Bullish underlying on-chain trend and a short-term sceptical outlook for Bitcoin
By: Jan Wuestenfeld
Tags: On Chain Data, Market, Bitcoin, Report, Money

Plus, some notes on how to critically evaluate on-chain data

You might have seen a lot of bullish on-chain tweets coming out over the last week. For example, the amount of HODLed or Lost Coins has been increasing again, or Miners’ Outflow Volume (7d MA) reached a 5-month low of $1,725,244.14 on June 16 2021.

Overall it looks like “smart” money is accumulating. So why in the meantime, Bitcoin is on track to have the worst second quarter over the last 8 years?

I increasingly see people wonder why price does not follow this bullish on-chain news and due to this see some of them starting to question the usefulness of on-chain data. Unfortunately, this happens when these charts are not put into context and just sold as bullish news. Which many of them potentially are, but usually not in the short-term. These charts are handy in determining the underlying trend. To determine short-term moves however most of these are not necessarily that useful. Particularly with Bitcoins relatively high volatility, short-term moves are hard to predict, irrespective of whether you are using on-chain data or any other data source. Here a comment by Checkmate on this topic:

I will try to give a brief explanation on why despite the positive on-chain data and news like El Salvador making Bitcoin legal tender and many more, we haven’t seen Bitcoin breaking out so far.

First, let’s have a look at the Coinbase Exchange Balance chart. At the beginning of the year, a lot of Bitcoin have been leaving Coinbase. Since mid-May, this isn’t happening anymore at the same scale. As big money is or has been buying there, e.g. Michael Saylor or Grayscale, these net flows can be seen as a proxy for institutional or big investor demand. That the balance has been rather flat is signifying a drop in demand from that side.

Another potential proxy is the 7-day fund net inflows of Bitcoin. According to data by ByteTree.com fund net inflows started increasing in mid-October, reaching a peak in January this year and afterwards have started falling and even turned partly negative since mid-Mai. Interesting to note is that inflows started to decrease before Bitcoins recent ATH. Overall demand here is a little bit disappointing.

On the positive side addresses with 1,000–10,000 Bitcoin have started to accumulate again following the price drop as per data from @santimentfeed (Thanks to @cyberspaceape for pointing me to that data source). While indisputably some of the whales are accumulating, demand currently is not that high for Bitcoin to make significant moves again.

Yes, on-chain data is increasingly showing positive signs for the medium to long-term, but don’t be surprised if Bitcoin’s price goes sideways a bit longer. This doesn’t mean that current levels aren’t a good buy opportunity. As Bitcoins moves are rather unpredictable in the short-term, it might not be the smartest strategy to stay on the sidelines if you are in it for the long-term. You don’t want to be out, should the capital sitting on the sidelines decide to rush in (e.g. there are many stable coins relative to Bitcoins supply in the market).

How to critical evaluate on-chain data?

When you see an on-chain chart posted on Twitter or somewhere else, I find the following questions useful to get an idea how relevant it is and what it means in the context of the market Bitcoin is in:

What exactly does this chart show? Is it reliable data? E.g. short-term some on-chain data might not be accurate. Is the chart bullish or bearish? How relevant is it? Does e.g. the effect matter or is the trend long enough? If it is relevant: Will this affect Bitcoin in the short, medium or long-term? Is there other data supporting this chart or what data is speaking against it? (Charts are useful, but usually only in combination with other charts/data)

As always, the motto “Don’t trust! Verify!” applies to any chart posted out there. Even for the carts I am posting.

For more regular updates follow me on Twitter: @JanWues

Disclosure: The above article references an opinion and is for information purposes only. It is not intended to be investment advice.

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