Bitcoin (BTC) On-Chain Analysis – A Short-Term Speculative Risk?

Bitcoin retraces once again

The price of Bitcoin (BTC) drops below $ 50,000 and the MA200. Failing to overcome these two levels of resistance, Bitcoin returns to its rangeidentified during previous analyzes.

Despite BTC hovering around $ 40,000 again, however, data on the chain indicates strong demand on the market. Interest in Bitcoin does not appear to decline even as the price is correcting.

Figure 1: Bitcoin (BTC) Daily Price

This week we will study the downward dynamics of trading platform reserves as well as demand caused by three large buyers of BTC before completing our monitoringexposure to derivatives market risk.

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A diligent accumulation on a broad spectrum

We begin this analysis by introducing a new metric: the Accumulation Trend Score.

This tool was designed by Glassnode in order to measure the overall accumulation investor portfolios. It lets you know when large entities (whales) and / or large portions of the market (shrimp, in large numbers) are accumulating or liquidating BTC, all while filtering out miners and exchanges.

Figure 2: BTC accumulation trend score

The metric fluctuates between the values ​​0 and 1 with the following interpretation:

• The values ​​close to 0 (yellow / orange) indicate that the market is operational distribution or that there is small accumulation significant (bearish).
• The values ​​close to 1 (purple) indicate that the market is open net accumulation and the balance of investors’ portfolios increases significantly (bullish).

There was a steady stream of values ​​above 0.65 this week, indicating that a general tendency to accumulate is in progress.

This information can easily be confirmed by studying the total trade balance, which begins a new decline as evidence of massive withdrawals.

After stagnating reserves between 2.5 million and 2.6 million BTC since the last quarter of 2021, the total sum of BTC available from centralized trading platforms now represents only 13% of the current supply.

Figure 3: Total foreign exchange reserves

It should be noted that, starting from the capitulation of March 2020, this balance started a structural downward trend, a sign of a paradigm shift market participants who today tend to accumulate BTC massively, particularly through DCA strategies.

This click is clearly visible in the graphic below. Representing the monthly change in total foreign exchange reserves, it represents the periods of deposits (green) and withdrawals (red) in a given period.

Figure 4: change in the net position of the stock exchanges

We can clearly see the amplitudes of the decreasing withdrawal waves after March 2020, as withdrawals, which very rarely exceeded 50,000 BTC, have now become a new normal.

The current market structure is therefore part of a dynamics of accumulation and withdrawal of BTC from exchanges to cold storage wallets.

In fact, since July 2021, the number of so-called “illiquid” BTCs (held outside trading platforms and smart contracts) has been constantly growing and represents over 75% of the current supply.

Figure 5: Illiquid supply

This last graph is striking for the clarity of its interpretation: BTC exits exchanges and is massively accumulated by various entities, drastically decreasing the liquidity of BTC and creating a long-term bullish pressure on the price of bitcoin.

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Institutional demand is doing well

That said, retail investors are far from the only seekers of BTC and it looks like the year 2022 will be marked by the arrival of new institutional actors ready to get their hands on their piece of cake.

One of the recently arrived public bodies is the Moon Foundation Guard (LFG), which collects a total of 39 897 BTC to 11 April 2021 following a series of important purchases.

Figure 6: Reserves held by the Moon Foundation Guard

With an initial acquisition of 9,564 BTC in late January, worth $ 358.6 million, LFG’s balance increased by 21,163 BTC in nine days and then again by 9,625 BTC this weekend. The total value of the LFG balance is now greater than 1.6 billion dollars.

The trend of “wrapping” BTC in a tokenized variant for distribution on other blockchains has also been constant over the past few years.

More than 1.45% of the bitcoin supply (275,236 BTC) is now held by the custodian BitGo and issued as a WBTC tokenized version on the Ethereum blockchain.

Figure 7: Reserves held as Wrapped BTC

Since the April 2020 high, WBTC’s offering has increased by an additional 132,451 BTC, indicating a increased demand for bitcoin collateral in the decentralized finance sector (DeFi), despite uncertain macroeconomic and geopolitical conditions.

We can also accuselarge purchases by Canadian ETFs, the Purpose Bitcoin ETF receiving the largest share. Overall, the total holdings of all these ETFs increased by 6,594 BTC from the low at the end of January, reaching an all-time high of over 69,000 BTC (0.36% of the current offer).

Figure 8: Reserves held by Canadian ETFs

Such strong withdrawals from exchanges, as well as large inflows into ETFs, DeFi applications and personal accumulation portfolios signal thatstrong demand remains despite uncertainty global economy.

ATH of speculative risk in derivatives markets

However, it appears that interest in Bitcoin has not spared the derivatives markets. Although we warned of the significant return of risk-taking two weeks ago, it appears that speculators in derivatives markets still have a say.

In fact, we can now look at extreme risk takingincreasing the likelihood of seeing a compression trigger (both long and short).

The dominance of open interest futures over BTC, calculated as the ratio of Bitcoin’s market capitalization to the total funds allocated to futures contracts, is currently at an all-time high, indicating that the influence of derivatives markets on the price of BTC has significantly increased.

Figure 9: Open leverage ratio

Likewise, the estimated ratio of leverage used in perpetual contracts far exceeds its overheating threshold of 1.3 and currently exceeds 1.5. This means that the total funds allocated to this type of contract represent over 5% of BTC’s market capitalization.

Figure 10: Open perpetual leverage ratio

This finding of excessive risk-taking in derivatives markets is explained in particular by a inflow of over $ 2.7 billion occurred on Thursday 7 April when BTC began its decline.

Figure 11: weekly change in open interest

It is precisely this discrepancy between funds allocated purely bitcoin and those allocated to speculation instruments that has caused a drastic increase in the value of the leverage ratio illustrated above.

As BTC corrects, speculators are aggressive and seem ready to take risks which could leave the broader market unsure of the direction of the next volatile price move.

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Summary of this chain analysis

Definitely, the current price correction does not seem to worry investors who accumulate more and more bitcoins with the aim of keeping them in custody for the long term.

While foreign exchange reserves begin a new structural declineilliquid BTC ratio now reaches 3 to 4. In other words: over 75% of the bitcoins in circulation have a reduced chance of being spent in the short term, a sign of strong conviction and insensitivity to prices on the part of a wide spectrum of market operators.

Institutional investors, led this week by the Luna Foundation Guard, continue to induce buying pressure on Bitcoin literally sucking up the stock still available for sale. Reflecting the strong demand, these entities are demonstrating diligence in their BTC purchases that contrasts with the climate of global economic uncertainty.

In the end, it appears that derivatives speculators are also seeing renewed interest, both the flow of funds into futures and perpetuals has been strong this week. As a result of this enthusiasm, excessive use of leverage portends high volatility on the horizon. The scenario of a series of cascading liquidations thus becomes more and more plausible, whatever direction this unstable movement may take.

Sources – Figure 1: Coinigy; Figures 2 to 13: Glassnode