Cycling On-Chain is really a monthly column that uses on-chain and price-related data to raised understand recent market movements and estimate where we have been in bitcoin’s larger market cycle. After providing a broader look back and forward in the initial edition, and discussing how Bitcoin has entered the geopolitical stage in the next edition, we’ll now have a look at the present, ongoing supply squeeze that recently resulted in a brief squeeze in the bitcoin market that drove prices up steeply. The last 90 days have already been pretty rough for bitcoin from the price perspective. You could create a good case that, things haven’t looked better. The weak hands are shaken out and the bitcoin results in strong hands. but instead see it being an opportunity.
Squeezing Supply
Sometimes also known as a supply squeeze, can be an event where the way to obtain a product or commodity that’s actively being traded available on the market changes and causes a cost move.
Bitcoin’s halvings are programmed in to the software, but a supply shock may also occur when previously illiquid supply becomes liquid or vice versa. Hence, it is interesting to assess from what extent supply is in the hands of entities which are or aren’t selling.
Utilizing the data in the Bitcoin blockchain, you’ll be able to look at the ages of all unspent transaction outputs (UTXOs) which have ever existed. Glassnode analyzed these “coin ages” and discovered that roughly 155 days is really a historic cut-off point once the possibility of a UTXO being spent becomes suprisingly low. Predicated on this, they created metrics for the short-term holder (STH) and long-term holder (LTH) supply.
Logn Term
This Long-Term Holder Supply Ratio is displayed in the green line in Figure 2. The green color overlays represent periods where the LTH Supply Ratio rises, which often occurs during market downturns where price (black line) decreases or bottoms. The red colorization overlay shows the contrary: LTH Supply Ratio usually decreases when price rises, illustrating that long-term holders have a tendency to sell against market strength and accumulate during market weakness. Long-term bitcoin holders are therefore usually viewed as “smart money.” Having the ability to follow their economic behavior via the blockchain may hold valuable information regarding hawaii of the bitcoin market.
The LTH Supply Ratio also we can compare how current values for the part of the total supply that’s held by long-term holders comes even close to historical values. Figure 3 illustrates that the cheapest LTH Supply Ratio reached in this latest $65,000 market top had not been only those reached during previous market cycle tops. Needless to say it does not need to reach these levels, but implies that if $65,000 does become a more substantial macro market cycle top, it had been seen as a lower LTH sell pressure than previous market cycle tops.
Bitcoin Blockchain
Because the Bitcoin blockchain is really a public ledger, additionally it is possible to forensically assess from what extent unspent transactions result from or move to certain forms of entities, such as for example exchange wallets.
Utilizing a proprietary algorithm to use clustering predicated on forensic analysis of Bitcoin’s UTXO set, they created metrics for the illiquid, liquid and highly liquid supply. For the rest of the column, the latter two are combined as “liquid supply” to help keep the analysis simple.
The bitcoin price (black), circulating supply (blue), illiquid supply (green) and amount of the liquid and highly liquid supply (red) (source)
If you compare the initial STH and LTH supply (Figure 1) with this particular illiquid and liquid supply chart (Figure 4), you’ll note that the changes in the latter are a lot more nuanced. This is likely the consequence of the applied clustering, as young UTXOs can be held by illiquid entities with little to no history of selling.
Bitcoin Supply
As the bitcoin supply is increasing by every block and these increases are changing as time passes because of the halving-based supply issuance schedule, these values can’t be accurately in comparison to historical values. In the end, a 200,000 bitcoin illiquid supply decrease was a lot more impactful when there have been only 2 million bitcoin circulating (10% of the full total) than it might be whenever there are 20 million coins circulating (1%).
This issue can be solved by dividing the illiquid supply by the circulating supply, creating a metric called the circulating supply-adjusted illiquid supply changes,” which is displayed in Figure 6. During the early years, the illiquid supply increased massively, a lot of which was likely related to coins being forgotten about or lost, as well as some of the early HODLers stacking sats before that became a thing. The relative illiquid supply decrease seen during the recent market downturn was the largest since the 2017 market cycle top, which was preceded by two more similar episodes during that bull run. The current illiquid supply increase is also the largest since mid-2017, before that cycle reached its final blow-off top.