Glassnode: Full Analysis of "Black May" in the Encryption Market

Original title: "Surveying the May 2021 Sell-off"

Original source: Glassnode< /blockquote>

Original compilation: Moni, Odaily Planet Daily

In May 2021, after the most dramatic plunge in Bitcoin history, investors' faith began to be tested. Blockchain analysis company Glassnode assessed the market reaction on the chain. Let Xingxing Jun (ID: o-daily) take a look with everyone.

On May 19, 2021, the Bitcoin market experienced the most significant liquidity drop and price volatility since "Black Thursday" on March 12, 2020 . Prior to this, the price of Bitcoin had been consolidating above $50,000 for several months before breaking through $60,000 and hitting a new all-time high on the "stimulus" of the Coinbase listing.

The market sell-off on May 19 resulted in the largest single-day candle in Bitcoin history, with an intraday price difference of as high as $11,506, meaning In the ten days from May 9 to May 19, the price of Bitcoin fell by a total of 47.3%. This dramatic downside price action caught the entire market by surprise, especially as the plunge occurred during the longest bull run in Bitcoin’s history. Therefore, many people believe that this Bitcoin bull market may be coming to an end, or even return to the long-term bear market structure.

In this article, we will study some structural indicators that lead to market sell-offs, as well as an assessment of the development trend of future bull and bear markets. The content mainly includes three aspects: 

1. Some indicators that provide early warning of a slowdown in institutional demand and distribution in on-chain spending patterns.

2. Analyze the token flow in and out of the exchange and the demand of stablecoins for exit liquidity (or  Dry Powder).

3. Compare with previous cycles, sell-offs and holders' behavior to judge whether the market's next step is a financial macro bull market or a bear market.

(Planet King o-daily Note: Dry Powder is a slang term in the American financial industry, referring to cash reserves on hand for paying future debts, For example, if a venture capitalist anticipates bad times in the IPO market, you might hear him say "We want to keep enough Dry Powder on hand to continue funding our company during these tough times.")

Changes in institutional demand 

As the Bitcoin market continues to grow and If you want to reach new heights, you must attract larger funds and more investors. The main driving force of this bull market is undoubtedly the entry of institutional funds. The main reason is that the US government has taken extraordinary measures to deal with the new crown virus epidemic. Unusual monetary and fiscal quantitative easing.  

Before 2021, the Bitcoin investment tools available to traditional institutional investors are mainly the Grayscale Bitcoin Trust Fund product GBTC. Through most of 2020 and early 2021, many benefited from the premium on  GBTC  due to strong demand from institutional investors. GBTC serves a dual purpose as it removes BTC tokens from liquidity, creating a self-reinforcing supply crunch that drives growing institutional demand.

In January 2021, the inflow of the GBTC Bitcoin Trust Fund has approached 50,000 BTC, and the transaction premium of GBTC has always remained at 10% to 20% between. But in late January, the premium rate pushed below 10%, and BTC inflows began to slow down sharply. In late February, inflows into GBTC stopped completely, and GBTC had to start trading at a much lower discount to the spot price.  

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By the middle and late May of 2021, GBTC has been trading at a discount for more than 3 months. On May 13, GBTC even hit a high discount rate of 21.23%. The existence of the GBTC discount both eliminates a huge supply sink and provides early warning that institutional demand has started to weaken since late February.  

However, with the recent larger sell-off in the market, GBTC's discount rate has begun to narrow, reaching -3.8%. This suggests that institutional interest, or the conviction of arbitrage traders, is picking up again as the spot price of Bitcoin has fallen.

The graph above shows the movement of the Grayscale Bitcoin Trust premium rate.  

Let’s look at a “similar” story again. From the end of April to the beginning of May, Canada’s previously launched Bitcoin exchange-traded fund, the Purpose Bitcoin ETF, has been There were capital inflows, and since then there have been increasing outflows from the bitcoin exchange-traded fund as the digital currency market began to show signs of weakness. However, like the Grayscale Bitcoin Trust Fund, when the price of Bitcoin fell, the demand flow seemed to rebound more significantly. In late May, the inflow of the Purpose Bitcoin ETF rose again.

