Chainalysis Archive

Markets try to find a new level with lower exchange activity but returning investors

16 June 2021
SUMMARY SUMMARY
    • The bitcoin price settles at the buy-and-hold level of investors acquiring in the last 12 months, which is $37.5k, while the Ethereum price is still above its price floor. This suggests demand for Ethereum continues to grow but is currently flat for bitcoin, although not declining.
    • A significant decline in on-chain exchange users appears to have halted. The number of active deposit addresses, across all exchanges, peaked at 287k per day for bitcoin in May, and is currently 145k per day. For Ethereum this peaked at 50k per day in May and is currently 16.5k per day. Such large declines show just how much activity has been taken out of the market but at least activity has now stabilised.
    • Bitcoin has started to flow from traders to investors again, reducing liquidity. This may bring more stability to prices after liquidity increased suddenly as prices fell in May and investors sold to traders.

The bitcoin price increased this week from a low of $31k last Wednesday 9 June to around $39k today, Wednesday 16 June. The Ethereum price closed at $2.6k seven days ago and is around $2.4k today, fluctuating between a low of $2,259 and a high of $2,640.

An increase in the bitcoin price and a relatively stable Ethereum price brings some respite to investors and traders after the price falls of the last five weeks, even though prices have fallen somewhat today. From the data, it looks like the market is trying to find a new level after a significant drop in price and on-chain activity compared to April and May.

The bitcoin price appears to be settling at the buy-and-hold level of investors acquiring in the last 12 months, currently $37.5k, as the first chart in the report shows. For Ethereum, this level is $1.8k, suggesting that demand for Ethereum is growing. In contrast, new demand for bitcoin appears limited as price sits at this floor, but at least demand is not decreasing.

A significant decline in on-chain exchange users also appears to have halted. I measure this from the number of deposit addresses receiving assets on exchanges, shown in the second chart in the report. This is an upper bound estimate of the number of users sending assets into exchanges via the blockchain. It’s an upper bound as deposit addresses are typically unique to users but a single user can have many deposit addresses.

The number of active deposit addresses, across all exchanges, peaked at 287k per day for bitcoin in May, and is currently 145k per day. For Ethereum this peaked at 50k per day in May and is currently 16.5k per day. Such large declines in exchange users as prices crashed shows just how much activity was taken out of the market but at least activity levels have now stabilised.

The reduction in on-chain exchange users appears to be due, in part, to a reduction in holders cashing out large gains. The third chart in the report shows the difference in the average USD percentage gain of entities sending assets versus entities receiving assets. When this is positive, entities with a higher gain are sending assets to entities with a lower gain, on average. This difference recently peaked in January, when entities that sent bitcoin had made 33% more since they last bought bitcoin than entities currently receiving bitcoin. 

Since mid-May, entities sending bitcoin or Ethereum are no better off than entities receiving bitcoin or Ethereum, with the difference being close to zero. This suggests that longer term holders, who typically bought at a lower cost and so have a higher gain, are not sending as much bitcoin, and holders who bought recently and so have a lower gain, are not receiving as much bitcoin. Hence prices are moving sideways, more than dramatically up or down.

Another metric that suggests markets are trying to find a new level is the return to more normal levels of liquidity. The fourth chart in the report shows the difference in the average liquidity of entities sending assets versus entities receiving assets. When this is positive, more liquid entities are sending assets to more illiquid entities, on average. Illiquid entities are those that retain more of their assets rather than sending them on, so are typically investors.

This difference spiked In early April, meaning that liquidity was reducing as bitcoin and Ethereum flowed from traders, who are liquid, to illiquid investors. Prices peaked shortly after but then, as prices fell, liquidity increased as investors sent assets to traders. Since mid-May, particularly for bitcoin, liquidity has been decreasing as investors cautiously re-enter. This suggests that sudden price falls are less likely now than they were a few weeks ago, although the sudden swings in liquidity shows that holders can change their attitude quickly.

So the turbulence of the last month may now be settling. Or perhaps it is more accurate to say that daily price changes are now only in single digit percentage points, not double digit changes. That is still plenty of volatility to navigate. Let me know if you find this data a helpful guide via marketintel@chainalysis.com!

Philip Gradwell, Chief Economist

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