BTC is in a panic and falling, but HODLers are still adding to their positions?

On-chain, we can observe a clear bifurcated reaction, with new entrants to the market panic-selling and suffering losses, while long-term holders appear to be relatively unaffected by the news.

Bitcoin prices are trading down more than 26.1% this week, as a series of tweets from Elon Musk raised concerns about the power consumption of mining. The week opened at a high of $59,463, before falling to $43,963 as a result of the tweets.

Musk’s tweet expounded on the negative externalities of energy consumption and proposed that 10x the expansion rate and larger blocks on Dogecoin is a viable alternative. Unfortunately, this has caused widespread confusion in the market, although for many Bitcoin HODLers, it is just another calm day.

On-chain, we can observe a clear bifurcated reaction, with new entrants to the market panic selling and suffering losses, while long-term holders appear to be relatively unaffected by the news. There are many supply and demand dynamics similar to the 2017 macro top, but with some peculiar differences that will challenge the conviction of both bulls and bears.

Measuring the size of the correction

First, we will assess the size of this correction compared to the bull runs of 2017 and 2021. The current correction is 28% below the ATH of $63.6k on April 13th. This is the deepest correction of the current bull run, however it is consistent with the five major retracements during the 2017 bull run.

In terms of bull market duration, the 2021 primary bull market has lasted for about 200 days, which is relatively short compared to the year-long bull market run in 2017.

The number of addresses currently in profit provides a perspective on where the market is below the equilibrium line. We can observe that this correction has caused more than 23% of on-chain addresses to be in the red, compared to only three uptrend periods since 2016. All of these comparison pullbacks are associated with relatively extreme events.

• In 2016, after a two-year bear market, the market rebounded and then retreated, leaving the bottom.

• In 2019, after a 1.5-year bear market, the pullback after the rebound was mainly driven by leveraged short sellers being squeezed.

• In 2020, there was consolidation following the global uncertainty following the COVID sell-off on March 12th.

New entrants panic selling

New entrants to the market panic-sold, causing them significant losses, and both aSOPR and STH-SOPR fell below 1.0 again. Both indicators take into account the degree of profit realized by cryptocurrencies moving on-chain, with higher values ​​indicating profitable coins moving, while values ​​below 1.0 indicate that most coins ended up moving at higher prices.

The aSOPR metric takes into account the entire market, while also filtering out all coins with a lifespan of less than 1 hour (these are usually temporary bounces and therefore not economically significant). The STH-SOPR only filters out cryptocurrencies that are less than 155 days old, and therefore represents entities that have bought cryptocurrencies during the current bull cycle.

Both indicators have fallen below 1.0, indicating that overall losses have been realized on-chain, with the effect being most pronounced in STH-SOPR. This is the second time STH-SOPR has fallen below 1.0 during this correction, indicating panic selling by a wide range of new holders.

The total number of addresses holding non-zero BTC balances also fell 2.8% from its recent all-time high of 38.7 million addresses. A total of 1.1 million addresses sold all of their cryptocurrency holdings during this correction, providing evidence that panic selling is currently underway.

If we look at the cyclical pattern of total supply held by short-term holders (STH), we can also see that a pattern of panic selling is playing out, similar to what was observed during the macro peak in 2017. What this chart shows is that the Bitcoin market tends to find a local or macro peak when new holders own a relatively large percentage of the total supply (i.e. a larger supply of cryptocurrency held by newer addresses).

However, it is important to note that the current peak in STH’s holdings is significantly lower than in 2017, both in terms of number of coins and percentage of circulating supply. New holders recently reached 28% of circulating supply (5.3M BTC), which is 9% less than the 2017 peak.

Given that Bitcoin is trading at a larger market valuation, this could reflect a larger inflow of capital that would be required to gain ground on market cap size. It could also provide a sign that this could be a retracement on a larger timeframe in the bull cycle as the weak capitulate and the strong resume accumulating cheaper cryptocurrencies.

Exchange traffic dynamics

Given our observations of panic selling, total exchange BTC inflows reached a clear high, with a net inflow of 27,500 BTC observed at the start of this latest correction phase. This is second only to the March 2020 sell-off and the 2019 PlusToken Ponzi scheme in terms of size.

However, if we break this observation down to the two largest exchanges, Binance and Coinbase, we can see two different realities.

Binance, which is primarily used by non-US citizens and is a preferred venue for retail investors, has been the primary recipient of this net inflow. We can also see that the size of both inflows and outflows has increased over the past few months, suggesting that the macro sentiment of Binance users is volatile. This further suggests that the recent inflows could be driven by new market entrants (panic sellers) or could be due to a rotation of capital into other crypto assets.

Conversely, Coinbase has seen almost complete net outflows of BTC since breaking the $20K ATH in the previous cycle, a trend that has continued this week. Coinbase is the preferred venue for US institutions, and given the typical daily withdrawal size (10k-20k BTC/day), this suggests that larger buyers are still actively accumulating crypto during this correction.

Long-term holders bought into this dip

In almost the exact opposite of the panic selling by new entrants, long-term holders appear to be buying the dip and accumulating cheaper cryptocurrencies. While the number of non-zero addresses has declined during this correction, the number of addresses in accumulation has increased by 1.1% since the recent lows. Accumulation addresses are defined as those that have had at least two buy transactions but have never sold any cryptocurrency.

Likewise, long term holders (LTH) are back in growth mode, again similar to the 2017 macro top. This chart is primarily reflecting buyers who bought crypto in late 2020/January 2021 and have yet to sell. As the supply of LTH begins to rise, this suggests that the amount of crypto maturing after more than 5 months of dormancy is outstripping the amount of older coins being sold to realize profits.

LTH currently has a supply of over 2.4 million BTC (8% of the circulating supply) more than at its peak in 2017. This suggests that a large amount of cryptocurrency has been moved to and remains in illiquid cold wallets, and that this trend is continuing.

Overall, the Bitcoin market is in the midst of a historically significant correction. There are strong signals that short-term holders are leading the way with panic selling, however long-term holders are stepping in to buy the dip, with their confidence largely unshaken. The PoW energy consumption narrative has been muted to say the least, and what comes next will be a test of conviction for the entire Bitcoin market.