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Is this the end of crypto winter?
After a 64% drawdown in price over the course of 2022, bitcoin has since rallied from a low of $15,700 on November 21 to over $23,000 in January, putting it on track for its best opening to a year since 2013. It seems hard to believe, but bitcoin and other large-cap tokens have recouped the entire dip caused by the FTX collapse and are breaking through several widely observed technical and on-chain pricing models. In fact, the crypto industry as a whole is back above $1 trillion in market cap. Given this recent move upward, we wanted to analyze if this was just a flash in the pan or if this rally has legs to last throughout the year.
Five market signs to consider
Realized Price
Let’s start with a key threshold that we have covered several times in past issues and highlighted in our research post at the start of the year as one indicator that led us to believe the market had bottomed in November: realized price. Realized Price is the average price at which all bitcoin last moved. You can think of Realized Price as the average cost basis of the network. Only during deep drawdowns does the market price of bitcoin fall below the realized price, signaling that, on average, bitcoin holders are underwater. This is typically a lagging indicator of a bear market but has historically been a leading indicator for the next bull run. On January 13th, bitcoin’s price crossed back above the realized price for the first time since June of last year. For the first time in eight months, the average BTC holder and mining operation are back in the black, which is a key psychological threshold as market participants are less inclined to sell and more inclined to buy when their investments are in the money. The current Realized Price is $19,800, and if bitcoin’s price can hold above this threshold, that would be a very good sign for the rest of the year.
Leverage
Another positive indicator is that the amount of leverage in the system has declined dramatically since November 2021. At the height of bitcoin’s price, the futures open interest (often used as a way to gain leverage in trading) was above $25 billion. We now know that many trading firms, including 3AC and FTX, had taken on massive debt, which in part fueled the run to $67k. Much of that risky behavior has been flushed out of the system, given that the futures open interest now sits at $9.5 billion, which is about on par with the levels from the start of 2021 prior to the market’s big move upward. In other words, there are fewer accounts at risk of liquidation and fewer tokens susceptible to being dumped in forced selloffs. This most recent upswing in price was not fueled by massive speculation or propped up by over-levered firms. Instead, this price movement seems to be a genuine market signal.
HODL’ers increase
As Glassnode highlighted in their recent weekly newsletter, the supply held by long-term holders continues to grow, which is an indication of strength and conviction in the market. The volume of coins 6 months or older has increased by more than 300,000 BTC since early December as this cohort has gone from selling in aggregate following the collapse of FTX to aggressively accumulating.
Increased on-chain activity
On-chain activity is picking up. The number of new addresses and the number of transactions on the network has spiked in recent weeks. Increasing on-chain transactions is a sign of increasing demand and a healthy indicator that we may be nearing the end of the bear market.
Stablecoin data spikes
As Bankless noted in their recent newsletter, stablecoin data shows a spike in the amount of dry powder (money waiting to be invested) held by big players sitting on the sidelines. Nansen Smart Money stablecoin positions, which measure the percentage of large whales’ portfolios that are held in cash, are at a historically elevated level. “This data suggests that investors are nowhere near fully allocated, and there is plenty of ammo remaining on the sidelines to drive prices higher.”
Source: Nansen
Recap
The recent move upward has crossed key price thresholds that have historically been reliable indicators of future bull markets. The amount of leverage in the system is relatively low, activity on-chain is picking up, long term holders continue to accumulate, and yet there is still plenty of dry powder sitting on the sidelines to fuel a future run. While it’s impossible to know for certain what will happen to prices in 2023, all the right pieces are in place from an on-chain perspective.
As always, the on-chain data is provided by Glassnode. If you would like to have access to the data yourself, you can sign up for Glassnode.