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The Good

Bitcoin is on a tear. The world’s largest digital asset has broken free from a three-month downtrend, reaching a recent high of about $45,100 and having appreciated roughly 16% over the seven-day period ending 8/8. BTC briefly traded above its 200-day moving average over the weekend in a move that bodes well for the coin’s long-term prospects. Then on Monday, it re-tested the 200-day SMA. A more sustained breakthrough above the well-tracked average will likely signal that bullish bias is beginning to color the market. We’ll be sure to keep track of this.  

Do Bitcoin’s recent moves tie in any way to the supply shock we’ve chronicled? According to data from well-known analyst Will Clemente, BTC’s illiquid supply Ratio (ISR) once again exhibited bullish momentum over the past week. 

The ISR is currently standing at around 3.3, has increased nearly 6% from May’s YTD lows (3.14). Back in early May, these same ISR levels coincided with BTC at $53K. 

Clemente has continuously underscored this growing divergence between spot prices and the on-chain data as the reasoning behind his bullish sentiment.   

This increase in illiquid supply is due in part to the behavior of long-term-holders (LTHs) who simply can’t stop accumulating BTC. Per Glassnode, LTHs currently hold 82.6% of Bitcoin’s circulating supply. LTHs have been slowly increasing their supply of BTC since May’s market capitulation, reflecting this currency cycle of accumulation and coin maturation. Conversely, the percentage of coins held by short-term-holders (STHs) has been on the decline and quickly approaching levels that have historically indicated a major supply squeeze. Several indicators seem to hint that this key threshold could be reached sometime in mid-September, a move that would firmly underscore a months-long trend.  

From a profit-taking perspective, BTC appears to be in safe hands as demonstrated by a metric called the Adjusted Spent Output Price Ratio (aSOPR). It examines levels of profitability/loss experienced by coins moved on-chain over a 24-hour interval. As it turns out, there’s an aSOPRs’ “bullish reversal” that has manifest itself over the past two weeks. 

In the context of the aSOPR metric, a bullish reversal would constitute the ratio breaking above 1 and reaching a local high before resetting back to 1 and breaking out once again. Got that? Okay, so as of 8/8, aSOPR was hovering around 1.027 having broken above 1 for the 2nd time on Wednesday. This would seem to indicate that much of the selling pressure that took place over the past week has been successfully absorbed by the market. A consolidation above 1 will confirm this trend.   

Per Cointelegraph, Bitcoin’s current on-chain outlook is eerily similar to that of October of 2020. Back then, BTC was on the precipice of a near parabolic move. 

The Bad

Bitcoin is currently in overbought territory, at least according to its 14-day RSI. The well-tracked momentum indicator was hovering around 71.01 as of 8/8, hinting that a short-term price correction may be on the horizon. 

The Bitcoin network’s daily transaction count is in the gutter, averaging only roughly 240,000 transactions per day for the second consecutive week. Last time we saw these levels, for context, was back in December of 2018 when Bitcoin was in the midst of a year-long downturn. However, transaction volume has remained healthy. This suggests the network is being dominated by larger entities, not exactly something seem as boding well for a bullish case. 

Another week, another mining crackdown, this one occurring in that hyperinflationary hotbed otherwise known as Venezuela; over the weekend, regional authorities in the state of Carabobo cut the power supply to all registered miners, upending their operations. 

The Ugly

Debate over the federal government’s proposed $1 trillion dollar infrastructure bill raged this week, with crypto at the forefront of a heated negotiation. The source of controversy: overly vague language used in that bill that some industry leaders have argued could be used to classify miners, stakers, and software developers as “brokers” thereby requiring them to submit transaction data and other tax-pertinent information to the Internal Revenue Service, a too-tall order seen as pretty much unworkable and potentially damaging to crypto’s still tender, ripening stage. 