The chart above shows the change in inflows to the Canada-based Bitcoin exchange-traded fund, the Purpose Bitcoin ETF.  

As can be seen from the inflows of the Grayscale Bitcoin Trust Fund and the Canadian Bitcoin Exchange Traded Fund Purpose Bitcoin ETF, institutional demand will increase from 2021 to 2021. Weakened between February and May, both funds had an impact on Bitcoin liquidity supply. On the positive side, the rebound in inflows into the Purpose Bitcoin ETF, as the Grayscale Bitcoin Trust no longer sells at a discount, seems to indicate that the recent market price drop appears to be “stimulating” more investors to re-buy Bitcoin.  

News of digital currency exchanges in May 2021 

Due to the new crown virus The market panic caused by the epidemic caused both Bitcoin and the stock market to plummet in March 2020, but after that, Bitcoin began to enter the world's macroeconomic stage, and this effect can be clearly observed in the exchange balance. In the previous period of time, the balance of digital currency exchanges has undergone a dramatic reversal—from continuous accumulation to continuous outflow. Additionally, BTC volume on exchanges has shifted from liquid to illiquid, creating a self-reinforcing supply crunch, likely as BTC begins moving from exchanges to institutional custodians and cold wallets.  

From the Illiquid Supply Change indicator, we can see the rate at which Bitcoin has moved from a liquid state to an illiquid state over the past 30 days (green bar )——The accumulation rate in the past two years can be imagined, but the scale of selling pressure in May is also remarkable. There is no doubt that investors have clearly been spooked by the recent market sell-off.  

While it may be some time before the dust settles, a return to "accumulation" in the illiquid supply change indicator would be a very strong signal, This indicates that investor confidence has returned, and vice versa may indicate that there will be a new wave of distribution in the market.

The graph above shows the change in Bitcoin's illiquid supply.  

In the months leading up to the market sell-off, we also saw a trend of increasing amounts of funds being sent to digital currency exchanges bigger. On the contrary, as the price of Bitcoin fell, some investors began to buy on dips, and then introduced a large amount of digital currency to the exchange.  

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However, the total exchange balance has shown a downward trend, and we found that this state has lasted for more than 434 days, but on April 3, we observed a significant increase in the exchange inflow capital chain, which means This is consistent with the re-entry of previously illiquid digital currencies into circulation in the figure above. Please note that there are many factors that lead to this situation in the market, and these factors are likely to occur at the same time, such as: 

1. For distribution and sales purposes , more bitcoin flows into the exchange.

2. Provide collateral for loans, futures and margin transactions.

3. Capital transfer to other assets (such as ETH).

4. Speculation and transactions led by retail investors, especially some transactions related to the Binance Smart Chain.  

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Next, let's study this trend further: in fact, except for the three exchanges of Binance, Bittrex and Bitfinex, the outflow/inflow of most other digital currency exchanges basically maintains A "net neutral" (net-neutral) state. Throughout 2021, digital currency exchanges have witnessed accelerated inflows of BTC, especially on Binance. During the market sell-off in May this year, the total balance of BTC held by these exchanges increased by more than 100,000 in just one week. .  

It is worth mentioning that none of these digital currency exchanges have set up service entities in the United States, which also shows that for the exchange between different international jurisdictions There are differences in industry reactions and beliefs in digital currency market sell-off events.  

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Digital currency exchange balance change chart 

On the other hand, the US-based digital currency exchanges Coinbase, Gemini, Kraken and Bitstamp, the balance of these exchanges continued to decline, which also had a huge impact on the trend of the digital currency market throughout May.

