How will the price of Bitcoin change in the future? Focus on these five indicators

Original title: "Wondering What Bitcoin Will Do Next? Look At These 5 Indicators"

Original author: Leeor Shimron

Bitcoin has recovered from a three-year bear market and has become one of the best performing assets this year. Bitcoin has outperformed other macro assets in traditional financial markets. Earlier this year, Paul Tudor Jones, a well-known hedge fund manager at Tudor Investment Corporation, famously called Bitcoin the "fastest dark horse" in the current macroeconomic environment, and Bitcoin has performed very strongly, breaking through $17,000 this week (Note: On November 18, Bitcoin broke through $18,000), and has risen 148% year-to-date.

Looking at the short-term chart, Bitcoin's price movement is unpredictable and seems chaotic, with prices swinging due to volatility generated by speculation (highly leveraged derivatives make short-term speculation possible). However, if we look at the long-term chart, Bitcoin's performance since its inception has been very stable and it still maintains a long-term upward trend.

Simply put, the price of Bitcoin is a function of supply and demand. The publicly available, accessible data is available for astute investors to analyze. Although it is difficult to predict the short-term price trend of Bitcoin, it is possible to predict the long-term trend of Bitcoin and where the current market is in a larger cycle from the indicators on and off the chain. As 2021 is approaching, the following five indicators can serve as a reference for investors.

Changes in Bitcoin holdings on centralized trading platforms

The vast majority of trading activity occurs on centralized exchanges. Traders and speculators place their coins on centralized exchanges to take advantage of rapid price fluctuations and market movements to make profits. Currently, about 13% of the Bitcoin in circulation is stored on centralized exchanges or in wallets controlled by centralized exchanges. This is a 20% drop from the highest point before the crash on March 12, 2020. The fact that so many Bitcoins were stored on centralized exchanges at the time may have been one of the reasons for the 3.12 crash.

As shown in the chart below, Bitcoin has been pouring out of centralized exchanges at an extremely fast pace over the past few months. The outflow of Bitcoin indicates that Bitcoin has been transferred from short-term speculators to long-term holders, who are moving Bitcoin from centralized exchanges to third-party escrow or self-custodial wallets. As Bitcoin continues to flow out, the selling pressure on Bitcoin spot will ease. The dynamics of this trend will indicate how the selling pressure will change in the near term.

Bitcoin holdings by large companies

When MicroStrategy CEO Michael Saylor announced that his company had completed a $425 million Bitcoin purchase this summer, it sent shockwaves through the crypto industry. Square soon followed suit, investing $50 million in Bitcoin, about 1% of the company's total assets. Investments by public companies tend to be held for a long time, and these Bitcoins held by giant companies further reduce the supply of Bitcoin on the market.

Currently, about 842,000 Bitcoins (4% of the total supply) are held by major companies. As companies normalize the idea of ​​Bitcoin as an inflation-proof storage asset, the domino effect will become more obvious and more companies will follow suit. Or, if they start to liquidate these assets, expect downward fluctuations in the price of Bitcoin to follow. And, since many of these companies already publicly hold Bitcoin, these behaviors are easy to track and observe.

Google Search Index

As Bitcoin peaked at $20,000 at the end of 2017, Google searches for the term "Bitcoin" also surged as expected. However, it is worth noting that although the current price of Bitcoin is very close to that year, Google searches are only 10% of the peak in 2017. This shows that retail investors are not driving Bitcoin's current price trend, but institutional investment is leading the rise in Bitcoin. Such a low Google search index may indicate that the current market cycle is still in its very early stages, and perhaps only when it reaches a new historical high will more people start to pay attention.

Futures Perpetual Swap Funding Rate

First introduced by BitMEX and quickly adopted by the wider crypto trader community, perpetual swaps are derivative contracts similar to futures contracts, but without an expiration or settlement date. Unique to the crypto space, these contracts offer unparalleled leverage, with some exchanges offering leverage as high as 100x. Extreme leverage can lead to wild short-term volatility, as traders on the wrong side of a trade can have their positions liquidated and be forced to buy or sell assets inappropriately, exacerbating volatility.

The perpetual swap funding rate balances the demands of buyers and sellers, bringing its price in line with the underlying asset. This is the fee that one side of a trade must pay its counterparty. If the funding rate is positive, traders who are long (expecting the price of Bitcoin to rise) pay traders who are short (expecting the price of Bitcoin to fall). If the funding rate is negative, short traders need to pay longs.

The funding rate remains positive, indicating that most leveraged traders are long and the market may be overextended. Any sharp downside could lead to forced liquidations and exaggerated downside selling.

Here comes the point. During the Bitcoin bull run after March this year, the perpetual swap funding rate has only remained slightly positive, currently around 0.005%. This shows that long and short leveraged traders are quite balanced, and the current trend is organic demand to buy spot Bitcoin. If the funding rate soars above 0.1% and stays there for weeks or months, this may cause concern among Bitcoin holders.

Bitcoin's effective supply

At the time of writing, approximately 18,545,000 Bitcoins have been issued to date (circulating supply). Active supply is a strong indicator of the "hodler" mentality. The active supply metric measures the number of Bitcoins that have been traded at least once in a specific period. As active supply decreases, Bitcoin holders express their desire to hoard coins, which further reduces the supply available for sale.

As shown in the chart below, Bitcoin's one-year active supply has been on a downward trend since the beginning of 2018. The one-year active supply currently stands at 38%, and the two-year active supply stands at 56%. This means that over 60% of the available supply has not moved in the past year, and over 40% of the supply has not moved in the past two years. Despite Bitcoin's volatility, Bitcoin holders are refusing to sell, and this trend only looks set to continue. While this analysis does not take lost coins into account, the trend clearly shows that Bitcoin holders are holding on despite a three-year bear market and recent price momentum. Conversely, a surge in active supply could mean that long-term holders are selling their Bitcoin, leading to additional selling pressure.