Willy Woo predicts Bitcoin price trend: market trend is seriously deviating from fundamentals

In my last forecast, the Bitcoin on-chain trading pattern was in a sideways bullish re-accumulation and recovery structure with no signs of a bear market. Since then, the Bitcoin price has continued to consolidate sideways, with a further bearish trend. During the same period, the on-chain parameter structure pointed to a completely different direction.

Reaccumulation and recovery remain intact and are indeed gaining strength, creating a classic divergence between price action and fundamentals. In this newsletter (No. 22, 2021) while Bitcoin fundamentals have not changed a lot from the last issue, I will take the time to explain the current Bitcoin market landscape in more detail.

Bitcoin market summary on July 2, 2021 (current price: $33,300):

• Macro Cycle: The bull market is intact and user growth continues to climb. As I said in the last two newsletters, macro indicators continue to be bullish.

• Short and medium term (no more than the next two months): Price and fundamentals show a classic divergence. What the market does not notice is that long-term investors are quietly accumulating. I personally expect this supply shock to push the market upward. I personally think that now is the best opportunity to enter since the network experienced a fundamental divergence caused by a similar supply shock that the market did not notice in the fourth quarter of 2020.

Important: All forecasts are probabilistic, with a historical reliability of about 80% for short time frame forecasts. Since fundamentals dominate in the long run, longer term forecasts are more reliable, and shorter time frame market movements are susceptible to unpredictable events and the randomness of the market. Short-term speculators should use appropriate risk management.

Detailed analysis

Understand the current market situation

In Bitcoin bull markets, prices always pull back to test the resolve of new buyers, which we call “washing out the unconvinced investors”:

1. The price of the currency began to fall

2. New buyers sell under pressure

3. Experienced investors buy shares at low prices

Senior investors are generally financially strong, and their purchasing power makes it easy for the price of the currency to rebound. This creates a V-shaped price trend like the one shown below.

In the case of a massive sell-off, it is impossible to achieve a quick V-shaped recovery. Instead, the tokens sold into the market take time to accumulate again. This leads to a long sideways trend, which we call the accumulation of chips at the bottom.

We typically see sell-offs of this magnitude at the end of a bear market, when maximum pain forces uncommitted investors out and smart money buyers move in to accumulate stocks at the bottom of prices.

The current situation is a very unique landscape for the Bitcoin bull market because the normal dynamics mentioned above are broken. The new participants who are now selling Bitcoin are well-funded speculative giants, while the buyers who absorb these tokens are long-term holders with less capital.

As Bitcoin rose all the way to $45,000 in the bull run, an unprecedented number of new whale institutions entered the market, and their purchases further added momentum to the bullish Bitcoin price trend, but by February, these "speculative whales" had begun to take profits and subsequently sold a large number of tokens to the market.

Whales have been buying Bitcoin in the fourth quarter of 2020 and selling it in the first quarter of 2021. Analyzing the turnover time of tokens, we can see that the main buying and selling activities in the market come from tokens with shorter holding times, so the most likely reason is that new speculative whales are constantly buying and selling.

By April, the aforementioned oversold selling overwhelmed the normal bullish buying, forcing exchanges to sell tokens. This massive sell-off is why I predicted in my 19th Newsletter (May 18) that it might take months to recover. A bottom accumulation is more likely than a quick V-shaped recovery.

While the transaction flow chart above shows that the sell-off has subsided, we do need to take a closer look at the quality of the holders who are inhaling tokens.

Our “Rick Astley” chart below shows the flow of tokens between long-term holders and speculative participants.

It is clear that long-term holders are accumulating speculative tokens at a strong rate. Now it is a waiting game until this is fully reflected in price action, and the data definitely indicates that a bottom accumulation is forming.

Supply shocks are quietly forming and will affect the market

While on-chain information has been pointing to a sideways bullish recovery, price action has not reflected this.

In my opinion, this is due to the increase in tokens held by speculators, who are eager to sell, while long-term buyers have been patient and slowly accumulating. Based on technical analysis, the price action is severely bearish in the eyes of speculators, and chart analysts point to a further plunge in the price of Bitcoin to $20,000, claiming that we are in a bear market. The fundamentals do not support this statement.
On-chain parameters are very bullish. A supply shock is quietly building without the market noticing. In the chart below, I have remixed the “Rick Astley” data, this time showing the ratio of Bitcoin held by strong hands (experienced investors) and weak hands (new investors).

