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The bitcoin price settles near its largest on-chain support level of $54.5k

22 April 2021
SUMMARY SUMMARY
    • Cryptocurrency prices have had a volatile week following the Coinbase listing, with extreme swings both up and down. This volatility had normal causes but was magnified by market conditions.
    • Coinbase’s stock and Binance coin, BNB, have a similar market capitalization, suggesting the market views them as similar financial propositions despite differences, while Dogecoin’s rise and fall likely reflects the general state of investing rather than a bubble in crypto.
    • The bitcoin price has dropped $10k since its peak but is settling near $54.5k. Cost curve analysis shows that 450k bitcoin have previously been acquired on-chain by 1k investors at an average cost of $54.5k. These investors each hold between 100 and 1,000 bitcoin, have held this bitcoin for between one and three months, and have collectively spent $24.5 billion on their bitcoin. This significant prior demand appears to be putting a floor under the bitcoin price.

Cryptocurrency prices have had a volatile week with extreme swings both up and down. Last Wednesday, 14 April, the bitcoin price reached a new all time high of $64,860 on the day of the Coinbase Direct Listing but fell to around $54.5k by Thursday 22 April, with a $5k drop over the weekend. The Ethereum price reached a new all time high of $2,547 on Friday 16 April then fell as low as $1,977 on Sunday before climbing back to its highest level yet, above $2.6k, on Thursday 22 April.

The price of Binance coin, the cryptocurrency issued by the exchange Binance, also known as BNB, also fell from it’s all time high before recovering, putting the market cap of BNB at a similar level to the market cap of Coinbase, around $62 billion. That Binance’s exchange token mirrors the stock of Coinbase suggests the market views them as similar financial propositions. That said, BNB is not a share in Binance, although Binance does burn BNB, similar to a share buyback.

And of course the price of Dogecoin reached an all time high of $0.41 on Monday 19 April before declining rapidly. However the price, at $0.29 currently, is still far above its $0.06 level at the start of April. Some might point to this as a sign of a bubble in crypto. But, given Gamestop and Hometown International, I think it is a sign that we are in a new normal where there is a lot of money flowing into all assets – not just cryptocurrencies. Indeed bitcoin, with its hard cap on supply, is designed to benefit from such a situation.

Last week I said the Coinbase listing was the end of the beginning for crypto. So what do such price movements in the first week of a new phase mean? To be honest, I don’t think they mean that much.

Prices are still historically high and the fall over the weekend appears to have been a fairly standard reversal after peak prices, which was magnified by three factors. First, the liquidation of a record number of leveraged bets that prices would continue to rise meant there was a cascade of crypto being sold. Second, there had been a build up of bitcoin on exchanges, which is typical when people are waiting to see if the price will continue to rise or reverse. When it reversed these holders likely rapidly sold. Third, all of this happened in an illiquid weekend market that appeared to have relatively few buyers. And of course, for Ethereum at least, the price has climbed again, to exceed last week’s peak.

However, the bitcoin price is $10k below its peak. In recent weeks I’ve described how analysing cost curves, the cost that different groups of holders have paid to acquire their cryptocurrency, can reveal the level of prior demand there has been at different price levels and so determine a floor to the price. Given the bitcoin price fall, I want to take a deeper look at the bitcoin cost curve to identify its strongest next level of support.

I’m changing the presentation of the bitcoin cost curve in three ways compared to my previous analysis. First, I am focusing on only the part of the bitcoin supply that was acquired on-chain at a cost of more than $50k.

Second, I am presenting the x-axis as the cumulative USD spent to acquire this bitcoin, rather than the quantity of bitcoin acquired. Understanding how many dollars have gone into purchasing bitcoin at a price level gives a better sense of the support than the number of bitcoin purchased.

Third, I am showing two cost curves. One curve is for all bitcoin currently held, in orange in the chart below. This is the same as in my prior analysis. The other curve is for bitcoin that has been held for more than two weeks, in yellow in the chart below. The reason for showing this second curve is because bitcoin that is held for a short period of time is sometimes moving internally within the wallet of a person or business. Bitcoin moving internally is not being acquired but appears as if it is, so it creates an upward bias in the cost curve. Removing bitcoin that is held for less than two weeks largely removes these internal transfers, but it will also remove some bitcoin that actually changes hands. So comparing the two cost curves gives us an upper bound, in orange, and a lower bound, in yellow.

We can look at one of the interesting parts of the chart below to explain how to read it. There is a large plateau on both the orange and yellow curves between $40 and $65 billion on the x-axis and at $54.5k on the y-axis. As the call out describes, this represents $24.5 billion spent to acquire 450k bitcoin (so an average cost of acquisition of $54.5k). This bitcoin has been acquired by 1,020 entities who are grouped by their properties. In this case they are investor entities, who each hold between 100 and 1,000 bitcoin, and have held this bitcoin for between one and three months.

So each horizontal part of the curve represents the USD spent by a particular group of entities to acquire bitcoin on-chain at, on average, the price level denoted by the position on the y-axis.


What does this particular plateau on the cost curve at $54.5k tell us? It shows that over 1,000 investors have each spent between $5.4 million and $54 million to acquire bitcoin within the last three months and continue to hold. This is a large group of buyers with significant resources. So as the price falls towards their average cost of acquisition I would expect them to buy more, thereby putting a floor under the price. The bitcoin price does appear to have stabilised around $54.5k. This is not investment advice! But it does suggest that on-chain data gives fundamental insight into the market.

There is another plateau at $55.8k. As the second callout describes, this is 229k bitcoin acquired at a total cost of $1.3 billion, which is held on a crypto-to-crypto exchange. This level of support was just above the price at the close of Monday 19 April, the same date as the data in the cost curves in the chart. Bitcoin held on an exchange does not offer as much support as bitcoin held by investors who self-custody, as bitcoin is typically held on exchanges to be sold. Monday’s price level was not maintained, illustrating the importance of understanding the types of entities that make up each part of the cost curve.

Above $56k the orange and yellow lines start to diverge. This shows that much of the bitcoin acquired on-chain at high costs was purchased in the last two weeks. This makes sense as prices have only been that high in the last two weeks. But it also creates some uncertainty in the level of support at higher prices, as some of this bitcoin may be moving internally rather than being acquired.

Above $57k the range between the upper and lower bound support starts to increase, making it harder to ascertain the level of price support. However, I would argue that above $57k the real driver of the price is the level of new demand, which sets the price ceiling, rather than prior demand, represented by the cost curves, which sets the price floor.

I know this is complicated but I hope it is insightful. Such analysis is just not possible for traditional assets. Cryptocurrency is not just changing finance, it is changing how we think about financial data. Please let me know if you’d like me to explain the analysis in a different way or if you have any other questions by emailing me at marketintel@chainalysis.com.

Philip Gradwell, Chief Economist

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