Strategies For Big Swings: Are On-Chain Analytics Advantageous For Traders?
Cryptocurrency trading is fraught with volatility pitfalls that leave the most astute traders scratching their heads with market movements. But blockchain analytics can prove to be one of the essential tells as to upcoming market changes. With Bitcoin remaining the most heavily traded cryptocurrency, traders can use on-chain data to assess potential changes before the asset hits the exchange. Alongside certain limitations inherent to the blockchain – more precisely – time for confirmation, traders would be at an advantageous position looking at distributed ledger data. ZUBR looks at the most considerable price changes and day swings in Bitcoin's price and what happens on-chain before the fact.
• Large swings in Bitcoin can be to the benefit of traders with foresight. Blockchain data showing larger than average movements are indicative of a new market direction.
• Whale alert movements that have become a popular outlook are not enough. Above-average signs must be taken into account for traders to have a collective view of market participant views on price direction.
• Looking at Bitcoin alone is only half the story. The Tether movement, the stablecoin that is most heavily used globally, is also a key indicator on the buy-side.
• Bitcoin 10-minute delay has proven to go into the hours during times of high volatility. The information on the transactions' size pending confirmation landing onto an exchange leaves traders with a window of opportunity to assess market pressures.
• Tether movements are fast, with the bulk now moving on the Ethereum blockchain. These are real-time analytics explains why Bitcoin's price sharply moves, rather than gradually.
• Leveraged positions during large swings can be an effective strategy for profit gains in tight supply markets. But history has shown that long-positions are the most heavily liquidated, being blind-sided by downward pressures. The blockchain can give an initial glimpse of such potential outcomes. Part 1 of this research looks at the largest swings on the downside, and if some blockchain information can mitigate such risks.
Insights into cryptocurrency price movements are invaluable. Bitcoin's volatility comes from a mix of potential cases from news, adoption, exchange problems, regulatory scrutiny, low supply, and other factors such as social network trends.
With prices scurrying similar to a child's whims' characteristics, any information beforehand will only help traders take profits or exit a potentially dangerous position.
Blockchain data could provide that insight. After all, there is a 10-minute window of reprieve between each block when miners confirm all transactions. The information is so valuable that over a quarter-million users follow 'Whale Alerts' on Twitter, an account that flags up large movements of various cryptocurrencies, just for that glimpse of what's moving on the blockchain.
But data has come a long way since 2017, and providers from Chainalysis, Santiment, IntoTheBlock, Glassnodes, and many more, are now catering to provide such insights for traders.
The information out of the box makes for a reasonably even playing field, however. More scrutiny of the data is likely to give traders a better advantage when setting up their strategy in relation to blockchain movements.
Bitcoin movements, though, only tell a sell-side story. On the other hand, Tether can be indicative of the buy-side, as the stablecoin remains the most dominant traded pair on a global level. The assessment of both is of equal importance.
High-Tide And Lull
During times of high price volatility, Bitcoin transactions can take well into the hour mark to be finally confirmed. To add to this time-gap between supply hitting an exchange are the confirmation requirements set by each trading platform.
While derivative markets mostly require a single confirmation (a single block), the more regulatory compliant exchanges go up to four confirmations before crediting the trader’s account. This means there is a significant lull in market dynamics where traders can begin to assess the trading pressure that is incoming properly.
The Daily Opportunity
Being a relatively new asset that's being heavily traded across global markets, Bitcoin traders have had little tools beyond looking at technical analysis trends and how the cryptocurrency reacts day in, day out. What is clear is that Bitcoin closes between -1% and 1% from open the majority of the time (see chart 1 below).
However, that picture is not as indicative as it may seem. Bitcoin's volatility during the day sees massive swings. This means plentiful of opportunity to take profits on longs as well as shorts when looking to time the market.
In fact, 42% of the days that Bitcoin closes higher than it opens see swings to the low side upwards of $100 (see chart 2 below). These are massive opportunities when compared to traditional assets. In Part 1 of this research, we look at these specific days where Bitcoin's price fell steeply only to recover stronger than the day started.
