Bitcoin On-Chain Analysis (BTC) – Cleaning Up In The Derivatives Market?

A healthy correction for Bitcoin (BTC)?

Crossing below the level of 64,000 dollars (former ATH), the price of Bitcoin (BTC) forms a weekly low of 59,471 dollars, induced by a correction after the creation of the new ATH of 68,426 dollars.

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Daily Bitcoin Price Chart (BTC) – Source: Coinigy

Currently sitting near $ 60,000, BTC is taking the time to build healthy price action, sparing us excess verticality at the gates of price discovery.

Following this week’s retracement, Bitcoin has moved through a cluster of volume which is likely to act as resistance in the coming days.

Note, however, that the price is now facing a large volume of trade at the level of 59,500 dollars which should serve as support in the short term.

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Bitcoin Realized Volume Graph (BTC) – Source: checkonchain.com

Despite the recent decline, spending behavior did not indicate any noticeable change. First of all, we will therefore take advantage of this market breath to:

continue our monitoring of derivative markets; study the security of the Bitcoin network; quantify the supply of BTC held by institutional entities.

Then, in a second article, we will introduce a new metric in order to establish a mid-term price target for BTC.

Forced liquidation of reckless speculators

Before getting to the heart of the matter, let’s take a look at the cost-benefit ratio. Note that a 7-day moving average will now be applied to this indicator in order to smooth the data and make it easier to observe its trends.

The observation made during our first analysis remains intact: daily expenses continue to form a base above the breakeven point. In other words, some market participants make small gains by selling their token (s) above their base cost.

We can however note an acceleration of aSOPR, which could enter Phase C during the coming weeks if the price of BTC were to push upwards.

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Bitcoin (BTC) aSOPR chart – Source: Glassnode

Continuing our study of derivatives markets, it would seem that the recent decline has allowed to liquidate the excess leverage deployed by some traders.

Indeed, after hitting a new all-time high of $ 26.4 billion, the sum of all funds allocated to futures has fallen dramatically.

This drop in interest indicates that the test of the $ 60,000 support ejected unsuspecting speculators, forced to liquidate their position.

Add to this a positive perpetual contract financing rate for more than 30 days and we obtain all the ingredients for a potential decline, induced by the excess risk contracted on the derivative markets.

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Bitcoin Open Interest Chart (BTC) – Source: Glassnode

In reality, the risk of a cascade of long liquidations had to be taken seriously. Since the ATH, more than $ 200 million has been withdrawn from the hands of bullish speculators, denting their leverage ratio.

The premise of a larger series, the liquidation wave of November 9 was only a warning. Well off those who preferred patience to ill-adjusted risk.

Following these observations, we can only be cautious in the short term, although the medium-term bias of the market remains deeply upward and the recent wave of liquidations has cleaned up the derivatives markets in depth.

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Bitcoin Futures Contract Closeouts (BTC) Chart – Source: Glassnode

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Exemplary resilience

On a more encouraging note, the Bitcoin network just happens to be pretty much recovered from the major event in May. Indeed, the hashrate has recovered 93% of its potency since the fall caused by the migration of miners from China.

The miners, having finally been able to relocate to Texas for many of them, have reconnected their machines to the network since mid-July and made it possible to restore a hash rate of 165 exahashs per second in nearly 5 months.

Confirming the renewed security of the network, the difficulty has adjusted upwards 9 times since the July trough.

While some critics announced the death of Bitcoin with the arrival of a Sybil attack following the drop in the level of computing power necessary to create a new block, the network was able to demonstrate its resilience in a big way.

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Bitcoin Hash Rate (BTC) chart – Source: Glassnode

👉 To go further: Bitcoin (BTC): the majority of the hashrate now comes from the United States

Lack of institutional demand

Regarding the adoption of bitcoin by institutions, demand has stabilized since the 1st quarter of 2021.

Following sustained growth since the last bear market, the total BTC held by ETFs or companies is around 885,000 BTC or 4.2% of the total supply, i.e. 5.7 times more than in 2017.

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Chart of BTC holding by ETFs and companies – Source: woobull.com

While currently insufficient, this demand could grow as the price of BTC explores new highs in the coming months.

Note that the acceptance of BTC as a means of payment by businesses in El Salvador marks a turning point for the adoption of Bitcoin and can only encourage its adoption in the long term.

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Synthesis

Finally, despite an unchanged market structure, the financial markets will have got the better of the short-term evolution of the price of Bitcoin during the recent correction.

Based on our observations, we can now state that:

many bullish speculators have been liquidated since the formation of the new ATH; network security has almost recovered to the level of the first quarter of 2021; demand from institutions does not constitute significant purchasing pressure.

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About the Author: Prof. Chain

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On-chain analyst, fervent fighter in information asymmetry.

My goal is to inform everyone of the state of Bitcoin (as an asset and a distributed network) through the prism of on-chain analysis.
All articles by Prof. Chain.

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