Forbes: Want to know what happens next with Bitcoin? Please focus on these 5 indicators

After a three-year bear market, Bitcoin has been one of the best performing assets this year. Compared with other macro assets, Bitcoin has outperformed its peers in traditional financial markets. Earlier this year, Paul Tudor Jones, a well-known hedge fund manager of Tudor Investment Corporation, announced in a high-profile manner that Bitcoin is the “fastest horse” in the current macro environment. It is currently seen that Bitcoin has played a role, so far this week. It exceeded 17,000 USD, an increase of 148%.

When viewed on a short-time frame chart, Bitcoin price behavior is fickle because speculative demand leads to price fluctuations (highly leveraged derivatives can be subject to short-term speculation). However, from a longer time frame, it is clear that Bitcoin has been performing well since its birth, and its long-term upward trend is still intact.

In the final analysis, its basic principle is that the price of Bitcoin is a function of supply and demand. Bitcoin’s public blockchain can display data that can be analyzed and publicly viewed. Although it is difficult to predict Bitcoin’s short-term price trend, on-chain and off-chain indicators can provide clues about the larger trend and the asset’s position in the current market cycle.

After entering 2021, investors should pay close attention to the following five indicators.

1. Exchange Bitcoin balance

The vast majority of trading activities take place on exchanges, and ecstatic traders and speculators place cryptocurrencies in convenient locations during transactions to deal with rapid price fluctuations and market movements.

Currently, about 13% of all bitcoins in circulation are in exchanges or exchange-controlled wallets. This is down about 20% from its local high, which happened to be before the Covid-19 Black Thursday sell-off. Bitcoin prices fell by about 50% in 24 hours. Before the fall in March, there were too many bitcoins on the exchange, which may have caused a sell-off.

As shown in the chart below, in the past few months, Bitcoin has poured into exchanges at the fastest rate in its history. Recent outflows indicate that Bitcoin has moved from short-term speculators to long-term holders, who transfer their Bitcoins from exchanges to third-party custodians or wallets. As cryptocurrencies continue to withdraw from exchanges, the selling pressure on Bitcoin’s spot price can be reduced, and the reversal of this trend will indicate near-term selling pressure.

2. Pay attention to Bitcoin deployed by big companies

The CEO of the software company MicroStrategy, Michael Saylor, announced that his company has completed a $425 million purchase of Bitcoin this summer, making waves in the entire cryptocurrency industry.

Other companies, such as Square, followed closely, with an investment of $50 million, accounting for about 1% of the company’s total assets. The earnings of listed companies often have a long long-term useful life, and the bitcoin accumulated on the company’s balance sheet will further reduce the available supply.

Currently, approximately 842,000 bitcoins (4% of the total supply) are on the balance sheets of some companies. As companies standardize the idea of ​​holding Bitcoin as an asset with anti-inflation value, the domino effect will continue to exist, and more companies will follow suit. In addition, if they start to liquidate these assets, downward fluctuations are expected. And, because many of these companies are public, these actions are in the public domain and easy to track.

3. Google’s search interest

Not surprisingly, as Bitcoin reached its peak of $20,000 at the end of 2017, Google searches for the term “bitcoin” surged. It is worth noting that although Bitcoin is close to the same price threshold, Google search volume is only 10% of its 2017 peak. This shows that retail investors did not promote the current price trend of Bitcoin, but rather institutional investment led the rise.

Such a sluggish Google search interest may indicate that the current market cycle is still at an extremely early stage, and only after reaching a new historical high will more people begin to catch up.

4. Futures perpetual swap funding rate

The perpetual swap product was first proposed by BitMEX and was quickly accepted by the wider cryptocurrency trader community. It is a derivative contract, similar to a futures contract, but without an expiry or settlement date. These contracts are unique to the cryptocurrency field and can provide unparalleled leverage, up to 100 times in some exchanges. Extreme leverage can cause violent fluctuations in the short term, because traders who trade wrong may liquidate their positions and be forced to improperly buy and sell assets, thereby increasing the range of price fluctuations.

The interest rate of perpetual swap financing balances the demand of the buyer and the seller for the contract, so its price is consistent with the underlying asset. This is the fee that one party to the transaction must pay to its counterparty. If the financing interest rate is positive, the trader will pay the long trade (expecting the increase in bitcoin price) to the short trader (expecting the decrease in the bitcoin price); if it is negative, the short trader will pay the long.

The continued positive financing rate indicates that most leveraged traders are doing long transactions, the market may be over-expanding, and any drastic price downturn may lead to forced liquidation and huge downward selling.

In the Bitcoin bull market after March this year, the perpetual swap financing interest rate has only remained slightly positive, currently about 0.005%. This shows that long and short leveraged traders have been quite balanced, and the current move is to buy spot bitcoins. If the funding rate soars above 0.1% and continues for several weeks or months, this may cause concerns among Bitcoin holders.

5. Effective supply of BTC

At the time of writing, approximately 18,545,000 Bitcoins (circular supply) have been issued to date. Effective supply is an effective indicator to measure the “Hodler” mentality. Active supply represents the number of bitcoins that are traded at least once in a given period. As the active supply decreased, Bitcoin holders expressed their desire to hoard BTC, which further reduced the supply available for sale.

As shown in the figure below, the effective one-year supply of Bitcoin has been in a downward trend since the beginning of 2018. The current one-year effective supply is 38%, and the two-year effective supply is 56%. This means that more than 60% of the available supply has remained silent in the past year, while more than 40% of the supply has remained silent in the past two years.

Despite Bitcoin’s turmoil, Bitcoin holders refuse to sell, and this trend seems to continue. Although this analysis cannot account for lost bitcoins, despite the three-year bear market and recent positive price momentum, this trend clearly points to holders of bitcoins. Conversely, a surge in active supply during these time periods may indicate that long-term holders are selling their bitcoins, leading to additional selling pressure.