Bitcoin On-Chain Analysis (BTC) – The Bitcoin Network Undermined?

Bitcoin (BTC) bounces around $ 40,000.

After rejecting three times the support of 40,000 dollars, the price of bitcoin (BTC) will have to overcome a lot of technical resistance before resuming a sustainable rise.

Currently working to recover the 21eMA (red), the BTC is still within a correction in the order of more than 35% since the new ATH of 69,000 dollars.

Daily Bitcoin Price Chart (BTC) – Source : Coinigy

Continuing our global study of market dynamics, let’s add today to our prism theBitcoin network health as well as the behavior of trade flows and their relationship with the BTC price in order to learn about a wide range of metrics at the start of 2022.

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Network health status

Let’s start by looking at how much the Bitcoin network has grown over the past few months.

An essential network security parameter, the hash rate or “hashrate”, the computing power necessary to produce a new block, has continued to increase structurally since 2020 before plunging in May 2021.

This event, known as ” Great Migration Is due to the exodus of minors located in China.

Forced to unplug their machines in search of a more lenient jurisdiction, these entities also had to liquidate part of their BTC in order to finance their relocation.

BTC hashrate 130122

Bitcoin hashrate chart (BTC) – Source : Glass knot

Result: these minors, mostly resettled in Texas or Kazakhstan, caused by their displacement a 51% drop in hashrate.

However, it will take more to bring down the global distributed network which quickly recovered from this logistical attack.

Indeed, eight months and twelve positive adjustments to mining difficulty later the hashrate brushes against his ATH and once again demonstrates his resilience.

Yet, although miners are busy securing Bitcoin, one of the sliders for its adoption is the entry of new entities onto the network.

Using the number of active addresses and the number of new addresses created, we can get an acceptable proxy of the overall trend of theparticipant engagement.

BTC Active Addresses 130122

Bitcoin Active Address Graph (BTC) – Source: Glassnode

It seems then that the entry rate of new entrants is declining since the capitulation in May. Ditto for pre-existing active addresses.

This indicates a lack of interest from participants in bitcoin, a sign that 2021 has not been a particularly prolific year in terms of organic adoption.

We can however qualify this statement by the fact that large companies such as MicroStrategy, Shades of grey or nations such as El Salvador all the same entered the market with the firm intention of staying there.

Corroborating this lack of interest, the number of transactions performed on the channel is he in structural decline since early 2021.

BTC Nb Tx 130122

Graph of the number of Bitcoin transactions (BTC) – Source: Glassnode

In addition to not experiencing significant growth, the network is also used less and less by participants already present on the market.

It is highly likely that the May capitulation kicked out many entities, which are not yet ready to return to the market.

The unprecedented price action of the year 2021, marking the introduction of curved tops and valleys close to the figures of distribution and accumulation of Wyckoff, has also played a major role by sowing doubt among certain actors, not used to this type of dynamic.

However, it seems that this lack of interest did not prevent the network from allowing the transfer of large volumes of capital. In reality, the increasing transfer volume tells us that more and more funds are sent to the channel.

BTC volume transfer 130122

Bitcoin transfer volume graph (BTC) – Source: Glassnode

Thus, although the number of arriving and active participants is low compared to previous cycles, the Bitcoin network is experiencing fewer but larger transactions.

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Trade flow

Let us conclude this vast study by observing the centralized exchange platform flows. Reflecting the overall feeling of the participants, their fluctuations make it possible to identify the psychology at play during market phases.

As we have seen in our previous analyzes, trade reserves have maintained a downward trend since the paradigm shift of March 2020.

BTC Reserves Exchanges 130 122

Trade reserves graph – Source: Glassnode

Yet it seems that this curve formed a medium-term floor at the level of 2.51 million BTC that the current accumulation is not enough to sink at the moment.

Adding more details to our prism, the net change in trade position indicates withdrawal phases in red and deposit phases in green.

Having experienced a overall dominance of outgoing flows, we can however notice a filing phase in November, a period during which some LTHs distributed part of their tokens in order to make their profits.

BTC Flows Trade 130122

Graph of net change in trade position – Source: Glassnode

Then follows a moderate resumption of accumulation from the beginning of December, despite a correction of more than 35% since the new ATH of 69,000 dollars.

Having said that, as mentioned by Data always, these metrics can be noisy and are often misunderstood by analysts.

โ€œIt’s not uncommon to see a chart showing declining foreign exchange reserves and then hear that the supply of tokens is going to run out soon and that prices will rise. There is some truth to this, but the story is much more complicated. “

Indeed, during a bull market, the inflow of trade is strongly correlated with the price of bitcoin.

Simply put: when the price increases, people who have held bitcoins for a long time are incentivized to realize their profits.

They therefore tend to transfer their tokens to an exchange platform in order to sell them to newcomers.

Thereby, if the price drops, the incentive to sell decreases and these actors are less likely to sell their pieces.

The graph below represents the 90 day correlation between the flow of exchanges and the daily variation in the price of bitcoin.

BTC Price / Flow Correlation 130122

Graph of the correlation between the price of Bitcoin and the net change in trade position – Source : Data always

During the bull markets, we tend to observe a high or no correlation, between changes in trade reserves and the price, while during panics, we are seeing huge price drops and very strong negative correlations between price and trade flows.

The use of this correlation makes it possible to determine the state of health of spending without going through profitability dynamics by identifying two antagonistic phases.

In blue are the periods during which the cprice – flow correlation is positive. Signs of a healthy market, they mean that the players sell during the ups and hold on during the corrections.

Conversely, the periods during which participants sell during declines and do not make a profit during increases are indicated in yellow.

BTC Price / Flow Correlation 130122

Graph of the correlation between the price of Bitcoin and the net change in trade position – Source : Data Aalways

We can then see that it took six months for the market to resume proper spending behavior after the May capitulation.

The new blue phase, started early December with the rapid fall in price following a leverage purge, indicates that participants hold on during the decline and act in a rational and healthy manner.

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Finally, it seems that the Bitcoin network is not operating at full capacity. Although few participants are active and new arrivals are long overdue, the use of the chain however allows more and more funds to circulate.

Trade flows indicate that the store of value and accumulation paradigm is still present and pushes the reserves of trade to gradually empty. The in-depth analysis of the price-flow correlation nevertheless makes it possible to point out the fact that the market has barely returned to healthy spending behavior.

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About the Author : Teacher. 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.
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