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Now, another perspective follows. So far, we have analyzed the Bitcoin market based on the number of transactions, but transactions can be executed multiple times in a short period from a single wallet, especially when trading is automated via algo/bot. You remember my example with entity A) and entity B)? Therefore, analyzing the volume of transactions is excellent for getting a feel for market dynamics.
You can derive trends from this, telling you a lot about the market.
A) High number of transactions and high volatility:
An active market could indicate a very active market with many buyers and sellers constantly trading. Possible news or events can trigger a sudden increase in transactions and volatility affecting the market, but depending on the importance and quality of the information, only short-term. This is often referred to as a pump and dump.
A market with a high number of transactions tends to be more liquid, meaning that large amounts of the asset can be bought or sold without significant price fluctuations. However, again here, if the price reacts "exaggeratedly," this is also an indicator of a disproportionality of actors (buyers and sellers), something we have been able to observe with Bitcoin since the beginning of 2023. High price jumps with a subsequent pause without or hardly any price fluctuations. This usually also indicates a disproportionality of actors. Rapid accumulation for direct distribution without strong and sustained demand.
B) Low number of transactions and high volatility:
A market with few transactions but high volatility could be illiquid. This means that there are not enough buyers and sellers, and even small trading volumes can lead to large price movements. In some cases, a market with low volume and high volatility could be susceptible to price manipulation. A single actor or a small group of actors with sufficient capital could move the price in the desired direction.
A lack of transactions could indicate uncertainty or lack of confidence in the market. However, if there are still large price movements, this could mean that the few actors who trade have very different opinions about the value of the asset.
Now let's jump to another perspective. We are now looking at the number of wallet addresses that are actively trading.
Again as a reminder. A wallet can execute many transactions automatically, but it's just one wallet address.
For simplicity, I have compared 2 indicators here. On one side, the top chart, the number of addresses showing active activity in spot exchanges (inflows/outflows) and below the whales ratio with a moving average of 30 days and 365 days.
The clever ones among you should now ask, why whales ratio and not the net flow of Bitcoin transactions? That would be an interesting question, but of course, I already have the answer ready. A market consists of many diverse entities with different interests and trading strategies.
However, this market particularly has two essential entity profiles. There are the retailer (short-term speculator and Bitcoin maximalist and long-term holder) and the institutional (hedge funds, asset managers, etc.). In a market where the token supply is as limited as with Bitcoin (just under 40% of all available Bitcoins are in less than 2,000 wallets).
Whenever a large entity wants to sell, it can hardly do it all at once without moving the price against its interest (assuming that it does not intend to strongly depress the price but to achieve the highest possible price during distribution). Therefore, it has to wait for the demand from the retails and adjust its distribution. For this reason, the Bitcoin spot net flow (especially with a larger time frame) wouldn't be of much use to me at this point. It is usually very balanced. For trend analysis (short and long term) I need more fluctuations in the values.
I achieve this through the whales ratio. What is the whales ratio? And why does it make sense here?
The whales ratio describes the following:
The total BTC amount of the top 10 transactions (in terms of total BTC sent) divided by the total BTC amount flowing into exchange.
Since we know that less than 2,000 wallets (per wallet more than 1,000 Bitcoins) have the highest amount of Bitcoins per wallet, it can be deduced that exactly these whales are represented in the whales ratio. Exceptions confirm the rule, like everything in life. ;)
If we now look at the charts, it makes a comprehensible picture.
To better understand this, here are 3 specifications.
1. The whale (rational) sells to retailer (emotional)
2. The whale generates buying incentives for the retailer so that he takes the Bitcoins at a higher price.
3. (In the 30D MA) Falling whales ratio large entities sell, rising whales ratio large entities buy. With larger time frames like the 365D MA, this results in a completely different quality of information.
If you now compare the chart whales ratio (30D MA) with the above chart trading address, you see their accumulation and distribution phases.
Only one event stands out here. At the beginning of 2018, there was a gigantic activity of Bitcoin wallets. Presumably, I know this is the case from my previous analyses, institutional entities apparently recognized the opportunity to generate huge profits with Bitcoin.
It seems that the previous ATH at nearly $20,000 showcased the potential of the Bitcoin market to some large institutional players. Especially hedge funds, which rely on performance fees, are always on the lookout for opportunities to generate extremely high profits in a relatively short time frame (this can mean months, or depending on the strategy, even years. A mixed strategy is also conceivable).
In my opinion, this marked the beginning of planning for the bull run in the later months of 2020. The process for whales is often the same. They prepare their operations months in advance – rationally. Retailers tend to react impulsively – emotionally.
Now, let's look at the chart with the Whales Ratio (365D MA). Here, a much clearer picture emerges. Whales, before 2018, accumulated here and started sending large quantities of Bitcoin to CEX from mid-2018 to around mid-2020.
It's also important to note that the profile of whales fundamentally changed after 2018. Whales before 2018 were miners and retailers who had bought Bitcoins cheaply years earlier. Later on, it became more institutional.
From the beginning of 2018, large quantities of Bitcoins were purchased, with many wallets involved (volume per wallet 100 - 10,000 BTC). Incidentally, this matches perfectly with the above chart.
You can see that the wallet activities involved in outgoing transactions (withdrawing) from CEX were higher than incoming (depositing) transactions. Only at the beginning of this year did we see a similar sequential scenario, but the depositing activities in terms of wallets have increased again. This is also confirmed by the Whales Ratio 365D MA. Currently, the activities of depositing and withdrawing wallets appear very balanced. However, we can also see that the activities of all wallets have generally decreased. This reinforces the conclusion of our previous analysis: market activity has significantly decreased, and significantly fewer wallets are active.
It should also be mentioned that we are analyzing the spot market exclusively. Nowadays, it accounts for only about 30% - 40% of the market. The rest is covered by derivatives (mainly futures).
Currently, in my view, everything still seems to indicate a distribution with low demand. High price increases with low trading volume and decreasing market activity usually indicate a market recovery orchestrated by institutional entities to trigger the impulsiveness, or emotional buying readiness, of retailers. Of course, we also have other market participants who have an interest in the market recovering positively, namely those who live off it. These are exchanges like Binance, Coinbase, or Bitfinex etc. and, of course, stablecoin operators like Tether.
A small note on the side about stablecoins: 70% of all USDT was absorbed by Alameda Research (36.7 billion USDT) and Cumberland (crypto trading arm of DRW Holdings) (23.7 billion USDT). As far as I know, even after the departure of Jane Street, Cumberland is still very active in the crypto market.
You can read a current article on this topic here:
protos.com/tether-papers-…
Chart Source: @cryptoquant_com
#BTC #OnChain #Crypto #WalletActivity #Trend
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