2021-February-19

Bitcoin Exchanges Balances: Effects on Price and Correlation

Bitcoin’s volatility is cause enough for the cryptocurrency community to have a dedicated website that lists when the media and celebrity call the “time-of-death” on the asset class. And there are definitely plenty of Bitcoin Obituaries but somehow the cryptocurrency much like a phoenix comes back from the dead even more powerful than before. But the volatility remains true to the cryptocurrency’s character.

While Bitcoin’s has the proven several times its ability to rise back higher after a bear market, that’s not to say that investors shouldn’t fear volatility. Perhaps in the long-run, the swings will be less of an issue and forgotten. Rolling volatility continues to down-trend as highlighted recently by Coinshares.

Today, however, traders best keep an eye on potential upcoming changes, especially with the increased use leveraged positions and derivative products.

As the swings between low and high can be quite alarming, it’s unlikely that traders will benefit from looking at only a single source of data. Major trends are unlikely to happen without certain context whether it’s news or supply demand mechanics. This is why looking at multiple points of data will be useful otherwise the signal will be haphazard and will likely read much more as noise.

Any fundamental outlook, for both short-term and long-term would benefit from a different vantage points – one that this report will delve into by looking at rolling changes of prices, trading volume and on-chain data for supply increases or shortfalls. Glassnode, one of the leaders in blockchain analytics has provided all the data in this research.

There are several questions that must be asked when it comes to good metrics traders can rely on. Though Technical Analysis (TA) is always in a trader’s toolbox, this digital asset class can provide much more reliable fundamental data. By marrying on-chain data and off-chain data, traders will be able to make better assessments into their trading strategies.

Zooming Out 

Bitcoin’s limited supply has caused a proper fundamental shift in the last year. With exchanges now holding the lowest amount of Bitcoin’s in well over two years since the last bear market after 2017, the cryptocurrency’s price continues to appreciate. And available Bitcoin’s to buy continue to dwindle (see chart 1).

For day traders who are using reasonable leverage that can handle price swings, the information is of vital importance as it can serve as crucial information as to market movements.

In fact, since ‘Black Thursday’ in 2020, day to day price changes where linked over 55% of the time (see chart 2 & 3). Half the time Bitcoin’s price increased had also seen the balance on exchanges decrease. This should give traders some additional confidence as to upcoming price movements as there is the highest correlation between these two events (see chart 4 & 5).

What can be vividly seen in the on-chain data, is that balance decreases on exchanges have a magnitude larger effect on the price than balance increases. This dynamic shows just how tight markets really are.

Markets are also proving to have a cyclical correlation with the two factors (see chart 4). This means that while traders can rely on this metric for fundamental trends, decisions and strategies should be paired with other potential factors that can move price.

1: Exchange Balances of Bitcoin vs. Price

2: Exchange Balance Changes vs Bitcoin Price Change Since 15 March 2020 (BTC Bottom Since 'Black Thursday') - # of Days

3: Bitcoin: Daily % Change of Exchange Balance and BTC/USD

4: 7-Day Rolling Correlation of Exchange Balance Change to Bitcoin's Price Change

5: Correlation Distribution: When Bitcoin Decreases in Price but Increased on Exchanges and Vise Versa (% of Days)

Old News on the block

The latest news out of Palo Alto left the world in shock and awe as Tesla, the first major Fortune 500 company invests part of its treasury in Bitcoin. The size of Tesla’s purchase of Bitcoin at rumoured to have taken place during January was to the tune of $1.5bn. But while normal folk flabbergasted, the crypto community had simply received confirmation of what they strongly believed would happen eventually. And by every indication on the blockchain, the writing had already been written on the wall long before Tesla’s reveal. One simply needed to look at the tightening of supply.

While the Financial Times has poured cold water on the prospect of many Tesla copycats, the reality is that the publication has long been sour on cryptocurrencies. As of date, the FT has been fairly snide and inaccurate in its extrapolation analysis on the cryptocurrency. The determination of the community of seeing the success of decentralized hard money is fact and one that even major banks such as Goldman Sachs agrees has been displacing gold even to some effect.

Major news from significant financial market players are bound to keep popping up. Traders need to look for the signs to know when. And blockchain analytics gives clues no other traditionally traded assets give.

Data was certainly hard to come by back in 2017 but today they’re a few clicks away and metric-ready for traders. And the most advantageous way to benefit from the data is looking at multiple factors that could potentially tell a story.

Our latest research for example highlights the importance of looking at both Bitcoin and Tether to see the economic directions of supply and demand in live fashion.

As with anything, on-chain data is a tool that can be used to the advantage of traders who can utilize blockchain trends into their own trading strategies. As an exchange, ZUBR looks to give such advantage to traders and new sign-ups can get access to Glassnode Advanced to test new trading strategies with on-chain data. Sign-up form is below.

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