Bitcoin’s bear market is far from over, but data suggests that investor sentiment is improving

It’s been a year of unprecedented extremes and black swan events for the cryptocurrency market, and now that 2022 is coming to an end, analysts are reflecting on lessons learned and trying to identify trends that could point to a price rally in 2023. .

The collapse of Terra Luna, Three Arrows Capital, and FTX created a credit crunch, a severe drop in capital inflows, and the threat that additional major centralized exchanges could collapse.

Despite the severity of the market downturn, a number of positives emerged. The data shows that long-term hodlers and smaller-cap wallets are actively accumulating during this period of low volatility.

Let’s take a look at the positive and negative data points.

Low liquidity and losses abound

When liquidity entered the market in November 2021, the price of Bitcoin (BTC) reached an all-time high and investors made a profit of $455 billion. Conversely, the $213 billion in realized losses gave investors back 46.8% of the bull market’s peak profits as liquidity tightened amid what many investors hoped were the darkest days of the bear market. The magnitude of profit versus realized losses is similar to the 2018 bear market, when the profit reversal rate was 47.9%.

The annual amount of Bitcoin’s realized profits and losses. Source: glassnode

In the following thread, Cumberland, a major liquidity provider in the crypto sector, highlighted the liquidity challenges facing the market:

According to Cumberland, limited liquidity is the result of large-scale capitulations, leaving insolvent firms with no coin to sell.

CoinSharesAn analysis of weekly stock flows also showed trading volume reached a new two-year low of $677 million during the week. Low trading volume is compounded by cryptocurrencies flowing out of digital assets, further inhibiting potential upside.

The crypto fund flows as a percentage of the AuM fund. Source: CoinShares

Historically, centralized exchanges (CEX) have been a source for fiat onboarding, helping to bring more capital into the cryptocurrency space. Raising new funds has become difficult due to regulatory concerns and CEX fears.

While the data above is very bearish, there are also some data points that could indicate a turnaround in the market.

Minimal improvements are seen in investor sentiment

While traders are hoping for a positive meeting from the Federal Reserve to reverse its short-term downtrend, there are chain data points that show sentiment leading to some marginal advances.

CoinShares reports that even with CEX fears and smaller volumes, inflows are improving:

“Bitcoin has seen a total of $17 million in inflows, with sentiment steadily improving since mid-November, and a total of $108 million inflows since then.”

While these numbers aren’t groundbreaking, Bitcoin’s low volatility presents investors with an opportunity to average dollar value and anticipate a potential trend reversal. Current volatility is at multi-year lows for Bitcoin, reaching levels last seen in October 2020.

Bitcoin made volatility a reality. Source: Glassnode

The record low in volatility is coupled with an all-time high in the cohort of long-term Bitcoin hodlers. Although the price of BTC remains in a downtrend, 72.3% of the entire circulating Bitcoin supply is already in the hands of long-term hodlers.

The total Bitcoin supply held by long-term hodlers. Source: Glassnode

Glassnode notes that the data shows:

“The near-linear uptrend in this metric is a reflection of the heavy coin accumulation that occurred in June and July 2022, immediately following the deleveraging event inspired by 3AC and failed lenders in the space.”

Adding to this perspective, former CEO of BitMEX, Arthur Hayes, believes that Bitcoin fell after a handful of bankruptcies forced irresponsible institutions out of the space.

While the uptick in sentiment and institutional investor flows may not be significant enough to trigger a trend reversal, the positive data points show some signs of recovery.