On-chain analysis, helps us to understand what is happening in the bitcoin network, and based on the metrics we are analysing we can draw conclusions.
ON-CHAIN BITCOIN DATA ANALYSIS
Supply (UTxO) in profit
Usually this is a metric that is little used by on-chain analysts, many prefer to analyse accumulation trends, whales, minnows, derivatives and futures data (the latter has nothing on-chain about it). But let's face it, an investment is appreciated by its profit, so understanding when most players are in profit or when they are in loss is crucial. The metric measures UTxOs (bitcoin notes) priced at the time of creation and compared to the price at the time the UTxO is destroyed (transferred).
Very low amounts of profitable UTxOs result in weaker selling pressure. every time there have been low values of profitable UTxOs, there have been increases in bitcoin prices. In 2020 with the covid the supply in profit hit lows and then later the year after with the China bitcoin mining ban the supply in porfit had another local low, and again in January 2022 (red arrow) another low.
But why are we talking about these lows? After both the 2020 (covid) and 2021 (China ban) lows occurred, there were ATHs of the bitcoin price (April 2021 and November 2021); now we don't know if this suply in profit low will lead us to a new ATH of bitcoin, from this metric we can understand that when players are at profit lows, it is clear that we are in a bottom, so if this January 2022 low is the local low, we could be on the verge of a suply in profit supply increase and subsequent bitcoin price appreciation.
Stablecoins and reserves
Stablecoins are now an important asset in the cryptocurrency industry and as a result need to be observed and studied, the fact that stablecoins also have a blockchain, this allows us to measure reserves, and to relate stablecoin capitalisations to bitcoin capitalisation, having said that, there are three metrics we are going to observe:
- stablecoin reserves
- exchange stablecoin ratio
- stablecoin supply ratio
The first expresses the amount of stablecoins deposited in exchanges, the second is the ratio of bitcoin reserves to stablecoin reserves held in exchanges, the third is the ratio of bitcoin capitalization to stablecoin capitalization.
In the picture below if we look at the metric "Exchange stablecoin ratio", we can see that from 24 February (start of the Ukrainian invasion) stablecoin holdings have decreased until 7 March, and after 7 March to date, bitcoin holdings have decreased; this may lead us to say that many stablecoins have been exchanged into bitcoin and subsequently withdrawn and stored in cold storage.
Instead, if we look at the metric "stablecoin supplay ratio" the ratio moves between 7.2/8.6, this helps us understand the amount of stablecoin (marketcap) in relation to bitcoin capitalisation. Comparing the stablecoin metrics, SSR and exchange stablecoin ratio, we see that the absolute amount of stablecoins over the same period has remained the same, and we can see this from the graph of SSR which moves like the price of bitcoin, while the exchange stablecoin ratio which is in relation to bitcoin reserves has increased, this indicates that there has been a strong buying action of bitcoins with stablecoins, and the lowering of stablecoin reserves confirm this and the subsequent drop in bitcoin reserves testifies to the fact that many bitcoins have been withdrawn after the drop in stablecoins.
This shows us how important the impact of stablecoins can be on the price action of bitcoin. In addition low values of SSR, indicate that a lot of buying pressure could occur.
Long term UtxO distribution (LTH)
Since the blockchain tells us "who has and how much", another important aspect to consider is time, the time of ownership, which on-chain analysts, after observing the time of bitcoin owners, have noticed a demarcation time, i.e. the very famous 155 days, what happens before and after the 155 days?
Observing the behavior of bitcoin owners, it was noted that after 155 days of ownership, there is a low probability that holders will sell their bitcoins, vice versa below 155 days, so much so, that to simplify we have distinguished two categories; short term owners (t< 155 days) called STH (short term holder), and long term owners (t> 155 days) called LTH (long term holder), of which we will see the respective metrics later.
But before commenting on the picture below and making considerations, we need to talk about the Realized Cap. also known as "the real capitalization of bitcoin" because it does not take into account the coins that have not moved for a very long time, and therefore have not appreciated (not realized), because every time an UtxO is moved today, it is compared to the value on the date of its creation and then revalued and added to the realized cap. So we can say that the realised cap. is a real capitalisation, from which we can calculate the realised price, simply by dividing the realised cap by the number of coins, which is currently around $24,000.
Now we know that the watershed time between STH and LTH is 155 days (about 5 months), and what is the realized cap.; we see in the picture the percentage (%) of STH, according to their time, the categories that I have chosen in this picture, not coincidentally start with the youngest period of 6 months, then a time greater than 155 days, so we are analyzing the long-term owners (LTH).
From 6 to 12 months we see that there is a slow increase, from 12 to 18 months, on the other hand, we can appreciate a big increase after the LTH of November, while the coins from 18 months to 5 years are almost the same. The fact that older categories do not increase is normal, and we must remember that in this metric which is calculated taking into account the realized cap. coins that have not been moved or destroyed for a long time are not considered.
Distribution UtxO short term (STH)
different is the behaviour of younger categories with time less than 155 days, in the picture below we are actually seeing the behaviour of short term traders (STH).
Precisely the categories that I have chosen are from 0 days to 6 months, we see immediately that the bands at lower times (from 0 days to 1 week) are in slight decline, flat the bands between 1 week and 3 months, while the band 3 to 6 months is increasing from the local lows of the price of bitcoin.
