- Data from blockchain analytics firm Glassnode suggests that it is far from clear if a bottom has been hit.
- Many of those short-term Bitcoin wallet addresses are now deeply underwater and if economic stresses in the real world intensify, these holdings could very quickly trigger a cascade of selling.
Down over 70% from its all-time-high in November last year, some investors may be tempted to dip their toe into cryptocurrency waters and buy their first Bitcoin, or maybe more.
But data from blockchain analytics firm Glassnode suggests that it is far from clear if a bottom has been hit.
Calling a bottom on an asset as volatile as Bitcoin is challenging even on a good day, let alone against a backdrop of soaring U.S. inflation and a U.S. Federal Reserve that is now being forced to take more aggressive measures to tighten policy than ever.
Despite expectations that Bitcoin would tank in the wake of the U.S. Consumer Price Index inflation print of 9.1%, the world’s largest cryptocurrency by market cap staged a stunning recovery, pushing Bitcoin over US$20,000, having tested US$19,000 as a level of support earlier.
A sobering reminder of just how unpredictable and perhaps manipulated cryptocurrency markets continue to be, an avalanche of short positions on Bitcoin were liquidated, with short covering pushing Bitcoin well over US$20,000, a level it had struggled to break for the past several days.
Of greater interest however is whether there are signs of capitulation by long-term holders of Bitcoin and to that end Glassnode data suggests that while probabilities have necessarily increased, no break in the dam has yet to be detected.
According to Glassnode analysts,
“Bottom formation is often accompanied by long-term holders shouldering an increasingly large proportion of the unrealized loss. In other words, for a bear market to reach an ultimate floor, the share of coins held at a loss should transfer primarily to those who are the least sensitive to price, and with the highest conviction.”
Glassnode data also appears to suggest that there has been a fresh influx of smaller transactions from smaller entities, signaling a potential recovery in demand and speculation for Bitcoin and evidencing some degree of dip-buying.
Bitcoin miners, a significant source of selling pressure, especially when the price of Bitcoin slips below mining costs, have also slowed their sales, cutting operation costs and in some cases, swapping to mine other cryptocurrencies instead, where the competition is not as intense.
Nonetheless, trying to discern a bottom for Bitcoin using blockchain data is akin to reading tea leaves for relationship advice – the data will reveal whatever you’re looking for and is highly susceptible to confirmation bias.
In previous bear markets, supply held by short-term holders made up just 4%, according to Glassnode, but that figure has quadrupled to 16%, thanks in large part to speculation peaking around 2021.
Many of those short-term Bitcoin wallet addresses are now deeply underwater and if economic stresses in the real world intensify, these holdings could very quickly trigger a cascade of selling.
