Build up of short term Bitcoin liquidity & volatility points to profit-taking

Build up of short term Bitcoin liquidity & volatility points to profit-taking

By fklivestolearn | Technicity | 15 Jan 2021

Bitcoin investors who have held the asset for less than one month and have realized 25%+ gains are booking their profits

It’s been a roller coaster ride for the past week or so in the Cryptoverse. And although this is something that we have to come to expect from the digital assets, there is always an underlying theme when the volatility picks up in any digital financial asset. The recent bout of volatility comes at the back of the recent Bitcoin high of $41,965. It wasn’t long after that BTC fell to a low in the region of $30k. No wonder it is often argued that crypto investing is not for the faint of heart.

Taking advantage of the 25%+ dip, Big bitcoin investors or the ‘Whales’ swooped in to add to their already huge positions. The dip-demand from institutional investors suggests that large investors expect the pullback to be short-lived. Whale address numbers have increased by nearly 25% year on year and have risen by 200 in the past two weeks. Data suggests that weak hands and/or retail traders liquidated their holdings.

The renewed demand for Bitcoin at the dip saw the price jump back up to $40k making a lower high. The tug of war between the bitcoin buyers and sellers is currently ongoing, as the price hovers just below $35k — at the time of writing. Most of the top cryptos including Ethereum and other Alt. coins are showing a similar trend, like Litecoin (below) and Ripple who have some other factors playing out too.

Before we move on to analyze the data for the recent week by Chainalysis Market Intel, there is a couple of noteworthy news regarding Cryptocurrencies that I wanted to share — the first one is about Anchorage, which has made history as the first US crypto-native fintech to acquire full banking rights. And the other one came as a relief for the SEC-battered Ripple. Japan’s top securities regulator Financial Services Agency (FSA) confirmed that it views XRP as a cryptocurrency and not as a security.

Bitcoin Inflow to Exchanges gathers Pace

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Figure 1

Taking the first chart (left above, Figure 1) into consideration, Bitcoin inflows to exchanges are relatively low — 7-day average inflows are 18% above the 180-day average while the price has increased by 141% across these two averages. In fact, if you compare the current inflows to some of the previous periods in the chart, they are still much lower than many other periods in the past.

Having said that, exchange bitcoin balances have actually increased in the last week. According to the research, Bitcoin trade intensity — the number of times a bitcoin sent to exchange is traded, is high relative to longer-term averages but has declined in the last few days. In simpler words, a little more availability of BTC is causing volatility in price action in the short term (ST).

The second chart on the right (above) highlights the fact that there is a divergence appearing between the liquidity of Bitcoin and other cryptocurrencies. An example of this is Ethereum inflows, whose 7-day average is 41% above the 180-day average. For Litecoin (as shown above), the inflows have reached record levels.

The huge supply of Litecoin on the exchanges points to a bigger price drop as people take off their bets. Traders often expect the crypto prices to be correlated and they take a cue from what happens in the premier digital asset. A difference in supply constraints among various cryptocurrencies might the deciding factor in diverging price action might be taking place, as we see in this case.

New Bitcoin traders at an All-Time High

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Figure 2

According to the second chart (Figure 2), the number of bitcoin held for less than one month has increased recently to 2.7 million and is close to its mid-August 2017 peak and at December 2017 levels. This means that a lot of new bitcoin traders/investors have just joined the arena to take advantage of the bull run. The collective action of this large group will dictate, where the price of Bitcoin goes in the Medium-term (MT).

If they decide to HODL their BTC for a longer duration, it would cause supply constraints leading to a price hike. On the flip side, if they decide to cash in on the short-term gains — a large influx of Bitcoin (liquidity) would put downward pressure on the premier digital asset, in the ST. Some of these ST price gains are already being realized.

ST Bitcoin Investors booking Profits

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Figure 3

Taking the previous conversation further, the challenge right now is that Bitcoin held for one to six months at a 25%+ USD gain is being sent in large amounts to exchanges. According to the intel, bitcoin that has been held for less than one month, and has made a 25% or more USD gain since being acquired, is being sent in similar quantities now, as in late 2017 (Figure 3).

As we have seen in the past, such profit-taking leads to price declines but doesn’t necessarily mean a reversal in trends. Taking an example of 2017 — high levels of bitcoin sent at a 25% or more USD gain in May & June, was followed by a plateau in the price in July, and then high levels of sending in August was followed by a price fall in September. However, on both occasions, demand overweighed supply until the peak in Dec. 2017.

This tug of war between ST & MT traders will eventually decide the price direction. Although one thing that remains different from the last peak in 2017 is the fundamental dynamics. While there might be a price correction and there might even be a prolonged consolidation, Bitcoin price would remain relatively high.

Originally Published on Medium

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Prolific Blogger on Medium with my own publication Technicity. Extensive trading experience in Forex & Stocks based on technical studies. Cryptocurrency trader and Enthusiast, Blockchain/Fintech Evangelist & generally just a Technology Freak.


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