NEWSLETTER
Bitcoin (BTC) had a rough year throughout 2022.
But new on-chain and futures market data shows positive signs that the leading cryptocurrency by market capitalization has started to recover.
After a series of short selloffs, the futures market is pointing towards a renewed equilibrium. According to Glassnode data, short liquidations have driven speculators out of the unhealthy market, on-chain and exchange data now point to an improvement in spot market and net exchange flows.
A large group of previously loss-making investors are now back in the category that Glassnode analysts label “unrealized gains.”
Short-term mass liquidations lay the foundation for new investors to thrive
Futures data typically maintains a balance between longs and shorts. As the market moves, investors tend to upgrade their futures to avoid selling off. By contrast, in mid-January, investors were caught off guard, resulting in an all-time high for short liquidations of 85%.
The short selloff dominance has helped fuel Bitcoin’s current rally. In January 2023, more than $495 million in short futures were settled. Liquidated shorts create automatic Bitcoin purchases, driving up the price of BTC. The year-to-date liquidations have three big waves that peaked at $165 million in one liquidation day.
After the historical number of short liquidations, the futures market is trending towards longs. On January 30, 51.46% of open interest is long rather than short.
The selling off of the shorts not only helped the Bitcoin price rally, but also apparently suggests a return of positive sentiment in the BTC market.
Glassnode researchers said:
“In both perpetual swaps and calendar futures, the cash and carry basis is now back in positive territory, with annualized returns of 7.3% and 3.3%, respectively. This comes after much of November and December saw pullbacks across all futures markets, and suggests a return of positive sentiment, and perhaps with a side of speculation.”
Centralized net exchange flows reach equilibrium
In March 2020, centralized exchange (CEX) Bitcoin balances hit an all-time high. Since the all-time high was reached, Bitcoin has exited spot exchanges. Approximately 2.25 million BTC is currently held on 21 major exchanges, which is a multi-year low. 11.7% of the total Bitcoin supply held on centralized exchanges was last seen in February 2018.
Typically, throughout Bitcoin’s history, trade ins and outs are similar, creating an even balance. The balance was disrupted in November 2022 when net Bitcoin outflows from exchanges reached $200 million to $300 million per day. The big outflow during this period was historic, reaching the negative 200,000 Bitcoin left by exchanges for the month.
As Bitcoin began to gain bullish momentum in January 2023, the inflow and outflow of the centralized exchange normalized. Net flows are now closer to neutral and show a reduction in the high outflow trend.
Multiple cohorts of Bitcoin investors return to the “unrealized profit” zone
Bitcoin’s in-and-out movement helps provide analysts with an estimate of BTC’s acquisition price from investors. During the 2022 bear market, only pre-2017 investors saw potential profits. Investors who came to Bitcoin after 2018 suffered unrealized losses.
According to Glassnode researchers,
“Through the 2022 downtrend, only those investors from 2017 and earlier avoided hitting a net unrealized loss, and the class of 2018+ saw their cost basis wiped out by the red FTX candle. However, the current rally has pushed the class of 2019 ($21.8k) and before to an unrealized gain.”
The fact that a growing number of investor cohorts have returned to profitability is a good sign, especially after Bitcoin witnessed record losses in December 2022.
Two of the largest investor groups, those who bought BTC on Coinbase and Binance, have an average BTC acquisition price of $21,000. As Bitcoin continues to try to reach $24,000, any upcoming corrections caused by macro factors may reduce unrealized gains in these groups.
Positive signs of Bitcoin price recovery can be seen in on-chain, spot exchange, and futures data. The futures market is signaling a renewed equilibrium after a record number of short liquidations.
The market is now showing improved trade net flows and spot market activity suggests that investors are slowly returning to the crypto market.
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