In the picture below we can better appreciate the reading
Exchange inflow - spent output age bands
With this metric, I make a brief parenthesis. Exchange inflow - spent output age bands shows us the age of the coins being deposited in the exchanges, the peaks between August and September (blue arrows) show us that older coins have moved to the exchanges, recently no high peaks have occurred, only between December and January, there has been a movement to the exchanges (red circle), but of low quantity, unlike what happened in May peak in red indicated by the blue arrow.
As we can see on the left side of the chart the age groups are getting lower and lower, and as long as the trend is like this, the selling pressure will be lower and lower.
SOPR LTH and STH
Why do we give so much importance to these two categories of traders LTH and STH?
The first thing we have tried to understand is: who is selling, and whether these sales are profitable or loss-making. To answer this question, we need to take a moment to address another metric known as SOPR (Spent Output Profit Ratio).
The platforms that provide us with on-chain data, identify the UTxO transferred now, dividing the current value with the value of when they were created, then according to the time elapsed can be categorized as UTxO belonging to LTH or STH.
This ratio can be more or less than 1, coins sold at a profit will have a ratio greater than 1, while coins sold at a loss have a ratio less than 1.
In the picture below we see the SOPR ratio, relative to LTH and STH, the upper part of the STH chart, the lower part LTH; STH are the short term traders, usually traders who operate in the leveraged derivatives markets, we see immediately that their ratio moves below and above 1 (dashed red line), this is usually because the traders' positions are liquidated by the market, or traders who have bought high, for personal needs need to liquidate their currencies even in the spot markets. On the other hand, if we look at LTH we have a chart where the SOPR ratio is almost always above 1, meaning that sales over 155 days have almost always closed with a profit. These two metrics let us know when the market is in a bullish or bearish phase. Example: if we see both LTH and STH below 1 for a long time we could say that there is a capitulation of all traders, long and short, and therefore we see a heavy selling pressure, so we could say that we are in a bearish phase, vice versa if we see the metrics above 1 with high values of SOPR, in that house we are in a bullish phase, but there is a third possibility, as happened from November to today, that LTH were above 1 while STH were below 1, Many "classic" traders said that we were in a bearish phase (which of course we were, from 69k to 34k, today we are at 42k), but technically from the point of view of on-chain analysis, we were not in a bear market but rather, in a long time correction, which is why in on-chain analysis is not enough to look at one metric, but evaluate a set of metrics, to give an example, in this report we have dealt with only eight.
To clarify, this correction, which now seems to be coming to an end, was triggered on 4 December with a massive liquidation of long orders. This induced fear in investors with little experience or even little knowledge of derivatives products, and the macroeconomic picture also did not help, with the first statements of the Fed that it had to combine monetary policy. The biggest selling pressure came from the derivatives markets, but the strange thing was that while experienced traders and big money were selling short bitcoin at the end of the day the bitcoin reserves in the exchanges were less and less, in fact the trend of bitcoin reserves did not hint at increasing, up to mark new record lows just this week between 14 and 20 March (but we will talk about bitcoin flows in another report.
BITCOIN TECHNICAL ANALYSIS
After breaking through the bearish trend line that from the high of 09/11/21 brought the price to touch $32,900, the price has tried a retest from below the resistance level that three times has rejected the price around the area $45,000/45,500, making us note that the first important level to overcome to hope for a continuation upward is exactly that price area. Also important is the cluster formed on 5/02 that we see as being close to the first search for liquidity on 10/01. It is on this level that the week of 21/03 begins, the price seems to be looking for support at the top of the cluster ($40,500), if demand were to begin to be felt we could see a new attack on the resistance area ($44,500/$45,500).
After analyzing the nearest static support and resistance levels we can see that the price has returned above the MA50 after finding support at the 37500 price level, thus marking another higher low (with subsequent bullish engulfing). Yesterday we can see a price rebound right near the MA100 which confirms its functioning as a dynamic resistance, converging on the static level of $42000 (the latter refers to the resistance of 08/01/21). An overcoming of this static level at the same time as the MA100 could lead the price to aim again at the area of $ 44,500/45,500 which, if it were to be exceeded with a good increase in volumes, would increase the probability of going to attack the MA200 (stronger dynamic resistance).
If it were to be broken to the upside it could lead the price to test the area of $52500, a very strong resistance which between 6 and 7 September '21 pushed the price back with great intensity, causing it to slide from around $52,760 to around $42,500, closing the day at $46900. I would like to draw attention to the following days, where the price found support exactly on the $44500/$45500 area, which as we have seen has functioned as resistance three times since February. I therefore believe that the first level of resistance to overcome is this area ($44500/$45500), which would mark a new higher high for the price (it is necessary that the breakout occurs with a good increase in volumes to avoid a false breakout).
Looking at the weekly candlestick chart we can see that the downtrend has maintained a minimum level slightly higher than that seen during the collapse during the summer of '21, after seeing two weeks of bullish attempts both with rejection we finally have a good weekly closing that could lay the groundwork to attack the levels considered above.
I hope you find the information and considerations made here useful. Please leave your comments below. Thank you for reading.