Bitcoin’s series of bearish swings have clearly instilled a wave of pessimism bordering on outright fear among market participants. After losing nearly 28% of its value in November this year, the flagship cryptocurrency appears set to enter a full bear cycle. Interestingly, on-chain data was recently released. This data explores several key indicators to illustrate the liquidity environment driving Bitcoin prices and provides an implicit indication of what we can realistically expect in the near term.
Available liquidity tapers as long-term demand increases
In a post on CryptoQuant’s QuickTake, analytics platform Arab Chain highlights the growing gap between seasoned investors in Bitcoin and ‘smart money’ market participants.
DeFi companies typically begin their reports with a reading from their aggregate sell-side liquidity metric, which tracks the amount of Bitcoin available for sale on the market based on the behavior of parties acting as liquidity sources. Per Arab Chain, this measure recently dropped to around 975,000 BTC, indicating a decline in the amount of coins available for sale by active market participants.
At the same time, the Accumulator Address Demand indicator showed a surge above 355,000 Bitcoin. For context, this indicator shows how much sustained buying pressure is coming from reputable Bitcoin accumulation wallets over the long term. The surge above 355,000 reflects the growing appetite for accumulation among holders of the top cryptocurrency. In general, positive accumulation behavior exhibited by market participants helps predict long-term sustainable price action.
On the other hand, Arab Chain also mentions the confluence of two indicators: liquid inventory ratio and ETF demand. The first measure of how long existing liquidity can sustain market activity comes in at 2.74 months, indicating that active supply is being replenished slowly. The latter indicator, which represents net outflows from US spot ETFs, fell to -51,000 BTC, indicating continued net outflows. Taken together, both indicators point to weakening institutional demand, which stands in sharp contrast to the increased on-chain accumulation seen elsewhere.
In particular, Binance data shows that the price-to-net buy correlation has decreased noticeably. At the time of the DeFi company’s report, when Bitcoin’s price was around $83,000, the correlation fell to 0.72. A weakening correlation is usually a sign of declining inflows relative to price action, meaning market movements are based solely on increasingly fragile liquidity. Historical data points out that even the slightest downward pressure in such situations can trigger an exaggerated price collapse.
Bitcoin Price Overview
As of this writing, Bitcoin is worth about $85,100 and has lost about 1.81% over the past day.
Featured image from iStock, chart from Tradingview
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