Original title: “Wondering What Bitcoin Will Do Next? Look At These 5 Indicators”
Original author: Leeor Shimron
Bitcoin recovered from a three-year bear market and became one of the best performing assets this year. Bitcoin has outperformed other macro assets in traditional financial markets. Earlier this year, Paul Tudor Jones, a well-known hedge fund manager and Tudor Investment Corporation, made a famous statement saying that Bitcoin is the “fastest dark horse” in the current macroeconomic environment, and Bitcoin’s performance is also very strong, breaking through this week. (Rhythm Note: On November 18, Bitcoin has broken through 18,000 U.S. dollars), a year-to-date increase of 148%.
Judging from the short-term chart, Bitcoin’s price trend is unpredictable and seems chaotic. The fluctuations caused by speculation (highly leveraged derivatives make short-term speculation possible) cause price fluctuations. However, if you look at the long-term chart, Bitcoin’s performance since its inception is very stable, and it still maintains a long-term upward trend.
Simply put, the price of Bitcoin is a function of supply and demand. Those publicly available and accessible data can be analyzed by sensitive investors. Although it is difficult to predict the short-term price trend of Bitcoin, it is possible to predict the long-term trend of Bitcoin and where the current market is in a major cycle from the indicators on and off the chain. As 2021 is approaching, the following five indicators can be used as references for investors.
Changes in Bitcoin holdings on centralized trading platforms
The vast majority of trading activities occur on centralized trading platforms. Traders and speculators put their coins in a centralized trading platform in order to take advantage of rapid price fluctuations and market changes to make profits. Currently about 13% of bitcoins in circulation are stored in centralized trading platforms or wallets controlled by centralized trading platforms. This is a decrease of 20% from the highest point before the plunge on March 12, 2020. At that time, so many bitcoins were stored on the centralized trading platform may be one of the reasons for the 3.12 plummet.
As shown in the figure below, in the past few months, Bitcoin has poured out of centralized trading platforms at an extremely rapid rate. The outflow of Bitcoin shows that Bitcoin has been transferred from short-term speculators to long-term holders, who are transferring Bitcoin from centralized trading platforms to third-party custody or self-custodial wallets. As Bitcoin continues to flow out, the selling pressure of Bitcoin spot will be eased. The dynamics of this trend will indicate how the recent selling pressure will change.
Big companies’ Bitcoin holdings
When MicroStrategy CEO Michael Saylor announced that his company had completed a $425 million Bitcoin acquisition this summer, it caused a shock in the crypto industry. Square also quickly followed up and invested $50 million to buy Bitcoin, which accounts for about 1% of the company’s total assets. Investments of listed companies tend to be held for a long time, and these bitcoins held by giant companies further reduce the supply of bitcoins on the market.
Currently, approximately 842,000 bitcoins (4% of the total supply) are held by giant companies. As companies normalize the concept of Bitcoin as an anti-inflation-preserving inventory asset, the domino effect will become more pronounced and more companies will follow suit. Or, if they start to liquidate these assets, expect Bitcoin prices to fluctuate downwards next. Moreover, since many of these companies have publicly held Bitcoin, these behaviors are easy to track and observe.
Google Search Index
At the same time that Bitcoin reached a peak of $20,000 at the end of 2017, Google’s search for the term “Bitcoin” did not unexpectedly increase. However, it is worth noting that although the current price of Bitcoin is very close to that year, Google search volume is only 10% of its peak in 2017. This shows that retail investors did not promote the current price trend of Bitcoin, but rather institutional investment led the rise of Bitcoin. Such a sluggish Google search index may indicate that the current market cycle is still at a very early stage, and perhaps only when it reaches a record high will more people begin to pay attention.
Futures Perpetual Swap Funding Rate
Perpetual swaps were first introduced by BitMEX and quickly accepted by a wider group of crypto traders. It is a derivative contract similar to a futures contract but has no expiration or settlement date. For the crypto field, these contracts are unique, they provide unparalleled leverage, and some trading platforms have leverage as high as 100 times. Extreme leverage can cause severe short-term volatility, because traders on the wrong side of the transaction may be liquidated and forced to buy or sell assets improperly, thereby increasing the volatility.
The interest rate of perpetual swap funds balances the needs of buyers and sellers to make their prices consistent with the underlying assets. This is the fee that a party to a transaction must pay to its counterparty. If the funding rate is positive, traders who trade long positions (expecting bitcoin prices to rise) will pay short traders (expecting bitcoin prices to fall). If the funding interest rate is negative, short traders need to pay longs.
The continued positive funding rate indicates that most leveraged traders are doing long and the market may be over-expanding. Any sharp downside may lead to forced liquidation and exaggerated downside selling.
Here comes the point. During the Bitcoin bull market after March of this year, the interest rate of perpetual swap funds only remained slightly positive, currently about 0.005%. This shows that long and short leveraged traders are quite balanced, and the current trend is organic demand to buy spot bitcoins. If the funding rate soars above 0.1% and stays there for weeks or months, this may cause concerns for Bitcoin holders.
Effective supply of Bitcoin
At the time of writing, approximately 18.545 million bitcoins (circulation supply) have been issued to date. Active supply is a powerful indicator of “Hodler” mentality. The active supply indicator measures the number of bitcoins that have been traded at least once in a certain period of time. As the active supply decreases, Bitcoin holders have expressed their desire to hoard coins, which further reduces the supply available for sale.
As shown in the figure below, since the beginning of 2018, the one-year active supply of Bitcoin has been in a downward trend. The current one-year active supply is 38% and the two-year active supply is 56%. This means that more than 60% of the available supply has not moved in the past year, and more than 40% of the supply has not moved in the past two years. Despite the high volatility of Bitcoin, Bitcoin holders still refuse to sell, and this trend seems to only continue. Although this analysis does not include the lost coins, this trend clearly shows that despite the three-year bear market and the recent good price momentum, Bitcoin holders are still sticking to it. Conversely, if the active supply surges, it may mean that long-term holders are dumping their bitcoins, causing additional selling pressure.
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