Willy Woo believes that Bitcoin’s re-accumulation and recovery remain unchanged and are strengthening, creating a classic price trend that deviates from fundamentals.
Written by: Willy Woo, cryptocurrency analyst Compiler: Perry Wang
In my last prediction, the Bitcoin chain transaction pattern was in a horizontally bullish re-accumulation and recovery structure, and there was no sign of a bear market. Since then, the price of Bitcoin has continued to trade sideways, and the trend is further bearish. At the same time, the direction of the parameter structure on the chain is completely different.
The re-accumulation and recovery remain unchanged and are indeed strengthening, creating a classic price trend that deviates from the fundamentals. In this issue of the newsletter (Issue 22, 2021), although the fundamentals of Bitcoin have not changed much from the previous issue, I will take the time to explain the current Bitcoin market pattern in more detail.
Summary of Bitcoin market on July 2, 2021 (current price of 33,300 USD):
Macro cycle: The bull market is intact, and user growth continues to climb. According to what I said in the previous two issues of Newsletter, the macro indicators continue to be bullish.
Short-term and medium-term (no more than two months in the future): Prices and fundamentals show a classic deviation. What the market does not notice is that long-term investors are silently absorbing funds. I personally expect this supply shock will push the market upward. I personally believe that since the fourth quarter of 2020, the Internet has experienced fundamental deviations caused by similar supply shocks that the market has not noticed, and now is the best opportunity to enter the market.
Important note: All forecasts are probabilistic, and the historical reliability of short-time frame forecasts is about 80%. In the long run, fundamentals dominate, so longer-term forecasts are more reliable, and market trends in a shorter time frame are susceptible to unpredictable events and the randomness of the market. Short-term speculators should use appropriate risk management.
Detailed analysis
Understand the current state of the market
In the Bitcoin bull market, the price will always fall back to test the determination of new buyers. We call this “washing out unsettled investors”:
- The currency price starts to fall
- New buyers under pressure to sell
- Experienced investors buy at low prices
Senior investors generally have strong financial resources, and their purchasing power makes the currency price rebound easily. This creates a V-shaped price trend like the one shown in the figure below.
In the case of a huge sell-off, it is impossible to achieve a quick V-shaped recovery. On the contrary, it takes time to re-accumulate the tokens that have been sold to the market. This led to a long sideways market, which we call the bottom accumulation of chips .
We usually see a sell-off of this scale at the end of a bear market, when the greatest pain forces unresolved investors out, and smart money buyers enter the market and absorb money at the bottom of the price.
The current situation is a very unique landscape for the Bitcoin bull market, because the normal dynamics mentioned above are disrupted. The new players who are now dumping bitcoin are well-funded speculative giants, and the buyers who absorb these tokens are long-term holders with less capital.
In the bull market where Bitcoin rose all the way to 45,000 US dollars, an unprecedented number of new giant whale institutions entered the market. Their purchases added further impetus to the bullish Bitcoin price trend. However, by February, these “speculative giants” “Whale” has already started to make a profit, and then sold a large number of tokens to the market.
The giant whale has been buying Bitcoin in the fourth quarter of 2020 and selling it in the first quarter of 2021. Analyzing the turnover time of tokens, we can see that the main buying and selling activities in the market come from tokens with a shorter holding time, so the most likely reason is that new speculative giant whales are constantly buying and selling.
In April, the aforementioned oversold selling overwhelmed normal bull market buying, forcing the exchange to sell tokens. This massive sell-off is the reason why I predicted in the 19th Newsletter this year (May 18) that it may take several months to recover. It is more likely that there will be a bottom accumulation market, rather than a V-shaped rapid recovery.
Although the transaction flow chart above shows that the selling tide has subsided, we do need to carefully observe the quality of the holders of the inhaled tokens.
Our “Rick Astley” chart below (note: in analyst terms, the former famous British pop star Rick Astley’s “Representative: Never gonna give up” is the prototype of long-term traders), showing long-term holders and speculative participation The flow of tokens between parties.
Obviously, long-term holders are absorbing speculative tokens at a strong rate. Now is a waiting game, until this is fully reflected in the price behavior, the data definitely indicates that the bottom accumulation of chips is forming.
Supply shocks are formed silently and will affect the market
Although the information on the chain pattern has always pointed to the horizontal bullish recovery, the price trend does not reflect this.
In my opinion, this is caused by the increase in tokens held by speculators. Speculators can’t wait to sell, while long-term buyers have been patient and slowly absorbing. According to technical analysis, the price trend is seriously bearish in the eyes of speculators. The chart analyst pointed out that the price of Bitcoin will plunge further to $20,000, claiming that we are in a bear market. The fundamentals do not support this statement.
