Volatility, liquidity, trading volume, and on-chain settlement volume are all at historical lows. This increases the possibility of the market entering an extremely indifferent, exhausted, and even boring period.
Authored by: UkuriaOC, Glassnode
Translated by: Deep Tide TechFlow
The liquidity of the digital asset market continues to dry up, with both on-chain and off-chain trading volumes reaching historical lows. Although holding (HODLing) remains the market's preference, a significant proportion of the supply is on the verge of significant losses.
Summary
The liquidity, volatility, and trading volume of the digital asset market continue to compress, with many indicators falling to levels before the 2020 bull market.
The supply of stablecoins continues to decline, with all major stablecoin assets except USDT being redeemed.
Long-term holders are steadfastly holding assets, with almost no trading activity.
On the other hand, short-term holders are on the brink of losses, with most of their supply acquired at prices higher than the current range.
The digital asset market has returned to a very narrow trading range, and we are experiencing a period of compressed volatility and extremely low trading volume. In this issue, we will further explore the depletion of liquidity and how to better describe this market structure using on-chain data.
Supply
We will study the inflow of funds into the industry from a macro perspective. Here, we consider the total invested capital held in the three main assets: Bitcoin, Ethereum, and stablecoins.
🟢 Since April 2022, the supply of stablecoins has been continuously declining, starting with the redemption of LUNA-UST after its collapse.
🟠 Both Bitcoin (BTC) and 🔵 Ethereum (ETH) have experienced net capital inflows since the beginning of this year, with their realized market values increasing by as much as $6.8 billion (BTC) and $4.8 billion per month, respectively.
However, since late August, all three assets have experienced a return to neutral or negative inflows, indicating a certain degree of stagnation and uncertainty.
If we analyze stablecoins separately, we can see that a total of $43 billion has been redeemed, equivalent to a 26% decline since the peak in March 2022. This can be explained as a reflection of both capital leaving under bearish conditions and an opportunity cost of higher rates that have not been passed on to non-yielding stablecoins.
When we break down the three largest stablecoins, we can see that these dynamics are not evenly distributed:
🟢 The supply of USDT has actually increased by $13.3 billion since the low point in November 2022.
🔵 The supply of USDC has almost equally decreased by $16.7 billion, which may partly reflect U.S. institutions moving funds to higher-rate markets.
🟡 The supply of BUSD has significantly decreased by $20.4 billion (89%), mainly due to Paxos entering a redemption-only mode after the SEC's enforcement.
From a relative dominance perspective, we can see how important the expansion of Tether's market share is. Tether now holds 69% of the stablecoin market, a sharp contrast to the low point of 44% in June 2022.
The dominance of BUSD has dropped to 2.1%, and USDC's dominance is only 21.7%, significantly down from its peak of 38% over a year ago.
In the short term, we can observe the relative positions of buyers and sellers of the three main assets flowing into exchanges. Here, we make a set of simple assumptions:
We assume that the USD value of Bitcoin and Ethereum flowing into exchanges represents "seller" pressure.
We assume that the USD value of stablecoins flowing into exchanges represents "buyer" pressure.
The chart below calculates the net USD difference between stablecoin inflows (+ value) and Bitcoin and Ethereum inflows. We are not concerned with the absolute size of the values (as these assumptions have a margin of error), but rather any significant shifts.
🟢 A positive value indicates a net buyer regime, where the buyers of stablecoins exceed the sellers of Bitcoin and Ethereum.
🔴 A negative value indicates a net seller regime, where the buyers of stablecoins are fewer than the sellers of Bitcoin and Ethereum.
The bull market cycle of 2021 was clearly dominated by net seller pressure, with investors taking profits in the frenzy of the uptrend. The collapse of LUNA-UST and 3AC in mid-2022 marked a return to net accumulation in the market, as investors worked to establish the market bottom.
However, since April 2022, the market has returned to a relatively neutral level, consistent with the slowing inflows of Bitcoin and Ethereum funds and the market becoming increasingly indifferent and uncertain.
On-Chain Quietness…
Despite the recent sell-off that saw prices drop to $26,000 and the subsequent volatility following Grayscale's successful challenge against the SEC, the actual volatility remains very low. The market is still in an environment of historically low volatility, which is usually a precursor to future increased volatility.
