- Bitcoin's price goes through accumulation phases, hype cycles, bubbles, and crashes.
- Factors such as the current Bitcoin balance on exchanges can be used to track the behavior of market players.
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It’s been a bullish start to the year for. Beginning the year at $28,800, it has doubled in value, hitting a record high of $58,300 late last month. Since then, its has corrected, rebounded, and is now threatening to break another all-time high.
But make no mistake, the crypto market doesn’t just always go up. It goes through accumulation phases and hype cycles, bubbles and crashes.
As markets go, it’s an exceptionally volatile and risky one. So to get a better understanding, we spoke to Ki Young Ju, CEO of crypto data provider CryptoQuant, who discussed five crucial ways to understand where the market’s at now—and where it’s heading.
1.Institutional investors are leading this growth
The key difference between this current market growth and Bitcoin’s surge at the end of 2017 was that it was led by huge retail demand then, according to Ju. This time around, it’s large companies and investors that are accumulating even greater amounts of Bitcoin, while the retail crowd—made up of everyday, casual investors—has yet to show up.
The way to see this in the charts is by looking at the current Bitcoin balance on exchanges. At the end of 2017, the Bitcoin balance on exchanges was at its all-time high (at the time) as retail investors flooded the market and kept their coins on exchanges. But after peaking in March 2020, this number has been steadily declining.
“I guess we are still in a sell-side liquidity crunch. There’s no Bitcoins to sell in exchanges,” Ju told Decrypt.
The idea here is that Bitcoin is being sucked away from exchanges into long-term storage, he said. This makes sense when you consider companies like Tesla, which has bought $1.5 billion worth of Bitcoin—the company won’t want to keep the Bitcoin on an exchange, it will want its crypto put into cold storage (a much safer way of storing cryptocurrency, where the crypto wallet is not connected to the Internet).
2.Whale watching can help confirm this
So, given that market players are so important to this current cycle, how does CryptoQuant track their behavior? One key metric here, Ju points out, is the seven-day moving average for Bitcoin inflows to all exchanges. This shows the average size of Bitcoin transactions sent to exchanges. If the average rises, that means whales are depositing large sums of Bitcoin, likely in preparation for a sale.
Ju explained that whales tend to realize their profits when retail investors are more active on exchanges, and this can be during times of extreme fear. As a result, this metric can often show when the market has bottomed out and indicate the presence of retail investors.
As you can see in the graph, the red line tends to spike when there are large drops or when the market price hits rock bottom. As such, Ju suggested that right now the market is dominated by whales and there are few retail investors. This implies that the market is dissimilar from the end of 2017, when retail investors flooded in, and that it’s not being led by retail investors—or at least, they haven’t come back yet.
3.Keeping an eye on Coinbase Pro
With a largely institutional-led rally, it’s important to watch the larger purchases taking place. A lot of big investors use Coinbase’s brokerage platform Coinbase Prime—where, Ju speculates, trades are executed through its professional trading platform. Therefore, by watching inflows and outflows to Coinbase Pro, it’s possible to see when larger investors are buying and selling.
The core assumption for inflows and outflows is that when exchanges see larger inflows, that suggests traders are moving their coins to the exchange to sell them. And vice versa, when exchanges see larger outflows, that could be investors putting their newly bought Bitcoin into long-term storage. In Coinbase’s case, Bitcoin outflows likely go tocustody wallets for over-the-counter trades (large trades between institutions), according to Ju.
“The latest significant outflow happened in the price range $48,000-$50,000. So I think those price ranges are the accumulation range,” he said.
Ju pointed to significant Coinbase Pro outflows ahead of the announcement on February 8 that Tesla had bought $1.5 billion in Bitcoin. At the time, he said it was likely that Tesla was behind these outflows. This implies that keeping an eye on Coinbase Pro outflows can indicate when bigger players are buying.
Another indicator of large buying activity on Coinbase Pro can be the so-called “Coinbase premium”. This is the difference in value between the price of Bitcoin on Coinbase (both its main and its Pro exchanges) and crypto exchange Binance. As Bitcoin’s price rose earlier this year, the Coinbase premium rose, a bullish sign.
4.Observing stablecoin holdings to time the market
There are two types of cryptocurrencies: volatile coins like Bitcoin, andsuch as , which are coins pegged to fiat currencies. The former are used for trading (since they can go up or down in value) while the latter are largely used for storing value without such heavy volatility.
So another key metric to watch, according to the CryptoQuant CEO, is the ratio between Bitcoin and stablecoins held on crypto exchanges. Specifically, the ratio is the exchange’s Bitcoin holdings divided by the stablecoin holdings.
When the ratio rises—and there’s more Bitcoin in the exchange compared to stablecoins—it indicates selling pressure is high as there’s more to offload. When it falls, that suggests a lot of money is waiting on the sidelines, held in stablecoins, and is ready to buy.
When Bitcoin started rising toward the end of last year, the ratio started rising as traders swapped their stablecoins for Bitcoin. But it has since fallen, as more stablecoins have been created and sent to exchanges.
Ju noted, “This indicates buying power is still prevailing.”
5.Bitcoin miners impacting the market
Bitcoin miners are rewarded with around 1,000 BTC in mining rewards and transaction fees per day, worth around $55 million. To pay for the cost of mining, they will usually offload some of their newly mined coins onto the market, and may sell the rest to turn a profit. As a result, miners do have some impact on the Bitcoin market.
Ju pointed to one particular miner who was affiliated with Bitcoin mining pool F2Pool, meaning he had previously participated in its mining pool but doesn’t belong to the company. He said that this whale impacted the price of Bitcoin when it was around $42,000.
However, the impact of Bitcoin miners on the price of Bitcoin has weakened recently, according to Ju. While they have been sending large amounts of Bitcoin to exchanges, the price hasn’t moved that much—at least particularly not with a downward trajectory. Despite this, large miners in particular still have the ability to move the market and are worth keeping a close eye on.
The Bitcoin market might seem opaque but these five ways of looking at it might make it a little more illuminated.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.