A coalition of lawmakers proposed an amendment that would have redefined the term “broker” with more clarity, solving for the harmful ambiguousness of the bill’s original language. But enter sandman, 87-year-old Sen. Richard Shelby (R-Ala.) who tossed a wrench in the works, singularly objecting, doing so in a petulant huff after some unrelated spending that he’d expressly wanted got nixed by Sen. Bernie Sanders (I-Vt.)

The President Biden-spearheaded bill passed in the Senate on Tuesday, potentially damaging language and all. 

Now it goes to the U.S. House of Representatives where an entirely new cast of Congresspersons get a crack at forging compromise and be wooed by the suddenly galvanized crypto lobby.

On Chain 

>Stable Coin Supply Ratio, 7-day SMA (SSR): Measures the supply of BTC relative to the supply of all stablecoins–denominated in BTC. In most cases, a ratio less than 10 suggests a lot of “buying power” waiting on the sidelines ready to spur a rally. On the other hand, a measure greater than 20 usually points to a low supply of stablecoins able to accommodate additional BTC purchases, a condition that usually precipitates a decline for the latter. The ratio’s 7-day moving average inched up slightly from the week prior, coming in at 6.97. After languishing around record lows for most of the summer, SSR appears to be forming an uptrend. Notwithstanding BTC’s recent bullish upswing, SSR still hovers far below yearly highs. Consequently, we can extract a favorable outlook from this metric given that ample buying power coupled with a low liquid supply of BTC can translate into continued upward price movement. The long-term downtrend in the SSR reflects the increasingly integral role of stablecoins in the crypto marketplace. As large-scale financial institutions and mainstream investors alike look to manage risk and liquidity needs associated with crypto trading, stablecoin usage is expected to proliferate. In fact, the collective market cap of all stablecoins has risen over four-fold YTD. Considering the unfathomable amounts of cash sitting on the sidelines of the financial system at the moment, it’s entirely possible that stablecoins will continue to receive inflows. 

>>Adjusted Spent Output Price Ratio, 7-day SMA (aSOPR): Examines levels of profitability/loss experienced by coins moved on-chain over a 24-hour interval. aSOPR calculates an aggregate level of daily spent outputs: the price at which a coin is sold divided by its respective cost basis. The adjusted metric ignores UTXOs with a lifespan less than 1 hr; as a result, it provides a better window into spending activity that actually results in economically significant profits/losses. Ratio above 1 indicates that coins–in the aggregate–are being sold for profit, vice versa for ratios below 1. About two weeks ago, aSOPR experienced some notable parabolic movement. The metric swung as high as 1.29 on 7/29, incentivizing droves of investors to spend their coins. Despite this notable realization of profits, aSOPR continued to hold above 1 over the following week and a half as the market adequately absorbed a fresh supply of spent coins. The metric’s weekly average came out to 1.02 for the 7-day period ending 8/8. Even after massive profit-taking, conviction remains high among traders for a continued rally. In dollar terms, aSOPR equated to an average daily net profit of $305 mil over the past 7 days.

>>> Number of Transactions, 7-day SMA: Weekly moving average for the daily number of transactions on the Bitcoin ledger. On-chain transaction volume is a helpful proxy for gauging underlying network effects associated with BTC’s value as a medium of exchange. As P2P transfers grow, the thesis behind BTC’s use case is buttressed, thereby reinforcing bullish market cycles and potentially incentivizing enterprise adoption. BTC’s ledger verified 233,545 transactions per day on average for the week ending 8/8. The disconnect between BTC’s price and a lack of on-chain transaction quantity continues to befuddle investors. However, with total transfer volumes still looking relatively healthy, it’s becoming increasingly clear that many recent on-chain transactions are between entities with large balances of coins. This may signal that large asset managers and/or high-net worth individuals are really starting to dip their feet into on-chain transfers. At the same time, it’s apparent that the months-long decline in transaction volume can be attributed to entities with smaller holdings of BTC.

