Bitcoin Non-Zero Balance Addresses Surge, But Some Key On-chain Metrics Weaken

As Bitcoin’s non-zero balance addresses reach new heights, on-chain metrics reveal the need to be cautious, suggesting a market in transition. A transition state is characterised by choppy market conditions where the price consolidates in a tight range before trending in either direction. Despite an influx of new market entrants, the sustainability of this phenomena of both rapidly growing non-zero balances and tight range-trading for Bitcoin remains uncertain.

According to Glassnode data, the number of Bitcoin wallets holding a non-zero BTC balance has surged to a new record of 45.388 million in the past week.

This is the fastest rate at which the Bitcoin network has added non-zero wallet addresses since early 2021. The increase in the number of wallets with a non-zero balance is a positive development for the Bitcoin price, as it suggests that more investors are entering the Bitcoin market or, put simply, that demand is growing. This metric is often used as a proxy for Bitcoin demand from new and smaller investors.

However, key on-chain metrics, such as Bitcoin Network statistics, suggest potential market weakness. Bitcoin network statistics are metrics that allow us to gauge the increase or decrease in activity for on-chain transactions for the blockchain.

The seven-day moving average of the number of active addresses interacting with the Bitcoin network on a daily basis recently fell to its lowest level since late January

Over the past two weeks, the number of daily transactions on the Bitcoin network has also dropped sharply. The seven-day moving average of this metric recorded 293,058 transactions on March 30th, down by over 13 percent since March 8th.

The number of daily confirmed transactions highlights the value of the Bitcoin network as a way to transfer funds without a third party securely. While this is an inconclusive indicator in terms of bullish or bearish signals, daily activity and transactions decreasing for Bitcoin have always occurred at transitionary phases in the crypto market. They suggest indecision and an unsettling predicament for both bulls and bears.

BTC and Ether Options Open Interest Hit ATH on CME.
As Q1 2023 concludes, open interest and trading activity for BTC and Ether options markets on the CME have continued to accelerate, with both contracts reaching a new all-time high open interest of 15,089 contracts combined on March 27th.
Amid the current banking crisis and a recent rally in Bitcoin prices, the volume of Bitcoin options and the open interest on the Chicago Mercantile Exchange (CME) have both reached unprecedented levels.

Open interest on the CME recorded a 67 percent increase in March since the start of 2023 to $1.3 billion. Similarly, Bitcoin options volumes experienced a significant increase, surging to $1.67 billion in March from $832 million in February. Notably, the previous all-time high for Bitcoin options volume was $1.1 billion in January.

Total Bitcoin options volume across all exchanges is also close to its all-time high at $32.17 billion for the month of March.

Bitcoin options are a popular choice for investors who wish to hedge against or speculate on price fluctuations. As Bitcoin options are considered to be a more sophisticated asset class, they are commonly traded by professional trading desks and institutional investors, which make up a significant proportion of the overall trading volumes in the options market.

The recent surge in Bitcoin options volumes may indicate that institutional trading activity is on the rise. Another indicator of increased institutional involvement is the recent spike in open interest for Bitcoin options.

BTC Correlation With The S&P 500 Is On Track To Be Restored

Investors have been speculating if Bitcoin is more prone to macro headwinds now that its correlation with the S&P 500 index and the NASDAQ composite is increasing.
Bitcoin’s correlation metric with the S&P 500 fell below zero earlier in March.

Any correlation below zero means that it is negatively correlated with Bitcoin. So an upward move by the S&P500 would see a downward move in Bitcoin.

In recent weeks however, with the BTC price remaining relatively stable above $27,000 and $28,000 levels, the Pearson correlation metric has risen to 0.61 for the NASDAQ composite and 0.12 for the S&P 500, indicating more positive correlation with these equity indices.

Despite concerns about Bitcoin’s vulnerability to macroeconomic headwinds, it ended the quarter with its best performance since Q1 2021
In March, Bitcoin has also benefited from reduced liquidity, which allows for upward price movements to be more pronounced. According to analysts at Kaiko, liquidity has hit a 10-month low, with market makers losing access to USD payment rails due to the ongoing regional banking crisis in the US.

Another factor contributing to the upward trajectory of Bitcoin in March has been the treatment of the asset, by some market participants, as a safe haven in times of banking crises. As stablecoins like USDC falter, Bitcoin has seen significant inflows, causing its dominance (i.e., the ratio of Bitcoin’s market capitalisation to that of the entire crypto market) to reach its highest level since June of last year.

Low Liquidity in Crypto Market Raises Concerns as Wider Market Impact Looms

As liquidity in the cryptocurrency market tightens, concerns arise regarding its potential impact on the broader financial landscape. We urge caution as low liquidity could exacerbate price volatility and hinder market stability.

The market depth for Bitcoin has reached concerning levels. Current liquidity in the Bitcoin market has reached a 10-month low, even lower than after the collapse of FTX.

At the time of the FTX/Alameda downfall, there was a large drop in liquidity which was dubbed “the Alameda Gap” due to the absence of one of the industry’s most prominent market makers. That gap is still yet to be filled, and with the recent banking issues, liquidity has taken another hit.

The spread on exchanges, which is the difference between the best bid and the best ask of popular crypto assets, is another way to gauge market liquidity. The USD versus USDt pairs also indicate that the recent banking issues have resulted in more volatile USD spreads, which went from two basis points (bps) to four bps following the shut down of Silvergate.

Similarly, as we saw with market depth, the USD-linked exchanges and USD pairs experienced declining liquidity as the logistical concerns surrounding the shutdown of fiat payment rails became evident. The longer it takes to establish a viable alternative to the Silvergate Exchange Network or Signet networks, the more volatility we can expect to see in spreads and depth as market makers confront new operational challenges and withdraw liquidity from exchanges until they can obtain more clarity.

