Bitcoin On-Chain Analysis 28th Jan to 4th Feb 2022

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On-Chain and Derivatives:

BTC has broken a 3-month long downtrend dating back to November. However, horizontal levels are far more important than diagonal. 

Major horizontal resistance still lies at 40.7K; start closing above that, and we can start eyeing the confluence of yearly open and short-term holder realized price around 47K.

Above that 47K area, will have reclaimed HTF momentum in my opinion. One step at a time though, still haven’t even closed above local resistance yet.

Bitcoin/Us Dollar, 1D
Bitcoin/US Dollar, 1D

Open interest still remains relatively high with no wipeout.

With no major wipeout on the push down over the last month and based on the context of where open interest has reacted with price action, tend to think the aggression of this open interest is mostly on the short side.

Open Interest Dominance
Open Interest Dominance

To add on, have also seen a prolonged regime of spot premium over perpetual swaps. This means that the market has been led by spot rather than derivatives and is a healthy backdrop for market structure, but not something to decide to immediately smash buy based on.

Bitcoin/Tether Us Perpetual Futures, 1H
Bitcoin/Tether US PERPETUAL FUTURES, 1H

Quarterlies or the 3-month basis between spot and futures is now down to 6 per cent. Typically we see quarterlies reach these lower levels when market sentiment is low, and in extreme conditions quarts flipping negative have been a strong buy signal. The Bitcoin market has been in a slump & the lowest quarterlies are 5.7%. Compare this to 1Y Treasuries yielding 0.75%. Over the next few years an influx of capital will come in not just on the directional side, but to capture yield. 

Another backdrop for the Bitcoin derivatives market has been the migration from traders using BTC as collateral to stablecoins. This is significant, because of the underlying risk profile brought on by using both forms of collateral for futures contracts. 

Using Bitcoin as collateral has a negative convexity. 

This means that if you’re long Bitcoin with Bitcoin as collateral and the trade starts going against you, not only is your PnL decreasing, but so is the value of the margin you are collateralizing the contract with.

On the flip side, stablecoin margined shorts are more likely to be squeezed. Because when collateralizing a short with Bitcoin, even if the trade starts going against you your PnL may be decreasing but your collateral is increasing in value, giving you an inadvertent hedge. 

Overall the migration from BTC to stablecoin margined contracts is a healthy backdrop for macro market structure.

Bitcoin: Futures Open Interest Crypto-Margined
Bitcoin: Futures Open Interest Crypto-Margined

From the on-chain side, we can see most of the selling over the last few months has come from younger and younger coins, very similar to the downtrend from February to July/August last year. 

Bitcoin: Entity - Adjusted Asol
Bitcoin: Entity – Adjusted ASOL

This is also shown by the short-term holder (<155 days) realized price because it is trending down. This means that coins previously bought at higher prices by short-term hodlers are now being sold at a loss.

STH realized price is also the level from an on-chain perspective that I think is the most important to reclaim for HTF momentum. This is in confluence with the yearly open around $47K.

On-Chain Cost Basis
On-Chain Cost Basis

Continuing to see whales holdings tick up after a multi-month downtrend.

This is one of the few on-chain metrics that provides us with a peek into what’s going on on the demand side of the equation.

Whales Filtered For All Known Entities
Whales Filtered for All Known Entities

The asymmetry is not skewed to the downside with BTC in the 30Ks. 

This is the Mayer Multiple, which compares BTC price relative to the 200 days moving average. We can see that the potential upside far outweighs the potential downside.

Mayer Multiple
Mayer Multiple

This is also shown by dormancy flow, reaching the 4th lowest value in Bitcoin’s history.

All in all, hard to think asymmetry is still skewed to the downside with Bitcoin at these levels. 

Bitcoin: Entity - Adjusted Dormancy Flow
Bitcoin: Entity – Adjusted Dormancy Flow

Nothing in this article is financial advice.

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Naveli Sharma