Breaking out of the range established at the start of the year, the price of Bitcoin (BTC) is showing signs of encouraging reversals. However, isn’t it too early to declare victory and consider this rise to be 100% reliable and durable? The current market structure seems to indicate that all the ingredients for a serene trend reversal are not present. On-chain analysis of the situation.

Bitcoin gets a breath of fresh air

The Bitcoin (BTC) price is showing encouraging signs of a trend reversal . Following a successful sixth test, BTC broke through the $44,500 resistance and headed towards the next key level : $50,000 .

After more than two months of consolidation, the market seems to be resuming an upward trend. Whether the current market structure favors this bias and whether participants are willing to realize their gains within a potential upside remains to be seen.

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Figure 1: Daily price of bitcoin (BTC)

This week, we will analyze the market from three distinct angles to determine if the conditions favoring the resumption of a sustainable rise are present:

  1. The Destruction of Days of Tokens (JJ) . By studying the spending or saving behavior of maturing BTC on-chain, we will gain insight into long-term investor engagement (LTH).
  2. The positioning of the LTHs . Observing the buying/selling behavior of long-term investors as well as their level of profitability makes it possible to gauge the probabilities of a bullish distribution phase occurring.
  3. The bias of derivatives markets . Analyzing the evolution of risk taking and the fluctuations of capital allocated to financial derivatives informs us about the psychological bias of speculators and about the sustainability of the trend in the making.

Insufficient BTC rejuvenation

In order to be able to identify a viable uptrend, observing the Token Days (DD) destruction rate provides us with prime insights.

Indeed, it is common to observe the formation of an increasing JJ destruction peak during powerful bullish phases, while bearish phases are characterized by weak episodes of destruction, except during large amplitude capitulations.

Before going any further, let’s quickly recall how the JJ creation/destruction process works. Token days are a measure of bitcoin’s economic activity giving importance to BTCs in proportion to their dormant and maturing state .

Every 24 hours, a UTxO left inactive will accumulate a “ token day ”. When he is finally spent, his accumulated DD count is reset , or ” destroyed “.

Thus, the number of JJ destroyed in a given period is a function of the number of tokens spent multiplied by the lifespan of these coins:

  • A 2 BTC UTXO inactive for 100 days accumulates 200 JJ;
  • A UTXO of 0.5 BTC inactive for 100 days counts as 50 JJ;
  • A 10 BTC UTXO inactive for 6 hours (0.25 days) carries within it 2.5 JJ.

The graph below represents the JJ destroyed without taking into account transfers between addresses of the same entity, so as not to interpret an internal transfer as a potential sale.

BTC JJD 290322

Figure 2: Plays of Destroyed Tokens

We can then distinguish two trends: an increase in JJ destroyed in 2020 and at the start of 2021, followed by a continuous drop in the count of JJ destroyed, from February 2021 until today.

These two opposing behaviors are indicative of two complementary paradigms: spending or profit-taking (red) during upsides and saving, accumulation and – in rare cases – loss-taking (green) during corrections.

As it stands, there’s no significant spike in destruction to show a lot of old BTC spending, a sign that seasoned investors, hoarding BTC in anticipation of a mighty upside, haven’t yet started their bullish distribution process.

The destruction spike of February 1, 2022 was triggered by the movement of funds from the Bitfinex hack in 2017 and, although it shows the effectiveness of on-chain analysis in terms of heuristics, does not cannot be associated with the observable behaviors of market participants.

This second graph groups the BTC spent in different degrees according to their age and represents them by colored bands as a proportion of the total tokens moved. In short, it measures the level of seniority of expenses and their share within the total volume of expenses.

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Figure 3: Expenditure volume age band

We can observe a similarity with the previous graph: both in terms of quantity and volume, the expenditure of old BTC is slowing down and does not indicate any sign of a reversal.

This observation allows us to push our thinking further and to declare that the correction, from November 2021 to March 2022 , will have allowed us to see the number of mature BTCs fall, but also that this period gave rise to a very strong accumulation .

Indeed, liveliness, a measure of BTC rejuvenation and maturation, indicates a clear dominance of maturation during this period as during the correction following the May capitulation.

Liveliness is calculated as the ratio of cumulative JJs destroyed to the cumulative sum of all JJs ever accumulated by the network and provides insight into changes in HODLing behavior, helping to identify investor accumulation or distribution trends long-term.

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Figure 4: Liveliness

In fact, it appears by the gradual fall in liveliness that the BTC entering a state of maturation are more numerous than those rejuvenated, a sign that the bias of the market is not yet at the expense .

A final example of this BTC saving and maturing process can be accessed through the study of HODL waves.

Selecting the bands of BTC that are at least one year old, a relatively coordinated global dynamic presents itself to us and indicates an accumulation as well as a continuous maturation has been underway since December 2021 .

Following these observations, it appears that the commitment of long-term investors, in particular through their spending behavior, is currently insufficient to trigger a large-scale bullish distribution.

