Bitcoin Santa’s Rally Unlikely, Says On-Chain and Derivatives Data

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As the coldest days of the crypto winter set in, speculative investor interest in the crypto market has fallen to pre-2021 levels, undermining the chances of a substantial directional move prices. However, there is a possibility of a bear market rally similar to the uptrend from July to August 2022.

The market is entering a state of uncertainty

The FTX implosion affected over 5 million users worldwide and hurt many crypto companies exposed to it. The industry is currently in recovery mode and Cumberland, a US-based crypto market broker, recently echoed this narrative in a tweet. The company noted that “dozens of crypto businesses are either severely reduced or bankrupt, and the future of the industry is cloudier than ever.”

The data suggests that building a sustainable bullish move will be difficult as the market is pushed back to a regime of low liquidity and volatility.

Crypto analytics firm, Glassnode, reported declining futures volumes for Bitcoin and Ethereum, rising back to pre-2021 levels when Bitcoin price first broke above $20,000.

Bitcoin (orange) and Ethereum (blue) futures trading volume. Source: Glassnode

The volume of open interest on Bitcoin and Ethereum futures has fallen significantly towards mid-2022 levels, which was after the collapse of Luna-UST. The BTC and ETH leverage ratio indicator, which measures the ratio of open interest volume, is currently down at 2.5% and 3.1%.

Bitcoin spot trading volumes on crypto exchanges also fell significantly to 2020 lows. Data from Blockchain.com shows the 7-day moving average of trading volume fell to $67 million , down from $1.4 billion near the peak of the 2021 bull market.

Bitcoin spot exchange trading volume. Source: Blockchain.com

Due to low liquidity and a cloud of uncertainty in the market, it is quite possible that the bear market is far from over. Bitcoin’s realized volatility also fell to two-year lows of 22% (1 week) and 28% (2 weeks).

Going forward, volatility may remain lackluster, with prices falling more sideways or slower. However, there is still a chance of a short-term bearish rally.

Is a Bitcoin price pump and dump in play?

The FTX-induced upheaval in November was similar to the LUNA-UST implosion seen in June and these events typically cause panic selling and make an asset attractive to bargain hunters looking to buy a sellout.

Therefore, a short-term bullish rally takes effect that can last for a few days or weeks, which is precisely what happened from July to August when the price of Bitcoin surged towards $25,000. Based on the November upheaval levels and signs of institutional buying, Bitcoin could experience a similar rally in the bear market.

The measure of realized profit and loss of long-term holders has fallen to historic lows, indicating possible oversold conditions. Losses realized by the long-term holder had only reached comparable levels during the lows of 2015 and 2018.

Gains and losses by yield bands. Source: Glassnode

Additionally, the futures market is currently in backwardation, which means there are more open short positions than long ones. Throughout Bitcoin’s history, similar conditions have only lasted for short periods and resulted in a short-term pump to squeeze short-term orders.

BTC futures market swaps against 3-month rolling. Source: Glassnode

The accumulation trend among institutions and whales, which had been negative for most of this year, turned positive in mid-November. An increase in the holdings of these cohorts of investors provided a tailwind to the bear market rally in the third quarter of this year.

CoinShares reported that institutional Bitcoin investment vehicles saw inflows totaling $108 million following the FTX implosion, with $17 million added last week. Notably, the current entries are significantly lower in weeks 25 and 35 this year, which has driven the uptrend towards $25,000.

Weekly asset flow measurements of BTC institutional investment products. Source: Coin Shares

Glassnode’s on-chain data also shows positive accumulation among Bitcoin whales, identified as addresses holding 100 BTC or more in value (worth around $1.7 million at current prices).

While the holdings of these whales have risen from their yearly lows similar to July through August, the price of BTC has yet to reflect this positive addition.

BTC address holdings with greater than or equal to 100 BTC. Source: Glassnode

Technically, the support and resistance levels of the previous trading range between $18,700 and $22,000 could form the local upper levels of the current rally. Conversely, if BTC builds support above $22,000, the bear market rally could become more significant with a continued uptrend.

BTC/USD 1-day chart. Source: Trading View

However, the chances of a bullish rally above $22,000 are low due to low liquidity and the cloud of uncertainty that will motivate selling as prices rise. Nonetheless, discounting a short-term bearish rally can punish late sellers.

The views, thoughts and opinions expressed herein are the sole authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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