>>>>Coin Days Destroyed (CDD): CDD is used to gauge the dynamics and length of market cycles by placing heavy attention on the trading actions of investors that hold BTC for the long term. For each day that one BTC remains unspent, it’s UTXO address accumulates a coin day: the balance of BTC within the address multiplied by the number of days since it was last moved. When that idle balance is eventually spent, the accumulated level of coin days on the UTXO is recorded by the CDD measurement. By aggregating all the individual levels of destroyed coin days, CDD provides insight into impeding market phases (accumulation, capitulation), which traders can utilize to predict longer term price trends. Historically, CDD values less than 5 million days signal that long-term holders expect an upcoming rally; conversely, values greater than 20 million days indicate an approaching ceiling as long-term investors look to take profits on their existing holdings because of what they see as frothy conditions. CDD is another metric that has undergone some blistering movements over the past two weeks. After reaching nearly 147 million coin days on (7/29), CDD tumbled back down to more familiar levels. Over the past week, the metric recorded a daily average of 4.19 million coin days. In retrospect, it seems that the market sufficiently absorbed an uptick in profit-taking, reflecting strong beliefs that BTC’s rally has more room to flourish.

Technicals

>200 Day Simple Moving Average: Equally weighted average tracking daily pricing data from the last 200 trading days. Often represents a key area of support/resistance and provides a solid assessment of the underlying price trend by largely ignoring volatile day-to-day price swings. After much anticipation, the bullish crossover on the 200-day finally occurred on Saturday evening (8/7). As of Sunday evening, the 200-day was standing at $44,866, as we’ve begun to see the formation of a bullish divergence. Looking back, the negative gap between BTC’s spot price and the 200-day lasted close to 3 months, a much shorter period compared to past bear markets such as the one seen in 2018. 

>>Relative Strength Index (RSI): Momentum indicator measuring both the speed and rate of change of recent price movements. Helpful in determining overbought/oversold market conditions. Values above 70 indicate an overbought market and bearish momentum, while values below 30 signal an oversold environment with bullish momentum to the upside. As of Sunday night, BTC’s RSI had crossed over into overbought territory standing at 71.01, hitting that a short-term price correction may be in the works.  

Fundamentals

>Open Futures Interest, 7-day average: Calculates the total amount of funds ($USD) currently locked in BTC futures contracts (across all major exchanges) that have neither been exercised nor expired. Provides insight into the actions of institutional traders, while also evaluating the general level of strength/weakness that underlies price fluctuations of BTC. For the past week, daily average open interest in futures contracts came in at $13.63 B. Corroborated by heightened levels of inflows seen during the past two weeks, activity in the futures markets looks to be projecting strong momentum going forward. Nonetheless, positions such as these can fuel volatile swings–either positive or negative–in the weeks ahead.

>>Exchange Net Flows, 7-Day SMA: Weekly moving average tracking the difference between # of BTC flowing into and out of exchanges. The numbers projected by the metric are counterintuitive; positive net inflows are normally taken as bearish signatures, and vice versa for outflows. For the week (8/2 – 8/8), daily average net flows came in at 1,255 BTC. Considering the historically massive reading of net outflows seen on 7/28, the slight upward reversal seen this past week looks relatively healthy. Despite these recent inflows, selling pressures were simply not enough to deter BTC’s recent climb.

>>>Network Value to Transactions Ratio Signal (NVTS): Slight variation of Willy Woo’s NVT ratio. Measures BTC’s market cap relative to the 90 day SMA of daily transaction volume on the Bitcoin network. Provides insight on overbought/oversold market conditions, serving as a leading indicator of market peaks/troughs. NVTS’s months-long consolidation looks to be in the rearview mirror, thus arguing that the bottom of this current market cycle has passed. NVTS ended the week at 33.23. The metric is beginning to hit levels not seen since the May selloff. Considering that NVTS still hovers well below its yearly highs, it is fair to say that the current upward price trajectory has not yet outstripped the value being generated on the network.

