When will Bitcoin interest return? (Cryptocurrency: BTC-USD)

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As we head into 2023, we want to highlight the latest state of Bitcoin (BTC-USD) volume and volatility after a recent wave of capitulation. The last time we addressed these dynamics was in The Bitcoin Ghost Town in October, where we highlighted that extremely low volume and a period of low volatility in Bitcoin price, Grayscale Bitcoin Trust (OTC:GBTC) and the options market were a worrying sign for the next leg lower. It happened in early November.

Fast forward and the declining volume and low volatility trends are back. While this could be a sign of another lower leg coming into the market, it is more likely a sign of a complacent, decimated market that few participants want to touch.

Even during the November 2022 capitulation period, there was a period of historically low volatility. Sometimes the greatest pain in the market can be felt when waiting for a clear change in trends. The price of Bitcoin provides this pain because we have yet to see the type of burst in market volatility that has defined market pivots and major directional moves in the past.

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Although there are many different ways to define, categorize and estimate the volume of Bitcoin in the market, they all show the same thing: September and November 2021 were the most active months of action. Since then, volume in the spot and perpetual futures markets has steadily declined.

cheese brakes

Overall market depth and liquidity were also hit hard after the collapse of FTX (FTT-USD) and Alameda. Their destruction has led to a large liquidity hole, which has yet to be filled due to the lack of market makers currently in the space.

By far, Bitcoin is still the most liquid market of any other cryptocurrency or token, but it remains relatively illiquid compared to other capital markets as the entire industry has been crushed over the past few months. Lower market depth and liquidity means assets are subject to more volatile shocks, as relatively large single orders can have a greater impact on the market price.

Kaiko’s Q4 report

Kaiko’s Q4 Report

Chain apathy

As expected in the current environment, we are also seeing more market complacency when looking at on-chain data. Although continuing to increase over time, the number of unique addresses active as a sender or receiver has remained fairly stagnant over the past few months. The chart below highlights the 14-day moving average of active addresses falling below the moving average over the past year. In previous bull market conditions, we have seen the growth of active addresses quite significantly outpacing the existing trend.

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Since address data has its flaws, examining Glassnodes data for active entities shows us the same trend. Overall, the reversal in bear markets is the result of many factors, including growth in new users and an increase in on-chain activity.

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We can look at moving averages of transfer volume over different time frames to see if on-chain activity and momentum are rising or falling relative to the trend. In past bear market cycles, on-chain activity begins to pick up relative to the trend before the exchange rate recovery cycle is fully effective.

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The current trend shows a decrease in the level of on-chain transactional activity when comparing the 30-day and 365-day moving averages. While this does not mean that there is a certainty of lower prices and worse conditions for the asset, it does mean that a significant change in trend has not yet taken place.

Finally, we can look at the seller’s constant exhaustion metric, which takes the percentage of Bitcoin’s supply in profit and multiplies it by the 30-day realized volatility. The name of the metric perfectly states its intent: an attempt to quantify when sellers may be exhausted, given low levels of profitability and historically low levels of volatility in tandem.

glass knot

In our July 11 statement When Will the Bear Market End?, we argued that the weight of price-based capitulation had already been felt, while the real pain ahead was in the form of a surrender based on time.

A look at previous Bitcoin bear market cycles shows two distinct phases of capitulation:

The first is a price-based capitulation, through a series of sell-offs and liquidations, as the asset drops 70-90% below previous all-time highs.

The second phase, and the one that is talked about much less often, is the temporal capitulation, where the market finally begins to find a balance between supply and demand in a deep trough.

We believe that time-based surrender is where we are today. While pressures on exchange rates could certainly intensify in the near term given the remaining macroeconomic headwinds, the conditions that look likely to persist in the short to medium term appear to be an extended choppy period with levels of volatility extremely low levels that leave both traders and HODLers wondering when exchange rate volatility and appreciation will return.

We can expect the market to decline in the coming months, but this period of time-based capitulation has always been a rare buying period for those with a strong belief in the long-term value proposition of Bitcoin.

Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these actions.

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