The on-chain parameters are very bullish. Supply shocks are quietly taking shape, but the market is not paying attention. In the chart below, I remixed the “Rick Astley” data, this time showing the ratio of Bitcoin held by strong players (senior investors) and weak players (Mengxin investors).
Liquidity supply ratio refers to the number of tokens held by very few sold tokens (strong hands) divided by the number of tokens held by speculative participants (weak hands)
The tokens sold by the whale to speculators are now absorbed by long-term holders. The level of supply shock we are currently at is comparable to when the Bitcoin price was $50,000.
We rarely see these fundamental deviations, that is, the quiet withdrawal of tokens from the market, and price behavior does not reflect this. The market suddenly discovers that the supply of tokens is exhausted, which may only be a matter of time. A good opportunity for admission is just around the corner.
The following is another view of the supply panic, which is based on the speculative inventory available on the exchange.
The supply shock ratio is the total supply of tokens divided by the number of tokens available on the exchange. As the exchange’s token supply relative to the total supply decreases, this will exacerbate the supply shock (the green line increases)
It should be noted that the quality of the holders (the first chart) shows this particular supply shock more clearly than the stock of the exchange (the second chart). Traders can usually obtain exchange inventory, but as more retail investors enter the market in the middle of the bull market (which is what we are seeing now), the indicative meaning of exchange inventory will decrease. Retail traders like to deposit their tokens on exchanges.
This reminds me of a supply shock that the market did not notice in the fourth quarter of 2020. When the data shows that long-term investors are quickly absorbing bitcoin, what experts are arguing about is whether bitcoin is an investment hedge in the post-epidemic world. The price of Bitcoin subsequently plummeted, and soon its close correlation with stocks decoupled.
Bitcoin network growth rate hits new high in 2021
Glassnode has done a great job of binding wallet addresses to individual participants one by one based on the participants’ historical interactions. From these data, we can see that an average of 32,000 healthy users are added to the Bitcoin network every day, which means that 2021 will usher in a new high.
Physical net growth (2-week change average). That is, the number of new users joining the network minus the number of users leaving the network (emptying the wallet)
I marked the beginning of the real bear market in red (early 2017); new users stopped entering and higher prices could not be sustained. The on-chain parameter pattern we are now experiencing is not the case. New users are taking advantage of this opportunity to buy on dips, and the rate of entry has hit a new high in 2021. This becomes another example showing that price behavior deviates from on-chain data.
ETF investors are buying
ETF is an alternative Bitcoin investment tool that gains exposure to Bitcoin through shares in a brokerage account. They are very popular among long-term traditional investors and institutional investors.
During this downturn, the newly launched Canadian Purpose Bitcoin ETF’s holdings increased by 4100 BTC, which is in line with what we see on the chain: long-term investors are buying.
Now let’s take a look at Grayscale, which is the largest and most mature ETF, managing 3.5% of the entire Bitcoin supply. The unique feature of Grayscale Investment Tool is that when shareholders sell shares, it does not reduce BTC holdings, but sells shares at a price lower than the BTC market. In fact, we can judge the buying and selling demand based on the gray premium.
Grayscale premium refers to the price difference that represents the share of the underlying BTC asset
Grayscale investors began to sell their assets in late February, which caused Grayscale ETFs to fall from a premium transaction to a discount. During this downturn, the selling order has turned into a buying order, again showing a deviation of the price trend.
Vigorous mining integration is underway
This letter is not complete without commenting on the great migration of China’s Bitcoin mining industry. Most of the short-term bearish pressure on BTC prices can be attributed to China’s recent ban on BTC mining.
Since China occupies a high proportion of the Bitcoin mining network, this ban has effectively eliminated the last large centralized area on the Bitcoin network, so it is optimistic about the long-term future of the network.
In the short term, with the migration of mining hardware to other places around the world, the hash rate in the network has temporarily dropped. The block processing speed is 3 times slower than normal.
The network will compensate for this drop in hash rate today (at the time of writing), thereby alleviating the temporary slowdown of the network. This is expected to be the biggest difficulty reduction adjustment in the history of the Bitcoin network. (Chain note: At 14:35 on July 3, Beijing time, the Bitcoin network ushered in a difficulty adjustment at block height 689472, and the entire network was reduced to 14.36T, which was the largest reduction in history by 27.94% .)
Once the mining difficulty is adjusted in place, it will open a window for the rebound of the Bitcoin price and the bottoming of the price.
This is actually a concession from the miners. When the miners were removed from the network, the surviving miners held their coins firmly because they knew that the selling pressure of closed miners had subsided and the price was in place. We can see this effect intuitively through the compression of the Diffculty Ribbon. This has historically been a reliable signal of the bottom of the price.