1: 2020 Bitcoin Daily % Change from Open-to-Close Distribution (%/Days) *Upto End-November.
2: USD Swing to Low on Days Markets Move Upwards And Closed Higher ($/Days)
3: USD Swing to Low on Days Markets Move Downwards And Closed Lower ($/Days)
Assessing Incomplete Information
The breakdown of market dynamics for Bitcoin then should be broken down into 10-minute windows. ZUBR takes a look at the most volatile days and whether they can be used as critical indicators beyond what the industry has mostly used for their analysis – volumes and technical analysis.
While providing lots of information, the blockchain is also one with many incorrect data points from an absolute perspective. For example, the amount of Bitcoin the blockchain records as being sent - output - also includes the sum of change (i.e. the balance of the address less the intended transaction total).
On the surface, such information can be seen as incorrect to look at. However, there are apparent trends that can be seen and worth taking notice of what is happening at any given time.
On a day where volatility is low, the average Bitcoin output is a little north of 5000 BTC (as recorded on the blockchain including change - the actual transfer value is less) (see chart 4 below).
For this research exercise, ZUBR used this baseline to see whether deviations from this average are a telling sign to potential market movements and how they might appear before large movements. And seeing as traders are more likely to get liquidated on their long positions, as ZUBR's research previously found, we take a look at downward pressures and whether or not a trader can find enough signal on the blockchain to either exit a position or even reverse their trade.
4: Bitcoin's Least Volatile Day in 2020: What was the baseline average output? (2020-07-18)
Excluding 'Black Thursday' that happened in March this year, there were plenty of opportunities for traders to take advantage of short positions. On the full 10 days that saw the most considerable swings on the downside, Bitcoin averaged a whopping 11% decline. The top 20 - 9%. And from an absolute dollar loss perspective, these large swings averaged a drop between $900 and $1100. The question becomes, does the blockchain offer any signal service on the most basic level for traders to look at?
|wdt_ID||Date||Open||Close||$ Diff||% Diff|
Early Blockchain Activity
As one can see from the charts below, for the most volatile drops in Bitcoin's price this year, blockchain activity early on before price movement take on speed is dramatically above the average.
However, what does signal potential change is not the initial difference from the norm but the continuous deviation from that marker block after block. This means traders best keep a keen eye on further blocks to assess whether or not the market pressure is real as they await a price shift confirmation.
In most cases, when the largest swings happen, the blockchain becomes much more heavily utilized early on before a price shift occurs. With most Bitcoin being moved onto an exchange for sale, traders' anticipation of a major price drop slows block confirmations significantly.
Data calculations on the days assessed show that blocks can take as much as an hour to be confirmed. In fact, between 30-40% of the blocks during times of high price volatility take well above the aimed 10-minute mark. Essentially, this means that the quick-fire sale, and Bitcoin's price drop, is likely to happen much later than when higher activity is recorded on the blockchain giving traders essential time to make a judgment on market movements.
2020 November 26
2020 May 10
2020 September 3
2020 November 7
2020 August 2
2020 November 22
2020 June 2
2020 March 16
Better Evolution of On-Chain Tools
There are other data metric options to look at that traders can take advantage of. Multiple data providers now have further mapped out inflows and outflows of exchanges from Chainalysis, Glassnodes, IntoTheBlock, Santiment, among others.
But live feed data can be quite costly. And although the blockchain output data can be seen as incomplete information, there is straightforward utility of the blockchain during times of volatility worth keeping note of. This data is publicly available to see at all times. Merely running a BTC Node would give everyone such valuable information.
And while whale alerts are important, there is every trader in between with smaller amounts that are also adding to further downward pressures unaccounted for in whale soundings.
There are other considerations too. News continues to affect bitcoin. Exchange problems leave markets rattled with an increase of withdrawals rather than real price pressures. It is then in the interest of traders to use all tools possible, data, and news, to assess market direction.
It is clear, though, that the blockchain, in its most simple, albeit incomplete information, would be an essential tool to employ in a traders arsenal.
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