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As we head into 2023, we want to highlight the latest state of bitcoin volume and volatility after a recent wave of capitulation. The last time we played these dynamics was on “Bitcoin’s ghost town” in October, where we highlighted that extremely low volume and a period of low volatility in the price of bitcoin, GBTC and the options market was a worrying sign for the next leg down. This unfolded in early November.
Fast forward and the trends of declining volume and low volatility are back once again. While this could be indicative of another lower leg in the market, it is more likely indicative of a complacent and decimated market that few participants want to touch.
Even during the November 2021 capitulation period, there was a historically low period of volatility. Sometimes the biggest pain in the market can be felt by having to wait for a clear change in trends. The bitcoin price is providing that pain, as we have yet to see the kind of burst in market volatility that has defined market pivots and major directional moves in the past.
While there are many different ways to define, classify, and estimate the volume of bitcoin in the market, they all show the same thing: September and November 2021 were the peak months of action. Since then, volume in both the spot and perpetual futures markets has been in a steady decline.
Bitcoin volume in the spot and perpetual futures markets
Overall market depth and liquidity have also been hit hard following the collapse of FTX and Alameda. Their destruction has led to a large liquidity hole, which has yet to be filled due to the lack of market makers currently in the space.
By far, bitcoin remains the most liquid market of any other cryptocurrency or “token,” but it’s still relatively illiquid compared to other capital markets as the entire industry has been crushed in recent months. Less market depth and liquidity means assets are prone to more volatile shocks, as relatively large single orders can have a larger impact on market price.
Font: Kaiko Q4 Report
Font: Kaiko Q4 Report
chain apathy
Unsurprisingly in the current environment, we are also seeing increased market complacency when looking at on-chain data. Although it continues to increase over time, the number of active addresses (unique addresses active as a sender or receiver) has remained fairly stagnant in recent months. The chart below highlights the 14-day moving average of active addresses falling below the moving average over the past year. In prior bull market conditions, we have seen active address growth outpace the existing trend quite significantly.
Moving averages of active bitcoin addresses
Since address data has its flaws, looking at Glassnode’s data for active entities shows us the same trend. In general, the reversal of bear markets is the result of many factors, including the growth of new users and an increase in on-chain activity.
Moving averages of active bitcoin entities
Bitcoin transfer volume boost
Bitcoin Seller Exhaustion Levels
In our July 11 statement “When will the bear market end?”, we argued that the brunt of price-based capitulation had already been felt, while the real pain ahead was in the form of a time-based capitulation.
“A look at previous bitcoin bear market cycles shows two distinct phases of capitulation:
“The first is a price-based capitulation, through a series of strong sell-offs and liquidations, as the asset shrinks 70-90% below previous all-time high levels.
“The second phase, and the one that is talked about much less often, is time-based capitulation, where the market finally begins to find a supply-demand balance in a deep valley.” — Bitcoin PRO Magazine
We believe that time-based capitulation is where we are today. While exchange rate pressures may certainly intensify in the near term, given the ongoing macroeconomic difficulties, the conditions that are likely to persist in the short to medium term appear to be a sustained cutoff period with extremely low levels of volatility leaving both traders and HODLers questioning when volatility and exchange rate appreciation will return.
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