2021-February-02

Bitcoin-to-Exchange: Supply Trends Setup Early Stage for Price Direction

Bitcoin’s price swings have long left a label on the cryptocurrency as an asset that is speculative, high-risk and always coming with a buyer-beware warning label. The reality is, however, that Bitcoin’s very underpinning technology of being on a blockchain ledger that records coin movements, is by definition the transactions of available supply. Bitcoin go into exchanges, and out of exchanges. Sellers, then, can be very simply recognized by changes of Bitcoin balances sitting on exchanges – perhaps not by name, but as total supply positioned to be traded. The other side of equation, the buyer, can be currently looked at by keeping an eye on the most popular stablecoin that is used in cryptocurrency exchanges to buy Bitcoin, Tether. The largest stablecoin in the cryptocurrency ecosystem now sits for the most part on the Ethereum blockchain. Using Glassnode data, this research takes a look at how traders can use live blockchain analytics to assess market economics of supply and demand for Bitcoin by analysing both key cryptocurrencies.

Outside of the strong convictions of avid believers, the price of Bitcoin in the long-term will be a good a guess as any. Favourable (or unfavourable) news can affect the cryptocurrency’s outlook. Regulations, exchange hiccups, low supply, and a multitude of factors can result in the large price swings holders have become so accustomed too.

But for active traders, the long-term trend is of significance as it helps mitigate risky positions that might be against set trends. Looking to profit on trades when Bitcoin is going up and down, both sides of the trade, is going to happen by making the best-informed decision. Unlike traditional assets, the blockchain paints a near live picture of supply and demand. Data by blockchain analytics firms such as Glassnode, give traders this advantage having mapped out the complex blockchain ecosystem. Trends can be established.

And of course, pessimist will argue that hindsight is a beautiful thing, as the saying goes. When it comes to blockchain analytics and asset valuations, however, it does though help in finding out whether or not such data Is actually useful and how investors might be able to take advantage of such information in the even that it is.

Rally Past 2017 All-Time-High

The latest Bitcoin price rally fuelled the cryptocurrency well above $40,000k, more than double its previous all-time-high at the end of 2017. And blockchain analytics tells the story. Bitcoin sitting on exchanges dropped by a whopping 600,000 in 2020 (see charts below).

From the time exchange balances peaked during the market crash of 2020, all the way through till the end of the year, deposits of Bitcoin ready for sale dwindled. From Bitcoin's price bottom seen on 'Black Thursday', exchange balances dropped by a massive 20%.

Getting to 2021 All-Time-High: Delayed 2020 Supply Shortage Reaction?

Zoom-In, See Trend: 600k Bitcoin Goes Off Exchanges during 2020

The Otherside of the Equation

There is of course the need to assess the demand side. As Tether remains the dominant stablecoin within the ecosystem used for trading, the cryptocurrency can very well represent potential USDT available and ready to pick-up Bitcoin. At the start of 2020, exchange's held a little bit more than 500mn USDT on average. By the end of the year, this had ballooned more than double to average 1.3bn USDT after hitting a huge 2.2bn in April (see charts below). Minimum exchange balances for USDT stood at more than double that seen at the start of the year indicating traders might be taking profits, and waiting more opportunities.

In any case, as far as looking for trends on the blockchain, the writing seems to have been on the wall as to a strong recovery for anyone who was paying attention.

USDT Supply Surges Post Crash, Bitcoin Price Slowly Grows

USDT Minimum Exchange Balance End of 2020 Double Start of Year

Into 2021: Supply Trend Squeeze Intact

Bitcoin's new all-time-high set over $40,000 in January was by and large a fundamental supply and demand reality unlike 2017 when the cryptocurrency was driven by a large retail crowd. This makes on-chain analytics a much more reliable and important metric moving forward for traders to assess market conditions.

Although Bitcoin has seen a retreat in price to as much as 25% since its new high in January 2021, Glassnode places exchange balances at their lowest point since mid-2018 shortly before the cryptocurrency reversed from its bear market.

Important to note that while the Bitcoin reward block was cut in half in mid-2020, miners continues to supply the market in grand style sending more of the cryptocurrency to exchanges in 2020 than in 2019 keeping the markets supplied the best it can. This indicates real fundamental support of demand even further. But perhaps even miners will become squeezed for new coins further propelling a supply/demand imbalance? Traders best watch for such trends.

Maximum & Minimum Bitcoin Balances on Exchanges

Current Trend-to-Direction Setup

The short to medium trends of supply and demand can be well established using Bitcoin on exchange metrics from a birds eye view. A jolt in the reversal of a trend, whether Bitcoin or Tether, results in a fairly reliable indicator as to price direction.

Even on a block-by-block level, the data will help traders increase long-term profits and mitigate any major price changes that may be coming. Looking at the most volatile day of 2021, shows that very scenario (see charts below). In fact, for the overwhelming majority of extreme volatile days, blockchain has early tells.

The setup, despite Bitcoins massive swings, is actually a fairly straight-forward exercise that traders can utilize. An initial supply increase jolt, followed by a confirmation by more supply moving onto exchanges along with price weakness will give traders the early signs of price direction.

Largest Price Swing: 11 Jan 2021

All-Time-High: 08 Jan 2021

Fundamental Advantage

While traditional traders rely on technical analysis (TA) for their trading, the technical side of crypto - the blockchain - is actually a fundamental tool. While the examples above are given as an example, the model found in this research indicates the very same trend setup scenario across all days that might see an increase in volatility.

Important price movements, whether moving towards and high or a low for the day is preceded by a supply jolt on an exchange. Both Bitcoin and Tether are key indicators and blockchain analytics will give users a very important advantage to see ahead.

The very nature of a digital asset is the ability to track such movement and underlying intentions in real-time. And with block times going into the hours during heavy periods, and exchanges requiring multiple confirmations to credit trader accounts, this leaves a lot of breathing room for traders to properly assess the potential price action to their benefit.

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