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Bitcoin may be resetting to its Q1 market

09 June 2021
SUMMARY SUMMARY
    • The bitcoin price is now back at levels from late January 2021, the time that large, new bitcoin investors started to sell after their rapid acquisition of 1.1 million bitcoin from late September propelled the bitcoin price from $11k to as high as $43k. Were prices above $50k since then supported by more than hype?
    • Realized losses since 10 May have been limited, at $2 billion for investors acquiring in the last 3 months and $10 billion for services (primarily exchanges), while being minimal for other investor groups in aggregate. So overall, investors appear to be holding, even if they are not buying much, suggesting conviction in bitcoin from earlier in the year continues.
    • However, outflows from crypto-to-fiat exchanges to self-hosted wallets declined from mid-March. So when prices were at their highest, investor accumulation was at its lowest. This suggests the price in April was driven by an illiquid market and a lot of hype, rather than institutional buying.

Cryptocurrency prices have continued to fall in the two weeks since my last Report. From nearly $41k on Wednesday 26 May, the bitcoin price reached as low as $31k on Tuesday 8 June, before recovering to $34k today, Wednesday 9 June. The Ethereum price also declined from Wednesday 26 May, when the price was $2,912. The lowest price was $2,183 on Sunday 30 May but it has recovered to around $2,880 today, reversing most of the losses of the fortnight.

The bitcoin price is now back at levels from late January 2021. As the first chart in the Report shows, that was about the time that large, new bitcoin investors, the orange line in the chart, started to sell rather than buy, after driving the price from $11k to as high as $43k by purchasing 1.1 million bitcoin from late September to 1 February. They currently hold 925 thousand bitcoin. Once the large, new bitcoin investors retreated, medium-size investors – those holding 100 to 1k bitcoin each – appear to have become the driving force in the market (although some of these entities may be large investors splitting their bitcoin into smaller wallets). They currently hold 837 thousand bitcoin.

This observation leads me to reflect whether the current bitcoin price is at the level we should expect when hype is off its peak levels and institutions are no longer accumulating, as was the case at the end of January. Was a price above $50k in February through May really supported? I don’t know the answer, but I can provide a datapoint to argue either way!

My evidence that the price was supported in this time is that people have been buying and holding bitcoin at ever greater prices. This demonstrated that demand existed and provided a floor to price volatility until the last two weeks. As the second chart in the Report shows, most types of holders acquired their bitcoin at a cost close to the current price, so their USD gain per bitcoin held is above zero. It is only investors buying in the last 3 months that now face paper losses. These are large losses, at $15k per bitcoin on average across the 2.4 million bitcoin held by these investors. 

However, even for this group of investors buying in the last 3 months, realized losses have been relatively low, at $2.2 billion since the week of 10 May. Realized losses occur when bitcoin acquired on-chain at a high cost is sent on-chain when the price is lower. The only other group to realize significant losses since mid-May are services, primarily exchanges, with $10 billion of realized losses. Now these are averages across large groups of holders, and there are some significant losses within groups. But overall, most investors are holding, even those who entered in the last 3 months – despite their large paper losses.

My evidence that the price was not supported in the last few months is that outflows from crypto-to-fiat exchanges to self-hosted wallets declined from mid-March, as the yellow line in the third chart in the Report shows. This metric matters because institutional investors typically source bitcoin from crypto-to-fiat exchanges (or their intermediary brokers do). So the flow of bitcoin from crypto-to-fiat exchanges to self-hosted wallets indicates accumulation by investors.

These outflows declined from mid-March, suggesting that when prices were at their highest, accumulation was at its lowest. Interestingly, investors did not seem to sell more than usual at peak prices, as shown by the orange line in the chart, which describes the opposite flow of self-hosted wallets sending to crypto-to-fiat exchanges. As I noted at the time, bitcoin on exchanges became scarce. This suggests that the price in April was driven by an illiquid market and a lot of hype, rather than institutional buying.

While illiquid markets can drive prices higher when hype waxes, they can exacerbate price falls when hype wanes. Markets currently appear to be illiquid, with low bitcoin inflows to exchanges over the last seven days, at 61.6 thousand bitcoin per day on average, although they jumped yesterday to 116 thousand as price fell.

Hindsight is both useful in understanding how the future may play out, and useless because we cannot go back in time to act on that understanding. But it is easier than predicting the future. For the short-term market, that is currently very hard. For the longer term of crypto however, I think that is easier. I joined the Money 20/20 podcast recently to explain what that might look like. You can listen here. As always, please email me your questions and feedback at marketintel@chainalysis.com.

Philip Gradwell, Chief Economist

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