Author: UkuriaOC, CryptoVizArt, Glassnode; Translated by: Tao Zhu, Golden Finance
summary
The demand side of the market has declined significantly since the March ATH, with investor attention waning as the market trades sideways in this price range.
On the supply side, available tokens are also shrinking, with multiple “active supply” metrics compressed to relatively low levels.
Historically, tightness on Bitcoin’s supply side has been a precursor to heightened volatility.
It typically describes a balance reached between new demand and the wealth held by existing holders, but this balance tends not to last long.
Weakened demand
The rate of new capital inflows has continued to decline since the $73,000 ATH set in March 2024. Due to the peer-to-peer nature of the Bitcoin network, buyers and sellers are matched on a 1-1 basis. Therefore, measuring realized profits or realized losses can serve as a proxy for the size of new capital entering or exiting the network.
Using this framework, we can see that the Bitcoin market is currently seeing around $0.73B in new capital flowing into the network each day, which is not insignificant, but significantly lower than the $2.97B peak set in March.
On October 8, an interesting and significant spike in realized profits can be seen in the raw, unfiltered variant of this indicator. However, the same spike didn't occur when looking at the entity-tweaked variant pioneered by Glassnode.
The profit surge was due to BitGo migrating its on-chain ownership structure, which resulted in a large number of internal transfers within the WBTC cluster.
Glassnode’s proprietary clustering heuristics successfully identified such uneconomical transactions and correctly discounted them from the cleaned dataset. This provides a concrete view of the benefits of entity-adjusted filtering of on-chain transaction data.
Our point-in-time variant of WBTC balances shows a strictly append-only metric where the balance history is immutable, capturing the state of the cluster at the same time as the data point is recorded.
From this perspective, we can observe the initial drop in WBTC balance when it occurred and the subsequent recovery to previous levels because Glassnode’s automatic clustering algorithm correctly reclassified the transfer as internal.
Returning to our demand-side assessment, we can use the binary CDD metric as another indicator of demand-side pressure. This metric tracks the “hold time” spend in the market, tracking when holders of old supply trade in large amounts (brought into balance by new buyers).
We can now see that the daily destruction is relatively small, which suggests that long-term investors are still relatively inactive within the current price range.
Our measures of demand-side strength suggest that investor attention and new demand inflows have been relatively muted in this range, and no significant second wave has occurred so far this year.
Tight supply
After determining that there is a certain degree of weakness on the demand side, it is prudent to assess its opposing force, the supply side. Here, we consider “supply” to be the number of tokens that market participants are willing to consume and trade.
The chart below outlines several measures of “available supply,” including short-term holders and highly liquid supply. We compare these to measures of “kept or stored supply,” such as long-term holders or custodial supply.
We can see that our “Stored Supply” metric has seen a multi-month increase, highlighting the preference of existing holders for long-term holding. This has led to a subsequent decrease in the “Active Supply” metric, indicating that there are fewer tokens that are easily traded within the current price range.
We can also increase the granularity of the “Available Supply” measure. We can evaluate a “Warm Supply” cohort, which evaluates supply using the “Coin Age” heuristic and explicitly focuses on tokens that have moved within the last month.
In our long vs short holder classification study, we quantified that the probability of spending is strongly correlated with how long a token is held. Thus, “warm supply” captures the subset of valid tokens that we can reasonably expect to change hands soon.
We can also think of futures open interest and volume as a form of “supply exposure” in derivatives markets where we expect to be actively traded.
Taken together, this positive supply measure has effectively halved since its ATH in March. This suggests that low on-chain volumes and reduced futures market activity highlight a net decline in investor speculation and attention.
The Vitality Indicator is an elegant tool for assessing the historical balance between coin days destroyed (spending) and coin days created (HODLing). We noticed a large increase in spending activity between July and August, which included the redistribution of Mt Gox tokens to creditors.
Activity indicators are currently on a sustained downward trend, highlighting market participants’ strong preference to hold supply for the long term, which further limits the supply measures available to us.
Investors in a continuous cycle
We have now identified falling demand and a tightening supply. We can support this assessment by examining the proportion of network wealth held by these two groups. We consider the behavior of these groups under the following framework.
Short-term indicators [<1 month] (red) Realized capital or wealth traded in the last 30 days. This group is closely related to demand and includes new investors who are putting new capital into the market.
Long-term indicator [1-2 years] (blue) This portion of supply peaked during the bear market bottom formation phase. This group represents long-term and price-insensitive investors who accumulated and held during the bear market.
Comparing buy-side pressure directly to the wealth of holders' conviction, we note an increase in new demand but a decline. New demand is much higher than during the 2022 bear market, but much lower than the heights reached in March.
We have not yet seen the sharp and sustained surge in new demand that typically accompanies a cycle peak. Likewise, we have not yet begun to experience the rise in holding pressure that has historically occurred in deep bear markets.
This puts the current market in a relatively unique period of equilibrium, almost halfway between the two cycle extremes.
We can further examine this wealth balance through the realized HODL ratio. The above midpoint is also reflected here, with elevated RHODL indicating the presence of new investors but not yet reaching a peak consistent with demand saturation.
New investors’ confidence in market trends also remained in the neutral range, highlighting that new buyers’ spending is not much different from the original acquisition price.
Despite mildly negative sentiment from recent turbulent market conditions, confidence levels among new investors are significantly higher than in the 2019-2020 and 2021 markets.
This robustness is further highlighted by the lack of unrealized losses among new investors, underscoring that we have not seen a significant decline in investor profitability. This suggests that the financial stress and fear experienced by Bitcoin holders is limited, reducing the likelihood of a deep bear market at this point.
Summarize
The significant divergence between the forces of supply and demand continues to widen. Since the ATH in March, the market demand side has dropped significantly, while multiple indicators of "active supply" continue to compress and tighten. In terms of historical precedent, previous examples of severe supply constraints on Bitcoin were harbingers of increased volatility.
