Cryptocurrency News

Bitcoin’s bear market is far from over, but data points to improving investor sentiment

fa37f307 a96e 4782 841a a35c940040d9

2022 was a near-unprecedented year of extremes and black swan events for the crypto market, and now that the year is about to wrap up, analysts are reflecting on the lessons learned and attempting to identify the trends which may point to bullish price action in 2023. 

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

Despite the severity of the market downturn, a few positives have emerged. Data shows long-term hodlers and smaller-sized wallets are actively accumulating during this period of low volatility.

While the market continues to see red, positives are emerging.

Let’s dive in on the positive and negative data points.

Low liquidity and losses abound

When liquidity was flooding into the market in November 2021, BTC price hit an all-time high and investors realized $455 billion in profits. Conversely, as liquidity tightened in what many investors hoped were the darkest days of the bear market, $213 billion in realized losses led to investors giving back 46.8% of the peak bull market profits. The magnitude of the profits versus realized losses is similar to the 2018 bear where the ratio retraction from gains hit 47.9%.

5f1ad4d6 134d 4aad b952 60071a27f7da
Yearly sum of realized Bitcoin profits and losses. Source: glassnode

In the thread below, Cumberland, a major liquidity provider within the crypto sector, highlighted the liquidity challenges facing the market.

According to Cumberland, the limited liquidity is a result of large-scale capitulations, leaving bankrupt firms with no remaining coins to sell.

CoinShares analysis of weekly fund flows also showed CoinShares trading volumes reaching a new 2-year low of $677 million for the week. The low trading volumes are coupled with crypto funds flowing out of digital assets, further hampering potential upside.

ce34edb7 576c 4f7b 89e1 0f386fbc4659
Crypto fund flows as a percentage of fund AuM. Source: CoinShares

Historically, centralized exchanges have been a source for fiat onboarding which helps bring more capital into the crypto asset space. Due to regulatory concerns and CEX fears, bringing in new funds has become challenging.

While the above data is very bearish, the market also has some data points that may point to a reversal.

Minimal improvements in investor sentiment appears

While traders are hoping for a positive Federal Reserve meeting to reverse the short-term bearish trend, there are on-chain data points that show sentiment making some marginal improvements.

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

“Bitcoin saw inflows totalling $17 million, sentiment has been steadily improving since mid- November with inflows since then now totalling $108 million.”

While these numbers are not groundbreaking, Bitcoin’s low volatility offers investors an opportunity to dollar-cost average and await a potential trend reversal. Current volatility is at multi-year lows for Bitcoin (BTC), reaching figures last witnessed in October 2020.

55fe1528 2a5f 4647 83f6 ecc542a4d079
Realized Bitcoin volatility. Source: glassnode

Record lows in volatility is coupled with a new all-time high in long-term Bitcoin hodlers cohort. Even as the price of BTC remains in a downtrend, 72.3% of all circulating Bitcoin supply is now in the hands of long-term hodlers.

85fb0aad a3b4 4d5f a46d 400e03ecdbbd
Total Bitcoin supply held by long-term hodlers. Source: glassnode

Glassnode notes that 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 after the deleveraging event inspired by 3AC and failing lenders in the space.”

Adding to this perspective, former BitMEX CEO Arthur Hayes believes Bitcoin has bottomed after a handful of bankruptcies flushed irresponsible entities from the space.

While the uptick in sentiment and institutional investor inflows are not substantial enough to trigger a trend reversal, the positive data points show some signs of recovery.