This low liquidity and low volatility environment is also reflected in the settlement trading volume on the Bitcoin network. The USD-denominated Bitcoin trading volume has stagnated at a low of $2.44 billion per day, returning to the levels of October 2020.
If we observe the realized value on-chain (the difference between the purchase and sale prices of the currency), we find that it remains very calm. The overall locked-in profit or loss in the market is very small, indicating that most trades are close to their original purchase prices.
The realized profit and loss are comparable to the 2020 market levels, highlighting that the prosperity of the 2021 bull market may have completely disappeared.
We can also track the low liquidity and indifferent sentiment on-chain by observing the proportion of wealth held by the "hot supply" group (currencies transferred in the past week), the most active and liquid part of the market.
Currently, the realized value held by the "hot supply" group is at a historical low, indicating that very few currencies have been traded for over a week.
Off-Chain Quietness…
In the over-the-counter derivatives market, we can also see that futures trading volume has suffered a similar fate, reaching a historical low of $12 billion per day. The only period with lower trading volume was the calm period at the end of 2022, when the Bitcoin price fluctuated within a range of $557 for over two weeks.
However, we note an interesting divergence in the options market, with trading volume seeing a significant increase in 2023, currently reaching $437 million per day. This may reflect a preference for using leverage and capital efficiency through options in a period of overall tight liquidity in the market.
It is worth noting that, although the options market now has a comparable position size to the futures market, options trading volume is still an order of magnitude smaller.
Similarly, despite several days of intense volatility last month, the implied volatility in the options market remains relatively low. The initial rise in volatility premium is temporary, with the 1-month implied volatility returning to a historical low of 33.9%.
Long-Term Holders
With both on-chain and off-chain areas unusually calm, the supply of Bitcoin held by long-term holders has reached a new all-time high, reaching 14.74 million BTC. In contrast, the supply held by short-term holders, representing the more active part of the market, has dropped to its lowest level since 2011.
Holding remains the primary dynamic in the market, indicating both the steadfast belief of existing holders and highlighting that these investors may be the only ones left.
We can find consistency in the "activity" indicator, which elegantly compares the balance of coin days destroyed and coin days generated in the market. In other words, "activity" represents the relative balance of "investor holding time" in the market.
Consistent with the net seller market mentioned above, the "activity" in 2021 saw a significant increase as older coins were spent and profits were realized. With the bear market between May and December 2022, a strong downward trend emerged. This marked a turning point from a trader's market to a holder's market.
The "activity" has now returned to late 2020 levels and is showing a gradually intensifying downward trend. This indicates an overall increase in "investor holding time," with investors becoming increasingly unwilling to spend and relinquish the coins they hold.
A key insight of this work is the development of the realized market average, which we believe is the most accurate "cost basis" model for active Bitcoin investors. The model is currently at $29,600 and has formed a psychological resistance level since April 2022. The traditional realized price is $20,300, and both models have constrained much of this year's price action.
Market Sensitivity
If we apply these two pricing models to the URPD chart and use them as psychological boundaries, we can better describe the supply situation obtained between these two models. Currently, over 4.81 million BTC have a cost basis between $20,300 and $29,600.
We can also see that at the time of writing, with the price slightly below $26,000, short-term holders🔴 are almost entirely in a loss position. It can be said that this more price-focused group is somewhat nervous.
The chart below shows the percentage of profitable holdings in the supply of short-term holders. We can see that the majority of their supply is unrealized losses, with only 16.3% of holdings still "profitable."
For the long-term holder group, their profitability is gradually increasing, although still at historical lows and only recently emerging from the negative one standard deviation range. While this is a positive trend, over 26.7% of long-term holder supply is in a loss position relative to their purchase prices, far below the historical average.
Despite 2023 being a fairly reasonable recovery for Bitcoin and digital assets, these findings indicate that there are still several psychological cost basis barriers that need to be overcome.
Summary
Volatility, liquidity, trading volume, and on-chain settlement volume are all at historical lows. This increases the possibility of the market entering an extremely indifferent, exhausted, and even boring period.
The long-term holder group remains steadfast, with almost no relinquishment of the tokens they hold. On the other hand, the short-term holder group is teetering on the edge of profitability, with the cost basis of many tokens higher than the current trading range of $26,000. This indicates that this group is becoming increasingly sensitive to price, and many psychological price levels still need to be overcome.
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