is based on network traffic data, which may not accurately reflect actual transaction volume. For entities that do not directly participate in the market, the positioning of investor types cannot be detected, and no on-chain analysis company fully describes the behavior of all entities holding encrypted assets. At the same time market sentiment indicators may not be entirely accurate in their assumptions about the cost basis of each holder.
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