Glassnode: Is a new cycle of heightened volatility coming?

summary

• Net capital inflows into Bitcoin assets have cooled significantly, with few events of profit and loss among investors.

• Loss events are almost entirely associated with the short-term holder group.

• However, a large portion of the supply held by this group is transitioning into long-term holder status, holding for at least 155 days.

• Speculative activity in the perpetual swaps market experienced a full reset, indicating that speculative interest and long leverage are cooling.

Liquidity

Over the past few months, net capital inflows into Bitcoin assets have begun to slow, indicating that a certain balance has been reached between investor gains and losses.

It’s worth noting that capital inflows into the Bitcoin market have rarely been this quiet, with 89% of days seeing larger inflows than today (excluding loss-driven bear markets). It’s also worth noting that similar periods of inactivity have often preceded large spikes in future volatility.

Realized market cap remains at an ATH of $619 billion, with net inflows reaching $217 billion since the $15,000 low set in December 2022.

The MVRV ratio is a powerful tool that allows us to measure an investor's average unrealized profit.

Over the past two weeks, the MVRV ratio has tested its historical average of 1.72. Historically, this key level has marked the turning point between macro bull and bear trends. Approximately 51% of trading days have seen MVRV values ​​close above the average.

This shows that investors' profitability has basically returned to a balanced position, and the excitement and enthusiasm after the launch of ETFs has completely cooled down.

A similar picture is reflected in the supply percentage in profit indicator, which provides a reading of supply’s global profitability.

Like the MVRV ratio, this oscillator has reverted to its long-term average. Similar retests of this level have occurred before, in late 2016, throughout the 2019 volatility, and during the mid-2021 sell-off.

The sell-side risk ratio is another powerful tool that can be used to assess how balanced the market is. We can think of this metric in the following framework:

• High values ​​indicate that investors have spent tokens with large profits or losses relative to their cost basis. This situation indicates that the market may need to rebalance and often occurs after high volatility price action.

• Low values ​​indicate that most coins are being spent relatively close to their breakeven cost basis, suggesting that a degree of equilibrium has been reached. This situation typically indicates that the "breakeven" within the current price range has been exhausted, and typically describes a low volatility environment.

Currently, the sell-side risk ratio has fallen to a low level, indicating that most tokens transferred on-chain are trading close to their original acquisition price. Similar to the previously introduced indicators, this foreshadows a new state of heightened volatility.

Short-term pressure

Drilling down into these profit and loss activities, we can see that the magnitude of net realized profits/losses is decreasing.

Net realized profits/losses are currently +$15 million per day, a far cry from the $3.6 billion per day inflows seen when the market hit a high of $73,000 in March. Typically, this indicator returns to neutral levels around inflection points, such as a trend continuation or a reversal back into a macro bearish trend.

After hitting an all-time high in March, the confidence of new investors was tested by several months of choppy sideways price action, all while a large portion of Bitcoin supply remained tightly controlled, in the 3-6 month coin age range.

Historically, supply in this 3-6 month coin age range tends to peak shortly after a major market peak forms, often during a subsequent correction. Some of these new investors then decide to hold on during volatile conditions, eventually becoming long-term investors. Many others exit their positions and realize losses.

Currently, 3-6 month old tokens account for over 12.5% ​​of the circulating supply, a structure similar to the mid-2021 sell-off, but also similar to the peak of the 2018 bear market.

The chart below aims to further break down this group and compare the supply held vs. the supply lost in the 3-6 month timeframe. We start with the 3-6 month held supply shown in (dots) and then overlay the number of loss transfers for this group (squares).

From this, we can observe that since the beginning of July, loss events have increased significantly, while the total supply held has begun to decline. In terms of size, the scale of this sell-off is similar to major market inflection points in the past.

The supply that remains within this holding time range is getting closer to entering long-term holder status, meaning that these tokens are statistically less likely to be spent one day.

Another way to visualize the migration of tokens to LTH status is through the URPD metric, which differentiates between long-term and short-term holders. Here we can see that over +480k BTC was acquired above the current spot price and is now classified as LTH supply (blocks).

This also means that these LTH tokens are now in an unrealized loss state.

Short-lived and volatile

In this final section, we will add analysis of the perpetual swaps market which provides insights into speculation and leverage demand in the Bitcoin market.

Overall, liquidations have clearly declined in recent months, especially relative to the excitement of the record highs in March. This suggests that speculative demand has declined and points to a more spot-based market mechanism at the moment.

If we compare monthly price volatility to Net Liquidation Volume, we can see a strong correlation between the two factors. This highlights that market volatility is often exacerbated by squeezes in leveraged positions, as traders find themselves in an offside position when the market moves.

We can also study the ratio between price and net liquidation volume volatility to get a sense of the market’s appetite for leverage.

We find that this ratio is declining to its lowest level since February 2022. This reinforces the view that traders are less willing to take risky positions, suggesting that speculative interest has reset significantly.

This phenomenon is also seen in the wider digital asset ecosystem, with a large number of tokens now showing neutral funding rates. This underscores the view that a major reset has occurred in speculative interest across the market, and therefore the spot market is likely to dominate in the short term.

Summarize

A certain degree of balance has emerged in both the on-chain space and the perpetual futures market. This can be observed through the reduction of profit and loss activities and the return to neutrality of funding rates across the entire digital asset space. This shows that speculative activity by market investors has dropped significantly regardless of the instrument or asset class.

Beyond that, the market has been in a well-structured downtrend for over 5 months as consolidation and accumulation set in. However, as per historical preferences, periods of calm market structure are short-lived and often precede expectations of heightened volatility.