Apart from the banking issues, Binance also announced that it would end the zero-fee program for BTC trading pairs. The impact of this development on market liquidity cannot be underestimated; The zero-fee program enabled Binance to gain over 20 percent in market share since July, with over 61 percent of volumes coming from zero-fee pairs. The adjustment in spreads was evident as the previously volatile BTC spreads on Binance, due to a lack of taker fee, decreased substantially once a fee was reintroduced, bringing BTC spreads lower than ETH spreads.

Tighter spreads reduce the profitability of market makers to provide liquidity on a given pair. With the reintroduction of a taker fee, investors are disinclined to pay a higher spread. This has resulted in a significant depletion of liquidity from the BTC-USDt pair on Binance, with market makers seeking more profitable markets on other exchanges and pairs. Overnight, the liquidity of the BTC-USDt pair on Binance plummeted by 70 percent.
As a result of this low liquidity, volatility metrics are starting to pick up. The Crypto Volatility Index (CVI) has reached its highest level since the second week of January 2023.

In conclusion, this reiterates our lower timeframe stance that the market is indecisive right now.

Volatility in either direction is probable despite the strong uptrend in the crypto market since the start of 2023.

However, most metrics caution against over-leveraging or a heightened risk appetite during a transition period in the crypto market. This does not imply that the current bullish trend is reversing yet, or that our long term outlook of being at the latter stages of a bear market is invalidated.

The ratio between the open interest of Ether put and call options surged to 0.48, its highest level since May 2022.

This increase in the put-call ratio could imply an accumulation of bearish wagers in the market in anticipation of a forthcoming series of significant upgrades to the Ethereum network – known as Shapella – scheduled to take place on April 12th. The upgrades will enable the withdrawal of staked Ether tokens, among other enhancements.When the ratio of open interest in put and call options is below one, it indicates that investors are more inclined towards owning call options, which are a wager on the price rising, as opposed to put options, which are a bet on the price falling.Although the ratio still remains significantly lower than one, indicating that investors continue to overwhelmingly favour bullish option bets, the recent increase in the ratio implies that these bullish bets have significantly dwindled in recent days.

The Put/Call open interest ratio for Ether has witnessed a rapid surge from around 0.37 at the end of March, further suggesting a potential shift in market sentiment.While this may seem like a surge in bearish sentiment, while analysing the Ethereum options open interest, we believe that this increase in the put/call ratio might just be a case of large call option positions closing.

Aggregated Open Interest for Ether options fell to a low of $4.63 billion in April from $7.54 billion at the end of March. So the fall in call exposure for market participants is likely a delayed reaction to a similar trend in the Bitcoin options market whose put/call ratio reached a high of 0.55 in mid-March.It is also common for the options open interest to collapse at the end of a quarter. The trend in these statistics over the next two weeks should be telling regarding the options market sentiment and outlook for the second quarter of 2023.Bitcoin Flows Turn Negative After Seven WeeksOn-chain data suggests that major cryptocurrency exchanges have observed net negative BTC flows into their Bitcoin wallets over the past few days. Since mid-February, flows into exchange wallets had largely been positive, and this reversal could potentially signal an improvement in long-term market sentiment towards Bitcoin.

Investors and traders typically transfer their Bitcoin to exchange wallets when they wish to sell, resulting in net inflows to exchanges. Conversely, they move their BTC off of exchanges when they intend to hold onto it, leading to net outflows. The recent decrease in net inflows, therefore, could indicate a shift towards a greater preference for holding Bitcoin as opposed to selling it.Under normal circumstances, net exchange flows have a weak correlation with price performance, but they become more important when the market is in a transition phase, as we are currently observing and as discussed in last week’s Bitfinex Alpha. As per this data, the price is expected to have upward pressure from the consolidation range of $26500 to $28500 that we are currently in.When we correlate this data with the whale wallet inflows metric, we clearly observe how whales are still moving Bitcoin into cold storage (albeit at a lower rate than sub $20,000 prices).We see that over 118,100 BTC have been moved into whale wallets over the past week.

Bubbles in the context of Bitcoin typically represent the prices at which large-scale investors, or “whales,” have amassed Bitcoin that they currently hold in their wallets. The size of the bubble corresponds to the amount of Bitcoin that was accumulated from the day the bubble was formed.These whale bubbles tend to function as both support and resistance levels for Bitcoin’s price movements. Typically, larger whale bubbles are more significant as they represent greater amounts of Bitcoin accumulated.

A “whale” wallet is a wallet that holds more than 10,000 BTC.On-chain Bitcoin Support LevelsBitcoin’s short-term realised holder (STH) realised price is currently at around $22,500. The long-term holder (LTH) realised price is around $19,000. This is bullish and healthy for the Bitcoin market.The STH realised price for BTC often acts as support during bull phases.

This is because short-term holders tend to defend their cost-basis with buy orders, which helps prevent the price from dropping below a certain level.As a result, it is reasonable to anticipate that Bitcoin’s price will not fall below around $22,500, as long as these short-term holders continue to defend their cost-basis.However, it’s important to note that this support level is not fixed and can change over time. As more purchases are made at the current price, the cost-basis of short-term holders increases, causing the support level to rise as well.The LTH realised price is currently $3500 below the STH realised price. This is healthy and common for bull markets, as HODLers and whales usually accumulate BTC during the bear market and are more patient than STHs. STH realised price increasing and providing support to the price while new investors are entering the market is a very positive sign for Bitcoin’s price sustaining above the mid $25,000s.