Liquidity supply ratio is the number of tokens held by those who rarely sell tokens (strong hands) divided by the number of tokens held by speculative participants (weak hands)

Tokens that whales dumped to speculators are now being absorbed by long-term holders. We are currently at a supply shock level comparable to when Bitcoin was at $50,000.

We rarely see these fundamental divergences where coins are quietly withdrawn from the market without price action reflecting this. It may only be a matter of time before the market suddenly finds that the coin supply is running dry. A great entry opportunity is just around the corner.

Here’s another view on the supply panic, based on the speculative inventory available on exchanges.

The supply shock ratio is the total coin supply divided by the number of tokens available on exchanges. As exchanges’ token supply decreases relative to total supply, this exacerbates the supply shock (increasing green line)

Note that the quality of holders (first chart) shows this particular supply shock more clearly than exchange inventories (second chart). Exchange inventories are usually accessible to traders, but become less indicative as more retail investors enter the market in the middle of a bull run (which is what we are seeing now). Retail traders like to store their tokens on exchanges.

This reminds me of the supply shock that the market didn’t notice in the fourth quarter of 2020. While data showed long-term investors rapidly accumulating Bitcoin, experts were debating whether Bitcoin was an investment hedge in a post-pandemic world. Bitcoin prices then plummeted, and soon there was a decoupling from its tight correlation with stocks.

Bitcoin network growth hits 2021 high

Glassnode does a great job of tying wallet addresses to individual participants based on their historical interactions. From this data, we can see that the Bitcoin network is averaging a healthy 32,000 new users per day, meaning 2021 is approaching a new high.

Net growth of entities (2-week moving average). This is the number of new users joining the network minus the number of users leaving the network (emptying their wallets).

I marked in red the start of the true bear market (early 2017); new users stopped entering and higher prices could not be sustained. This is not the case with the on-chain parameters we are experiencing now. New users are taking advantage of this opportunity to buy the dip, and the entry rate is hitting a new high in 2021. This becomes another example of price action diverging from on-chain data.

ETF investors are buying

ETFs are alternative Bitcoin investment vehicles that provide exposure to Bitcoin through shares in a brokerage account. They are popular among long-term traditional and institutional investors.

The newly launched Canadian Purpose Bitcoin ETF saw its holdings increase by 4,100 BTC during this drop, which is consistent with what we are seeing on-chain: long-term investors are buying.

Now let's look at Grayscale, the largest and most mature ETF, managing 3.5% of the entire Bitcoin supply. The uniqueness of Grayscale's investment tool is that when a holder sells a share, it does not reduce BTC holdings, but sells shares at a discount to the BTC market price. In fact, we can judge buying and selling demand based on the Grayscale premium.

Grayscale premium refers to the price difference representing the share of the underlying BTC asset

Grayscale investors began selling their holdings in late February, causing the Grayscale ETF to fall from a premium to a discount. During this decline, selling has turned into buying, again showing a divergence in price action.

A vigorous mining integration is underway

This letter would not be complete without commenting on the great migration of Bitcoin mining industry to China. Much of the short-term bearish pressure on BTC price is attributed to the recent ban on BTC mining in China.

Since China accounts for a high percentage of the Bitcoin mining network, this ban effectively removes the last large area of ​​centralization on the Bitcoin network and is therefore bullish for the network’s future in the long term.

In the short term, the hash rate in the network has temporarily dropped as mining hardware has migrated to other locations around the world. Blocks are being processed 3 times slower than normal.

The network will compensate for this drop in hash rate today (at the time of writing), alleviating the temporary slowdown of the network. This is expected to be the largest difficulty reduction adjustment in the history of the Bitcoin network. (Chain News Note: At 14:35 Beijing time on July 3, the Bitcoin network ushered in a difficulty adjustment at block height 689472, with the entire network degree reduced to 14.36T, a reduction of 27.94%, the largest reduction in history.)

Once the mining difficulty is adjusted in place, it will open a window for Bitcoin prices to rebound and bottom out.

This is effectively a concession by miners. When miners are removed from the network, the surviving miners hold on to their coins because they know that the selling pressure from the out-of-business miners has subsided and the price has settled. We can visually see this effect through the compression of the Diffculty Ribbon. This has historically been a reliable signal of price bottoms.