GlassNode: Capital slowly enters the market, Bitcoin may maintain a volatile situation

Despite a temporary yearly high of $31,700, the bitcoin market remains captive within a tight price range. Several indicators point to capital slowly flowing into the Bitcoin market, some of which are similar to those of the extremely volatile 2016 and 2019-2020 cycles.

Summary

• Despite Bitcoin's tentative yearly high of $31,700, the market has remained steady, with the Bollinger Bands (BOLL indicator, which measures Bitcoin price volatility) price ranges currently separated by just 4.2%. *Bitcoin's "realized market capitalization" hovers at just under $400 billion, and capital is slowly flowing into the crypto market, mainly driven by the two mainstream assets BTC and ETH. *Bitcoin markets are in profit overall, but total realized value is at cycle lows, suggesting that holders are still reluctant to sell their bitcoins.
• Some indicators in the current market are similar to the extremely volatile 2016 and 2019-2020 cycle indicators.

Capital is flowing into the Bitcoin market

Although Bitcoin temporarily hit a yearly high of $31,700, its gains failed to sustain, with Bitcoin price back above $30,000 sideways.

The fluctuations in the current bitcoin market are still very small. The difference between the upper and lower ranges of the "Bollinger Bands" of bitcoin prices is only 4.2%, which can be said to be the most stable bitcoin market since the beginning of January this year.

Figure 1: Bitcoin Bollinger Bands

Capital is still flowing into the crypto market at a steady and slow pace. "Realized Market Cap" is a very macro and one of the most commonly used on-chain metrics that can be used to observe the real capital flowing into the Bitcoin market. It is considered the "chain market value" and reflects the cumulative sum of all previous realized gains and losses.

Bitcoin's "realized market capitalization" is currently just under $400 billion and growing, suggesting that Bitcoin is trading at higher prices and demand for Bitcoin is increasing.

Figure 2: Realized Market Cap

Usually during a bear market, there is a massive capital outflow from the Bitcoin market. The 18.8% decline in Bitcoin's "realized market value" in 2022 shows how weak the bear market was last year. In previous cycles, it took 239, 193, and 95 days for "realized market capitalization" to recover from the low to the all-time high (ATH), and it has now been 188 days since the current 2022 low.

Figure 3: Realized Market Cap Decline

Next we analyze the NRPL indicator (the difference between realized profit and loss), which is a derivative indicator of realized market capitalization.

For most of this year, the NRPL indicator was greater than 0 (meaning that most of the bitcoin traded out was profitable), and the daily net inflow (profit minus loss) was about 270 million US dollars. This is the first time since April 2022 that it has entered a state of sustained profitability, similar to the cycle in the first half of 2019 and the end of 2020.

However, compared with the 2021 bull market, 270 million is nothing. After all, the average daily net inflow of the 2021 bull market exceeds 3.68 billion US dollars.

Figure 4: NRPL indicator (7 days)

We can see that from 2023 to the present, the realized profit-loss ratio has maintained a stable and positive trend, steadily breaking through the 1.0 break-even level in early January.

This week, the ratio reached a new, less dramatic high, suggesting capital inflows have actually slowed. If this high is sustained, similar market volatility in 2019-2020 and the second half of 2021 is likely.

Figure 5: Realized profit and loss ratio (14 days)

We can also estimate the changing trend of the entire crypto market by comparing the "realized market capitalization" of BTC and ETH with the supply of mainstream stablecoins. By this measure, we see that the majority of capital inflows are through the two major cryptoassets, BTC and ETH, with year-to-date inflows of $21.9 billion and $18 billion, respectively.

The total stablecoin supply saw a net decrease of $10.4 billion, primarily due to redemptions in USDC and BUSD. The above analysis is not difficult to see the market's obvious preference for the two mainstream encrypted assets.

Figure 6: Realized Market Value of Other Assets

Profitable Bitcoin Market

SOPR (Cost-to-Profit Ratio) is also a good metric to use to track the size of profit and loss across the market. We usually use this indicator to judge the state of the market:

*Loss-dominant state: SOPR consistently below 1.0 indicates that investors are in the red and will usually sell at the break-even point (forming price resistance).

• Profit-dominated state: SOPR consistently higher than 1.0 indicates that investors are profitable, and the break-even level is usually considered a short-term value point (forming price support).

Currently, the SOPR indicator is 1.06, which is in a profit-dominated state, indicating that Bitcoin transactions achieve an average 6% profit. This again has similar characteristics to the period between 2016 and 2019.

Figure 7: SOPR (7-day moving average)

With this in mind, through a study of Bitcoin inflows to trading platforms, we found that short-term holders (STH, investors who have been actively trading since early February) are the main group active in the market. Of the 39,600 BTC daily inflows to exchanges, 78% were associated with short-term holders.

Figure 8: Trading platform inflows related to different groups

When we observe the proportion of STH holdings in Bitcoin in a profitable state, we can understand why STH is the main group active in the market-currently the proportion reaches more than 88%. In historical cycles, this ratio correlates with macro uptrends, so bitcoin prices may continue to rise.

As the price rises, it is more and more likely that the STH group will sell their Bitcoin holdings and make a profit.

Figure 9: Proportion of STH holdings in profitable Bitcoin

Relatively speaking, among the Bitcoins held by long-term holders (LTH), the proportion of profitability is not so high, about 73%. This means that about a quarter of the Bitcoin held by LTH was acquired at a price above $30,000 in the 2021-2022 cycle.

Figure 10: Proportion of Profitable Long-Term Holders Supply

In the current bitcoin market, the vast majority of bitcoins (at least 73%) held by LTH and STH remain profitable. From this we can see the strength of the market recovery from 2023 to the present.

Compared to the market weakness experienced after the FTX crash, the current Bitcoin market has improved significantly, after the FTX crash, 90% of all Bitcoin transactions were lost (this is the worst sell-off experienced in history).

Figure 11: LTH/STH Realized Loss (90 days)

The overall realized value (profits plus losses) of the market remains near cycle lows at just $290m/day. While that may seem like a high amount, it still doesn't compare to October 2019 and October 2020, when bitcoin prices were 50% lower than they are now.

This shows that holders with higher levels of profits and losses are reluctant to trade their coins despite the current market capitalization of Bitcoin roughly doubling.

Figure 12: STH/LTH Total Realized Value

Overall, the vast majority of bitcoin holders are holding back, continuing to hold their bitcoins and not increasing their holdings. The proportion of BTC circulating in the market is still very small.

Short term holders dominate

Normally, it is uncommon for LTH to be bought at a higher price than STH. However, such events did occur in previous cycles and were associated with selling activity in the deep bears. During these periods, even experienced buyers dump Bitcoin and get out of the market, especially those who bought near the top of the cycle through the entire downtrend.

With Bitcoin’s strong performance YTD and STH’s dominance strengthening, the SOPR ratio has begun its second decline, giving us a macro perspective into a reversal in investor behavior. There was a rebound in this indicator in March 2020, first rising above 1.0, and then below 1.0 for the next two years.

Figure 13: Long-term and short-term SOPR ratio

Summary and Conclusion

Bitcoin trading has remained confined within a narrow price range, despite a temporary record yearly high of $31,700. The Bollinger Bands are extremely tight, the price range is only 4.2% above and below, market volatility is low and realized value is also at a low point.

Currently, short-term holders dominate exchange inflows, with more than 88% of Bitcoin in profit. However, from a macro perspective, investors appear to be very reluctant to dump their Bitcoin. The current multiple indicators are similar to the 2016 and 2019-2020 cycles, both of which were extremely volatile markets.