>>>>Market value/Realized value Ratio (MVRV): Takes the current market cap of BTC and divides it by the realized capitalization. The latter attempts to gauge the true economic weight locked up in BTC by multiplying the number of total UTXO addresses by the price at which the coins in those UTXO’s were last moved–not at the current market price. Since realized cap presents a cumulative cost basis for the market and removes the influence of dormant coins, it provides a noteworthy assessment of Bitcoin’s long-term fair valuation. Periods in which the ratio falls below 1 signal the possibility of an impending accumulation phase; in this case, such a reading can point to the formation of a newfound fair value threshold. On the other hand, historical evidence suggests that a ratio above 3.7 flashes overvalued conditions, showing that traders may soon look to take profits. The ratio ended the week at 2.21, and its recent trajectory is starting to form a sustained uptrend from a local trough. What this ratio is saying is that hypothetically, if all holders were to sell their BTC positions right now, they would receive–on average–2.21x their initial investment. Ultimately, MVRV still suggests that BTC’s current price sits fairly above the level at which many long-term holders entered into their positions. 

>>>>>Hash Rate (estimated), 7-day SMA: Bitcoin’s decentralized nature incentivizes a global matrix of computer operators to verify network transactions through an ultra-fast competition of brute computational power, known as “mining”. Miners work to verify transactions by producing a series of unique 64-digit alphanumeric codes, collectively referred to as “hashes”. Hash rate is an estimation of the total numbers of hashes produced each second by miners on the Bitcoin network, serving as a key proxy of the total computational resources underpinning the world’s largest crypto. Bitcoin’s hash rate fell off a cliff in mid-June, declining more than 50% from May’s sustained peak; it’s yet to fully recover. The nose-dive can be almost entirely attributed to an intense Chinese mining crackdown which has effectively shuttered half of Bitcoin’s processing power. Miners are flocking out of China at record paces in an event deemed the “Great Migration” by many in the on-chain community. A quick hash rate recovery will signal bullish momentum, indicating miners (on aggregate) have successfully relocated (or liquidated) their operations. On the other hand, a slow and prolonged recovery will flash bearish, signaling displaced miners are having trouble finding a new home. Hash rate experienced sideways momentum for much of the past week averaging 112.22 EH/sec for the 7-day period ending 8/8. Although it’s still far below levels seen earlier this year, a positive outlook can be extracted from this metric considering that it has rebounded nearly 31% from early July’s YTD lows. Per Coinbase, there is mounting evidence that a number of mining operations have successfully relocated to the United States, a move that will bode well for the health of the network. 

>>>>>>Futures Perpetual Funding Rate: This metric is designed to track the average funding rate–weighted by the size of open interest on each tracked exchange–required to hold a perpetual futures contract tied to BTC. Since these derivative instruments never expire, the exchanges that offer them need a mechanism that can periodically bring the futures price in line with the underlying spot price; this is where funding rates come in. Basically, traders make or receive payments between each other–around every eight hours–depending on the nature of their position (long/short) and the size of the difference between the current spot price and the price tied to perpetual contracts. This funding rate is composed of a fixed interest rate and a premium; the amount of the premium is determined by the size of the difference between the futures price and the price of the underlying. When the funding rate is above zero for example, the price of perpetual contracts sit above the spot price; as a result, long positions will periodically pay short positions to maintain their bullish position. The converse is true when the funding rate is below zero. The prevailing rate–whether positive or negative–incentivizes traders to buy/sell perpetual contracts to converge the perpetual futures price with the spot price. During the last seven days, the average funding rate came in at 0.0042%. What this is essentially saying is that to maintain a hypothetical $1,000 perpetual BTC futures position, longs would be paying shorts about $4.20 every few hours. Since this positive number indicates people are willing to pay to be long, it can ultimately be read as a bullish signature.