Digital currency exchange balance change chart 

Recently, the proportion of on-chain transaction fees used for exchange deposits has also accelerated. Similar to the 2017 bull market, demand for exchange deposits across the market typically accelerates before reaching a new ATH (all-time high), and this time, too, total on-chain fees have risen by 20%. This suggests an urgent need for Bitcoin holders to prioritize deposits, whether out of panic or because margin positions need to be re-collateralized during a market correction.  

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The figure above shows the changing trend of exchange fee ratio.  

Finally, on the exchanges side, there has been a massive deleveraging in the derivatives market, leading to a cascade of sell-offs, margin calls and liquidations in the market. Futures open interest peaked at $27.4 billion in mid-April, but between then and the end of May, more than 60% of open interest has been liquidated. It’s worth noting that futures open interest is only one form of leverage available in the cryptocurrency market, with additional sources of margin coming from crypto lending, options markets, and a growing number of DeFi protocols, which we’ll continue to discuss in this article How they react to a market sell-off.  

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The chart above shows the trend of futures open interest.  

Liquidity exit vs. Dry Powder

There is no doubt that in today's In the cryptocurrency market, stablecoins have always played the role of reserve assets, and each stablecoin also has its own unique mechanism to maintain value "stable". Therefore, by analyzing the price performance of stablecoins pegged to $1, we can gain insight into the demand for liquidity exit in the digital currency market. The results show that in March and April of this year, the trading prices of the three major stablecoins USDT, USDC, and DAI were all above the anchor price of $1. This high premium situation did not ease until Coinbase’s direct listing. This shows that there may be a strong demand for the exit of stablecoin liquidity in the market, which is also closely related to the expected "sell-off".  

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Stablecoin price real-time chart 

However, during the sell-off in the digital currency market, the circulating supply of stablecoins hit a record high . Since the market began to correct on April 14, the supply of stablecoins has increased significantly in the past one and a half months, mainly including: 

1. USDT increased by US$14.2 billion, an increase of more than 30%;

2. USDC increased by US$9.72 billion, an increase of more than 88%;

3. DAI increased by 1.22 billion US dollars, an increase of more than 38%.  

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The picture above is a trend chart of the supply of stablecoins.  

The Stablecoin Supply Ratio (SSR) is a livestream comparing Bitcoin's market capitalization to the total stablecoin supply, designed to measure the Purchasing power denominated in USD - 

• If the SSR value is low, it means that there is a large stablecoin supply relative to Bitcoin market cap (i.e. Dry Powder);
• If the SSR value is high, it means that the stablecoin supply is small relative to the Bitcoin market cap.

As the market value of Bitcoin has shrunk due to recent market volatility, we have seen a recent increase in the supply of stablecoins, and the current SSR value has decreased by 7.5 times, reaching an all-time low.  

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Analysis of HODLer's consumption behavior 

Finally, let's analyze market expenditure and HODLing behavior.  

Here, we will pay special attention to two types of investors—— 

1. New investors: they may be more sensitive to bitcoin price fluctuations, and are more prone to FUD (fear, doubt, doubt) emotions. These people are regarded as short-term holders (Short Term Holders, STH);

2. Long term holders (Long Term Holders, LTH), they have been baptized by years of fighting, and they have also left the scars of years on their bodies.

In the 2020-2021 bull market, tokens held between 6 months and 3 years (representing buyers of the last cycle) experience  

1, December 2020 to February 2021, because during this period, Bitcoin The price rose from $10,000 to $42,000, and some Bitcoin holders sold during this period of market strength, realizing profits.

2. During the period from late April to mid-May 2021, people found that some early investors began to sell their own bitcoins. One reason may be capital rotation (the price of ETH has doubled at this time, investors may choose to sell Bitcoin to buy ETH), and the other may be to choose "cut meat" in response to the weak market structure.  

After these two time periods, however, the market sell-off slowed significantly as the price of Bitcoin corrected. This shows that experienced investors are quite good at selling before a major market correction, but as the price of Bitcoin gradually declines, they also tend to regain their "HODL" beliefs (and may also choose to buy on dips).  

