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As we enter 2023, we want to highlight the final state of bitcoin volume and volatility after the last wave of capitulation. We last touched on this dynamic in October in The Bitcoin Ghost Town, where we highlighted that a period of extremely low volume and low volatility in the bitcoin price was a worrisome sign for the next round of downside for GBTC and the options market. This happened in early November.
It’s moving fast and the trends of declining volume and low volatility are back again. Although this is indicative of an upcoming leg lower in the market, it is indicative of a complacent and doomed market that fewer participants want to touch.
Even in the November delivery period of 2021, there has been a period of historically low volatility. Sometimes the most market pain can be felt when having to wait for a clear change in trends. As we have yet to see the type of explosion in market volatility that has defined market pivots and major directional movements in the past, bitcoin’s price is providing that pain.
While there are many different ways to define, categorize, and value bitcoin volume in the market, they all point to the same thing: September and November 2021 were peak months of activity. Since then, volume has steadily declined in both spot and permanent futures markets.
Bitcoin volume in spot and permanent futures markets
After the collapse of FTX and Alameda, overall market depth and liquidity also took a hit. Their destruction has led to a huge liquidity gap that still needs to be filled due to the lack of market makers in the space right now.
Bitcoin is still the most liquid market of any other cryptocurrency or “token” to date, but it is still relatively illiquid compared to other capital markets as the entire industry has been crushed over the past few months. Lower market depth and liquidity means that assets are more prone to volatile shocks, as single, relatively large orders can have a greater impact on the market price.
Source: Kaiko Q4 Report
Source: Kaiko Q4 Report
Chained Apathy
As expected in the current environment, we see more market comfort when looking at data on the chain. Although it has continued to increase over time, the number of active addresses – unique addresses that are active as a sender or receiver – has remained fairly stagnant over the past few months. The chart below plots the 14-day moving average of active addresses below the average over the past year. During the previous bull market conditions, we saw the increase in active addresses significantly outpace the current trend.
Moving averages of active bitcoin addresses
Because address data is lacking, looking at Glassnode’s data for active entities shows us the same trend. Overall, bear market reversals are the result of many factors, including an increase in new users and increased activity on the chain.
Moving averages of active bitcoin objects
Bitcoin transfer volume speed
Exhaustion levels of Bitcoin sellers
In our July 11 issue, “When will the bear market end?” We argued that the burden of price-based capitulation had already been felt, while the real pain ahead was in the form of time-based capitulation.
“A look at previous bitcoin bear market cycles shows two distinct phases of surrender:
“The first is a price-driven capitulation through a series of sharp sales and liquidations as the asset falls 70-90% from its previous all-time highs.
“The second stage, and the less talked about stage, is capitulation, which is based on when the market finally begins to find the balance of supply and demand in the deep hole.” — Bitcoin Magazine PRO
We believe that capitulation based on time is where we stand today. While rate pressures could certainly intensify in the short-term – given the macroeconomic headwinds still lingering – the conditions for the short to medium term look set to be a sustained period of volatility with extremely low levels of volatility leaving both traders. and HODLers question when volatility and rate appreciation will return.
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