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Figure 5: HODL waves over a year old

A lack of coordination of LTH spending

If we take into account the supply dynamics held by the LTHs as a factor catalyzing their spending behavior, the situation takes on a clear meaning: cumulating 13.4 million BTC , the holdings held by this cohort move sideways. since November 2021.

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Figure 6: Supply held by long-term investors

Buys balancing sales almost perfectly indicate that these entities have not yet begun coordinated distribution , likely waiting for higher prices in order to realize further profits.

Indeed, the change in the net position of the LTHs shows us that, following a significant distribution and then an intense accumulation, the variations in the flows associated with this cohort are gradually diminishing , tending towards a balance between supply and demand.

It appears that long-term investors are part sellers and part buyers, with no overall consensus setting a clear trend in saving or spending their assets.

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Figure 7: Change in net position of long-term investors

With 81.8% of the circulating BTC supply under their umbrella , LTHs largely hold these tokens at a profit, although around a fifth of them are still smoldering unrealized losses .

Knowing that the periods of bullish distribution accompanying the appreciation of the price of BTC appear when a large majority of LTH is in a position to make profits, it is therefore potentially too early to see this dynamic begin.

BTC LTH Supply PnL 290322

Figure 8: Supply held by long-term investors in a profit/loss state

Knowing that the periods of bullish distribution accompanying the appreciation of the price of BTC appear when a large majority of LTH is in a position to make profits, it is therefore potentially too early to see this dynamic begin.

One of the probable brakes that these entities are currently encountering is therefore the lack of incentive to sell , whether through a still low price or through the buying pressure absorbed by long-term investors still at a loss.

Yet the aggregate base cost of LTHs , sitting just under $16,000 , is currently low enough to give the entire cohort a latent profit of over 100% .

Although this cohort does not currently seem to be adopting a coherent and orderly behavior with respect to their spending, here is the graph that will have to be followed closely from now until the next few days in order to detect the premises of a bullish distribution.

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Figure 9: LTH SOPR

The LTH spend profitability ratio is described as the ratio of the buy price to the sell price of 1 BTC that is more than 155 days old .

Adopting a gradual upward trend from the break-even point (LTH-SOPR = 1) to profitability ratios exceeding 8, this metric tracks the evolution of the profitability of long-term investors’ spending.

We can clearly see an increasing profit-taking momentum from May 2020 to May 2021, followed by a gradual decline in spending profitability due to the fall in BTC price.

Thus, in order to be able to identify a new phase of profit taking within a reliable uptrend, we will need to observe:

  • the fall in the percentage of LTH in a state of loss ;
  • the fall in the holdings of the LTH cohort , accompanied by significant outflows ;
  • the rise in the holdings of short-term investors (STH), ready to buy the tokens to sell;
  • the rising profitability of LTH spending as the price of BTC reaches new highs.

Noticeable return to risk taking

Let’s turn to the derivatives markets. Exchanges offering futures or perpetual contracts now total more than $27 billion despite low volumes.

If we look at the degree of leverage in the futures markets , we can see that the open interest is constantly increasing, reaching 1.94% of the bitcoin market capitalization .

Until 2021, leverage ratios above 2.0% of market capitalization have historically constituted periods of high risk , often followed by a violent purge (short or long squeeze).

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Figure 10: Open Interest in Futures Contracts

Open interest in perpetual futures markets represents 1.28% of bitcoin’s market capitalization, an area associated with high levels of risk .

It also appears that the market is currently preferentially deploying capital into perpetual swaps, rather than expiring futures.

Such levels of interest make cascading liquidation scenarios plausible and bring high volatility to the market, regardless of direction.

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Figure 11: Open interest in perpetual contracts

Mitigating this possibility, the study of trading volumes of contracts in dollars indicates a continuous decline since the middle of March.

Although a great deal of capital is being deployed through the derivatives sector, it appears that it is not very active at the moment. However, special attention should be paid to detect potential major movements.

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Figure 12: Trading volume of futures and perpetuals

Additionally, the market appears to be decreasing its reliance on borrowing leverage collateralized with BTC. Choosing to favor borrowing financed by stablecoins, some speculators limit the risk exposure of their collateral in order to avoid margin calls.

This strategy reflects a certain caution on the part of participants and is potentially constructive in favor of a healthy rise over the next few weeks.

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Figure 13: Open interest funded via crypto collateral

Summary of this on-chain analysis

Finally, it seems that the recent rise in the price represents for the moment only a breath of fresh air , not yet ensuring a sustainable rise on the fundamental level. The market structure, however, remains constructive and gives rise to legitimate hope following the recent consolidation of BTC.

The absence of a significant BTC rejuvenation indicates that long-term investor commitment still leaves something to be desired . Ideally, we will have to wait to see this cohort begin a new phase of coordinated profit-taking during the rise in order to witness a bullish distribution and a rotation of capital from LTH to STH .

In addition, derivatives market speculators seem to have already deployed a significant amount of capital and today expose themselves to a high level of risk , despite still low trading volumes. High volatility could therefore set in very quickly and lead the market to purge excess leverage over the next few weeks.

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

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