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If we compare the consumption behavior of the "old guns" with the market peak in 2017, we can see a somewhat similar pattern - as long as the market becomes ecstatic, the "old guns" Selling will slow down. However, as the possibility of a bear market increased, especially the U.S. government issued a "big coin" relief policy during the epidemic, which led to a rejuvenation of the market. The same thing actually happened during 2018, when the entire cryptocurrency market was in a downturn, but gradually recovered from November of that year.  

Bitcoin selling by early investors is an important indicator to watch in the current market structure, as it could indicate When a large amount of currency was issued during the virus epidemic to push the market to rebound, they hoped to "exit" on a large scale to make profits. On the contrary, if the early investors did not sell Bitcoin, it means that HODLers are still sticking to the value, which reflects that the market outlook is still more optimistic.  

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The above figure shows the trend of the change ratio of Bitcoin selling output at different holding times.  

The Realized Cap HODL waves provides a trend chart of the change ratio of Bitcoin selling output for different holding times, as shown in the figure above, according to the illustration We can see a typical cyclical pattern, which has two main features: 

1. The Bitcoin held by early investors is also in the bear market. The accumulation started again, and some past speculators also began to convert into long-term holders (LTH);

2. Bitcoin held by new investors It starts to increase during bull markets, as early investors allocate "more expensive bitcoin" to new, weaker speculators.  

In the current market structure, as new speculators enter the market, we are seeing investors holding coins for less than 3 months become The market's biggest push, which coincided with an initial bull market rally, saw bitcoins held by early investors start to be spent after the price rose from $10,000 to $42,000. In this cycle, one of the most obvious differences we can see is that the share of new market speculators has declined. There are three possible explanations for this phenomenon: 

1. Market demand for access to derivatives and instruments began to increase to gain price exposure without interacting with the blockchain at all.

2. Retail speculators have a preference and/or a single bias for other encrypted assets other than Bitcoin, and they have also begun to try similar derivatives and off-chain leveraged trading.

3. Institutional buyers accumulated early in the bull market cycle have improved market maturity and holding behavior, and have not been affected by market volatility caused by the early expansion of early investors Impact.  

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From the inversion of the chart above, we can see that there are two observations regarding the proportion of Bitcoin held by early investors: 

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1. The Bitcoin supply held by long-term holders has actually returned to an accumulation state, which means that the market is becoming more mature and institutional HODL is still in play. If this happens, it will likely signal the beginning of a bear market, but it will also eventually lead to tighter supply in the market.

2. Current long-term holders currently hold 10% more active Bitcoin supply than in all previous market cycles.  

The second point could be interpreted as bullish, as it means that HODLers are distributing fewer bitcoins. However, this could also be considered bearish as it suggests that there is not enough demand to absorb this relatively small amount of supply for sale.  

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At the end of the day, during a market sell-off, investors who may end up inflicting a great deal of pain from losing money, primarily because their own unrealized gains keep evaporating, whether it's back to a cost basis, Still an unrealized loss. A "Net Unrealized Profit and Loss" (NUPL) indicator is introduced here, which can calculate the total profit and loss held by the unused token supply based on the market value ratio. The inventor of Net Unrealized Profit/Loss (NUPL) is a market research institution and Bitcoin Investment institution Adamant Capital, and further summarized by data scientist  Rafael Schultze-Kraft . The approximate algorithm is the Bitcoin market value (Market Value) and the realized market value (Realized Value - if you don't know the realized market value, it roughly refers to the last time the token moved on the blockchain network. Market Cap aggregated from USD values) divided by Market Cap. Rafael Schultze-Kraft  believes that when different thresholds (threshold) are set for the NUPL value, the current state of the cycle can be clearly distinguished.  

