With low Bitcoin (BTC) price volatility, derivatives speculators are adjusting their positioning to limit liquidation risk. Additionally, a large volume of 3-4 year old BTC was spent on Tuesday, October 18. On-chain analysis of the situation.
Volatility hits record lows
The current market gloom is reminiscent of the events of September 2015 and November 2019as the volatility contracts the price of Bitcoin (BTC) into an increasingly narrow price range.
Seasoned investors and speculators know: the lower the volatility of an asset, the more its energy condenses, the more powerful the directional movement that will follow this consolidation will be.
Figure 1: Daily price of BTC
As HODLing behavior persists and selling pressure lessens, in spot markets, derivatives markets are showing a growing speculationaccompanied by constructive dynamics in terms of risk management.
This week we will assess:
The activity and positioning of derivatives market participants ;The recent spending of former UTXOs, dormant since 2018-19.
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Speculators limit risk
Volatility is a technical indicator, measuring the magnitude of changes in the price of BTC. High values indicate that the price movement is very high while low values signal a stabilization of the price.
Currently Below 20%, Volatility Reflects Gloom in Current BTC Consolidation, which spent more than a month between $20,000 and $18,000. It has only recorded such values on very rare occasions in the history of the BTC market.
In September 2015the consolidation had been broken from above, triggering the bull run of 2016-17; November 2019it had been invalidated from below, causing the price to fall by -50% in a few weeks.
Figure 2: BTC Weekly Volatility
Although the distribution dynamics of circulating supply and profit/loss are not transposable from one bearish cycle to another, it is clear that the price of BTC is on the cusp of a movement of extent, the direction of which remains unknown.
If the spot markets do not allow to assess the potential future direction of the price of BTC, the derivatives markets are teeming with clues that allow us to push our thinking further.
The following graph shows the total value (measured in BTC) allocated to Bitcoin futures, called Open Interest (IO). If it remained confined between 300k BTC and 380k BTC during the year 2021, the IO has since May 2022 started a new upward momentum.
Figure 3: Open Interest denominated in BTC
Sign that speculative interest in BTC is growing despite bear market adversity, IO is up nearly 80% since May, hitting a fresh 650k BTC ATH today.
Never has speculation been so strong, despite a historic deterioration in prices and macroeconomic components that are, to say the least, deleterious.
Following this observation, we can separate the IO according to two modes of collateralization:
IO collateralized in crypto (BTC or ETH)which presents high risk of liquidation during downtrends but extreme profitability during bull markets;IO collateralized in fiat (cash or stablecoins)which is accompanied by a liquidation ratio unaffected by the value of the collateral, making it less conducive to forced position closure.
Figure 4: Open Interest Collateralized in Crypto & Open Interest Collateralized in Cash/Stablecoin
While the bull market of 2020-21 was marked by a strong dominance of IO collateralized in crypto, it can be noted that a regime change took place during the month of October 2021.
Since then, IO collateralized in cash has dominated, a sign that speculators are adopting less daring speculative behavior and more measured risk management. The current speculative context is therefore healthier than before, despite significant capital inflows.
If we observe the evolution of the financing rate of positions contracted on futures contracts (in yellow), it is currently impossible to identify a clear speculative bias.
Figure 5: Weekly & Annual Perpetual Contract Funding Rates
Indeed, in opposition to the strong bullish or bearish biases recorded in 2020-21, thehe ongoing fall in the funding rate since November 2021 does not provide any clues worth investigating.
Contracting more and more, the amplitudes of the indicator are so low that they currently oscillate around their annual average (in blue), with values oscillating between +0.05% and -0.05%.
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A Notable Expenditure by Former UTXOs
The other subject of this analysis is the recent spending of more than 3000 BTC aged at least 3 years, which occurred last Tuesday, October 18.
At first glance, a peak destruction of Coin Days (JP) was recorded on this date. Totalizing more than 3 million Days of Parts destroyedthis peak is comparable to those created in September 2021 (rebound from $30,000) and July 2022 (rebound from $20,000).
While these elicited spikes did not promote a noticeable bearish bias, it is unclear whether this spending of former UTXOs will have any real impact on the price in the near term.
Figure 6: Days of Parts Destroyed
The message here is: a significant mass of old UTXO has been spent, but there is no indication that these BTCs have been sold. They may have simply been transferred to another wallet, from a different player, or even from the same owner.
By observing the liveliness of UTXOs, it is possible to gauge how much a spike in Coin Days (PD) destruction impacts the overall saving/spending behavior of the network.
This metric is obtained by dividing the JPs destroyed over a given period by the entirety of JPs created by the network since its beginning. Thus, we can compare the spending behavior at an instant you with its historical global trend.
The visible drop in liveness since September 2021 tells us that overall more JPs are created than destroyed. It means that saving behavior is more present than spending behavior.
Figure 7: Liveliness of BTC
That said, on occasion, spontaneous spikes in liveliness signal a noticeable spike in JP destruction (in purple), though it doesn’t challenge the metric’s long-term trend.
This expense is relatively low considering the large-scale maturation process of UTXOs on the line and does not indicate meaningful structural change.
By measuring the cost-benefit ratio of parts older than 155 days (LTH-SOPR), it is possible to plot the profit/loss generated by expenses over a given period.
By selecting the period of last October 18, it appears that BTC spent at this time had aggregate profits of +43%, putting their average base cost at around $11,000.
Figure 8: LTH-SOPR
Once again, there is no indication that these BTCs were deposited and then sold on an exchange or have simply been transferred during a portfolio reorganization transaction.
However, it is interesting to know that strong profits are hatched by these UTXOs, which have a cost base close to many targets held by the most bearish among us.
For those wishing to go further and obtain additional information about this expenditure of old BTC, you will find a lot of meaningful information within our private group: The toaster
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Summary of this on-chain analysis
Finally, this week’s data indicates that, despite very low volatility and a sharp contraction in BTC prices, the pessimistic bias currently carries as much weight as the optimistic bias.
Although speculation is rife in the derivatives markets, trading volumes of futures and the funding rate of perpetual contracts does not show a clearly defined bias.
That said, the speculative regime change underway over the past year signals that speculators favor cash/stablecoin collateral to commit their positions, limiting the risk of cascading liquidation.
This offers derivatives markets a healthier speculative structurewhich is quite constructive.
Furthermore, a notable expenditure of BTC acquired between 2018 and 2019 by addresses owning between 1k and 10k BTC, for an average base cost of $11,000 has recently taken placegenerating plenty of buzz on Twitter but not impacting market bias in any way, at least for now.
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Sources – Figures 2 to 8: Glassnode
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On-chain analyst, fervent fighter of informational asymmetry.
My goal is to inform everyone about the state of Bitcoin (as an asset and a distributed network) through the prism of on-chain analysis.
