Bitcoin transactions are sluggish, miners turn to hoarding coins, and short-selling pressure is slowly released

In the 28th trading week of 2021, volatility continues to spread, and the market has experienced an impressively quiet week. The price of Bitcoin continues to squeeze into a tight consolidation range, with an opening high of $35,128 and a low of $32,227. It seems like the calm before the storm, and the activities of spot, derivatives and on-chain indicators all appear very "sluggish".

In this article, we will explore a wide range of indicators and data across the Bitcoin market to explore overall sentiment, volatility triggers, and investor behavior models.

Early signs of recovery among miners

The key to building a bullish or bearish forecast amid the changing conditions in the Bitcoin mining market is how quickly the hash rate recovers.

• A rapid hash rate recovery could indicate that offline miners have successfully migrated or rebuilt their hardware, recovering costs and potentially reducing the risk of inventory liquidation selling pressure.

• A slow hash rate recovery could indicate that costs and disruptions continue to take a financial toll, increasing the risk of selling pressure.

This week, the hash rate has recovered from a drop of up to 55% to a drop of around 39%. If this level holds and is representative, it would indicate that around 29% of the affected hash power is back online. This could be due to:

• Chinese miners who have successfully migrated their hardware
  

• The old, obsolete hardware has been cleared out and replaced with new ones.

(Average hash rate chart)

We have previously argued that profitability for miners still operating at this time will be significantly higher, minimizing forced selling pressure. In support of this thesis, the miner net position change indicator has returned to accumulation. This suggests that seller pressure from offline miners is more than offset by hoarding by operating miners. The significant downward trend in this indicator suggests that financial pressure is affecting the mining market and may foreshadow an increase in liquidity supply.

(Chart of changes in miners' net positions)

Exchange token reserves are depleted

A key theme throughout 2020 and the first quarter of 2021 has been the relentless depletion of exchange token reserves, many of which are entering the Grayscale GBTC Trust, or being accumulated by institutions, which is manifesting as continued net outflows from exchanges.

Throughout May, this trend reversed dramatically as a large amount of Bitcoin was deposited into exchanges and the market sold off by about 50%. On the basis of the 14-day moving average, exchange outflows have dominated, especially in the past two weeks, at about 2,000 Bitcoin per day.

(Exchange Net Flow Chart)

As market volatility dies down, it is common to see mempools empty and blockspace demand fall. As a result, trade executions tend to represent a less speculative and more “purposeful” sample than during frothy bull markets.

This week, the share of on-chain transaction fees associated with exchange deposits fell to 14% dominance after briefly peaking around 17%. A continuation of this structural trend could strengthen the argument that sell-side pressure is fading.

(Chart of exchange fee dominance)

Conversely, the proportion of on-chain fees associated with withdrawals rebounded significantly from 3.7% to 5.4%, a 43% increase in relative dominance. This also indicates that people are increasingly inclined to accumulate rather than sell.

Note that deposit fees will often be larger than withdrawal fees, which is often a result of exchanges deploying batching techniques to improve efficiency, including many customer withdrawals under a single transaction and fees.

(Chart of exchange fee dominance)

Finally, on exchanges, total balances have decreased by ~40k BTC over the past three weeks. This represents approximately 28% of the total inflow of 140k BTC observed since the lows in April, and the exchange balances we track currently hold 2.56 million BTC.

(Exchange balance chart)

Derivatives trading slumps

Across derivatives markets, we saw relatively calm conditions as open interest stagnated and volumes continued to decline. Given the significant role of derivatives markets in the leverage recovery in May, this suggests a weakening appetite for leveraged speculation.

Since the May sell-off, futures open interest has remained between $10.7 billion and $13 billion, with only a few notable gains or losses within that range. Open interest remains 57% below the ATH set in April following the Coinbase listing.

(Futures open interest chart)

Volumes in the futures market are also declining, falling back to $45 billion per day. These volume levels were last seen in the first quarter of 2021, when prices traded in the $29,000 to $38,000 range. This puts current volumes 62.5% and 49% lower than during the sell-offs in May (#1 below) and June (#2 below), respectively.

(Futures Volume Chart)

Options markets are experiencing a similar slowdown, with open interest down more than 67% from typical highs of $13.2 billion in March and April. Current options open interest is $4.4 billion, back to December 2020 levels.

With all derivatives markets falling sharply, it is increasingly likely that market moves are driven by spot volume rather than short/long squeezes or leveraged liquidations. Therefore, the direction of the next big move is likely to strongly reflect underlying supply and demand (rather than speculative premiums/discounts).

(Options open interest chart)

Supply Dynamics

We look for the balance of sell and hold patterns to assess investor sentiment and conviction.

The ASOL metric captures the average holding time of tokens sold each day. Since ASOL only considers the average holding time of sales (not the number of tokens), it is largely unaffected by quiet mempools. The chart below uses entity adjustment to filter out exchanges and similar economic entities that often use low on-chain fee environments for wallet integration and management.

Similar to the 2017 and 2019 peaks, the average holding time of sold tokens is rapidly declining, indicating a return of HODLing and accumulating conviction (note that subsequent accumulation supply squeezes take time to manifest).

(EA-ASOL chart)

ASOL suggests that, overall, older coins are becoming increasingly dormant. The HODL wave provides more data points to support this thesis.

The chart below filters tokens held between 2 and 5 years, these periods reflect two groups of high-conviction buyers who both experienced huge swings:

• 2-3 year holders accumulated during the bear market from late 2018 to the peak of 2019. These investors currently hold 9.8% of the supply.

• Since March 2020, 5.2% of the circulating supply has “matured” from the 2-3 year band to the 3-5 year band.

• 3-5 year holders accumulated between July 2016 and July 2018 and therefore represent the bull buyers of the last cycle. This group continues to grow and now represents 13.1% of the supply. These investors bought at $20,000 between $640 and the previous ATH and experienced significant volatility.

HODL Waves Chart

For “middle-aged” coins (held for 6 months to 2 years), we can see that these investors were widely distributed (downward waves) through the first quarter of this year. After Bitcoin’s 2018 retracement to $3,000, these first quarter sellers accumulated in a range that stretches back to January 2019 (thus earning a nice profit multiple).

These groups appear to have recently begun shifting behavior, moving from spending to a holding mode. 1-2 year old coins currently account for 13.3% of the supply, having accumulated from mid-2019 to mid-2020. After a large distribution in the first quarter, their holdings have stabilized, indicating a slowdown in spending.

Those with periods of 6-12 months are bull buyers of this cycle and now hold 9% of the token supply. Starting in early April, the number of this period began to increase significantly, indicating that most buyers in November-December 2020 did not sell their tokens.

The evolution of these “mid-life” (6 month to 2 year) HODL waves over the next three months will be key to understanding how much of the “early institutional supply” is still being held tightly, or conversely, being sold.

HODL Waves Chart

Finally, we investigated the “youngest” tokens, with holding times between 1-6 months. These represent bull buyers, who typically purchase tokens from older hands to realize profits. This behavior is evident from November 2020 to May 2021, as the supply of newborn tokens increased from ~22% to over 32%.

However, since the May sell-off, new coin supply has begun to show a structural downward trend, indicating that holders are HODLing and accumulation may be ongoing.

If the new coin supply continues to decline (old coins dormant and new coins mature), it is positive for price. Conversely, a large spike in young coin supply indicates a reallocation of coins and a bearish trend.

HODL Waves real-time chart