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 shutdown 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.
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