Indicator formula:
NUPL = relative unrealized profit - relative unrealized loss
or
NUPL = (current currency total market value - realized currency value) / current total currency market value 

If we pass short-term holders (i.e. currency holding time Holders less than five months), we can see that the size of the market sell-off in May this year was comparable to that during the last bear market, and it can even be regarded as one of the largest declines in the history of Bitcoin. In 2021, a large number of buyers still hold a lot of bitcoins. We have found that the market is trying to recover. At the time of writing, according to Coingecko data, the price of bitcoins began to approach $40,000, and the buyers held Bitcoin may become an "indirect supply", which in turn builds strength for the bull market.  

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Short-term holders NUPL real-time chart 

If we also analyze the tokens held by long-term holders, we will also get a A chart, the results show that the current bitcoin market is standing on the edge of history. Long-term holders usually realize profit (or loss) at a certain point in time (some point in time), for this reason, the blockchain analysis portal has created a "point in time" special indicator: PnL, which It is possible to check the "exhaustion level" of long-term holders - the critical point at which they hold  BTC , which, if breached, will prompt them to sell  BTC  and accept a market profit or loss.  

The net unrealized PnL of long-term holders is currently testing the 0.75 level, a key level in previous transitions between bull and bear cycles , only appeared during the  2013 market "pull-up" rally. Long-term holders may sell at some point if their earnings continue to decline, but on the other hand, rising prices and buying on dips can also create a tight market, followed by a pulldown similar to the  2013  Higher case.  

Short-term Bitcoin holders - primarily entities that hold  BTC  for less than a week - largest seller. During the market downturn last month, many  BTC holders who had just entered the market began to panic sell, causing Bitcoin to drop  38% from its all-time high during this period.  

At the same time, bitcoin price up/down volatility continues to be high (double-digit percentages most of the time), which is important for Not friendly to short-term traders. TradingView's 24-hour Bitcoin Volatility Index showed a low of  1.9  Around 19.7  - This means that the Bitcoin Volatility Index has risen by  936% in just over a month. Dollar lows.  

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Summary 

In this article, we dig into many of the most spectacular (and terrifying) sell-offs that have been described before, after, and after Bitcoin's most spectacular sell-offs. Market structure indicators after neutralization. Data don't lie, we can actually explain bull and bear market conditions from some of the available data:

For bear markets -

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1. Institutional demand has weakened significantly from February 2021 and the resulting decline/squeeze in supply has largely dissipated.

2. The balance of digital currency exchanges has increased significantly, resulting in an increase in the transaction volume of a large number of tokens, and the indirect supply must now be re-accumulated.

3. After the listing of Coinbase, we can see from the price changes of the stable currency that the market distribution is in progress. Bitcoin is being sold off.

4. A large number of short-term holders still have not sold a large number of digital currencies they hold, while the unrealized gains of long-term holders are on the historical edge, which is consistent with This coincides with past bear markets.  

For the bull market——

1. Although the price crash provided institutions There are early signs of renewed interest, but institutional investment products such as Grayscale's GBTC and the Canadian Bitcoin Exchange's actively traded Purpose ETF are already showing signs of recovery.

2. While exchange balances have increased, a more nuanced view suggests that there is a gap between US-based regulated exchanges and offshore exchanges differences, there may be judicial bias.

3. The circulation of stablecoins has expanded dramatically, creating the largest purchasing power of encrypted native U.S. dollars in history.

4. Most of the selling behavior still seems to come from short-term holders, while the belief of long-term holders seems to be more and more firm, many people are in the market Choose to enter the market during the decline and increase purchases.  

Calling everyone to "HODLing Bitcoin" (holding Bitcoin) is an easy task, but for most investors, After such violent market fluctuations in May, it is inevitable that there will be waves in my heart. It is obvious that the sell-off in the digital currency market last month was very large, but judging from the current market situation, there are still a large number of buyers who have not yet "shot". Under the favorable macro background of digital scarcity, how the digital currency industry can recover as soon as possible from the current downturn is undoubtedly a huge test of market beliefs.

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