Investor Turning Point

Despite continued regulatory pressure on digital assets exerted by the US, Bitcoin prices still rallied above $25k, and Inscriptions breached 100k total. Meanwhile, investor behavior on-chain appears to be reaching a turning point, hinting at a new cycle.

Investor Turning Point

Bitcoin has seen another strong week of price performance, recovering the entirety of last week's correction, and reaching above $25.0k, the highest price since June 2022. This market strength comes despite persistent pressure coming out of the US regulatory environment related to digital assets.

In this week's edition, we will explore the cooling down of the initial wave of Bitcoin Inscriptions, as the total number of files encoded to the blockchain passes 100k. We will also assess the behavior of Bitcoin Long and Short-Term Holders using a suite of new on-chain tools we released last week, merging on-chain cohorts, realized profit/loss, and exchanges.

🪟 View all charts covered in this report in The Week On-chain Dashboard.

🔔 Alert Ideas presented in this edition can be set within Glassnode Studio.

The Initial Inscription Wave

February 2023 will likely be remembered for the emergence of Ordinals and Inscriptions on Bitcoin, introducing a new way of storing data and thus creating NFTs on the largest, oldest, and most secure blockchain. What is quite interesting about Inscriptions is that they generate on-chain activity, however, with a relatively light coin transfer volume footprint.

The chart below shows that the total number of UTXOs in the set reached a new ATH of 137M. The UTXO count increased at a rate of 117k per month last week, the highest since Dec 2022.

Live Advanced Chart

Taproot usage reached an all-time high, with 8.121% of all spent outputs last week using the newest Bitcoin script-type. As the total number of Inscriptions crossed 100k, we have seen a cooling down of this initial wave of excitement. Taproot script usage has fallen by 65% since this peak, down to 2.872% of spent outputs spent.

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The average block size has also seen a dramatic change, rising from a typical pre-Inscription ceiling of 1.5MB, to between 2.0 and 2.5MB today. This uplift in the average block size is primarily a result of Inscriptions fitting more data within the 'Data Discounted' witness portion of the transaction.

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For a full analysis of Ordinals, Inscriptions, and the impact on the Bitcoin blockchain, please refer to our latest research piece.

Ordinal Theory and the Rise of Inscriptions

Light on Coin Volume

As noted above, Inscriptions do not require a large volume of BTC to be associated with them, and in fact, most are utilizing around 10k sats (0.00010000 BTC) assigned to the inscription. However, whilst Inscriptions are taking off, so too is Bitcoins price action, and thus the classic market analysis of investor behavior is also needed.

Interestingly, despite an elevation in price action, the volume of transferred coin value remains extremely low. The chart below shows less than 115k BTC/day in total transfer volume (including the spending of the same coin) is attributed to the coins younger than 6-months old. Such low values have only been observed a handful of times throughout history.

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The total supply younger than 6-months has not increased significantly year-to-date, hovering around 4.298M BTC. Since this is a binary system (older/younger than 6m), this broadly indicates that coins older than 6-months are, in the aggregate, extremely dormant at present.

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This can be confirmed by looking at the Old Supply, coins remained dormant for at least 6-months, which is very close to a new ATH of 15M BTC. We have also overlaid the total supply older than 1yr, which did cross to an ATH this week, breaking above 12.913M BTC.

Despite regulatory pressure, and a 50% YTD rally, many old hands are sitting on their hands.

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We can see that older coins are similarly dormant, with less than 4,770 BTC on the move per day, this week. The chart below highlights the past instances with old coin volumes being this low.

Of interest is that since 2016, these instances have been during bear markets and toward the lows of a significant sell-off or correction. This provides a gauge of periods where older hands are unlikely to spend, potentially signalling a perception that the market is oversold, at least in the near term.

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In a newly released Entity-Adjusted variant of the SVAB metric, we can see that just 4.123% of all spent volume is older than 6-months. Key periods where older hands have displayed a similarly subdued tendency for spending are during bear market declines throughout 2018 to 2022.

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Visualizing Investor Behavior

On-chain tools are exceptionally powerful for visualizing and modelling investor behavior patterns, both from the lens of holding time (lifespan), and realized profit/loss.

For the Short-Term Holder Cohort (STHs), we can inspect their dominant behavior patterns throughout market cycles using our newly released variant of Dormancy. STH Dormancy reflects the average age (in days) of coins spent by the STH cohort.

  • Lower values indicate STHs are spending coins they acquired very recently, and are not HODLing for long periods of time. This is typically observed in bear markets, as frustration and price depreciation motivate quick sales.
  • Higher values indicate STHs are spending coins with a more extended holding period. This is typically seen in bullish impulses, as expectations of gains encourage investors to hold on a little longer and ride the market swing.

A sharp upwards move in STH-Dormancy suggests this latter condition is in effect, as buyers of the lows take a little off the table.

🔔 Alert Idea: STH-Dormancy (30D-SMA) breaking below 17-days is a notable decrease in the average age of spent coins, potentially signalling a degree of panic.
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We can see this profit-taking behavior in several SOPR variants, which find a degree of support on the neutral value of 1.0. An aSOPR retest of 1.0 during a bullish impulse indicates that profit-taking is slowing (which would otherwise be upwards pressure on the metric), and holders of coins at a loss are also slowing their spending (otherwise downward pressure).

Overall, this signals a reduction in sell-side pressure and a potential return of the 'buy-the-dip' mentality. A convincing SOPR retest and bounce from 1.0, especially on longer-term moving averages (14D or 30D, for example), is often a signal of a shifting market regime.

🎓 SOPR is a great example of an 'all-weather' on-chain metric, which can be used in any market conditions. A detailed write-up is available in Glassnode Academy.
Live Advanced Chart

We recently released a suite of powerful new metrics designed for our Professional members (full list here), and enabling analysis of the Bitcoin market utilizing three powerful concepts in combination:

  • Cohort Analysis (Long- and Short-Term Holders).
  • Realized Profit and Loss (for tracking sentiment and capital flows).
  • Exchanges and Entity-Adjustment (providing our cleanest signal of economic flows).

The chart below shows the relative share of realized profit and loss locked in by the STH cohort, filtered specifically for coins sent to exchanges to best simulate sell-side forces. We can see a decay pattern in relative STH losses towards market cycle lows, as last-gasp speculators are flushed out, and coins transfer to bottom-building buyers, now with a lower cost basis.

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As the market recovers from extended bear markets 🟦, these new STH buyers return to profit with gusto as the market rallies well above what is typically a multi-month bottom formation range. The STH cohort is thus almost entirely in profit, resulting in the majority of STH spending being profitable 🔴.

We have seen this explosion in STH profit dominance, indicative of a large proportion of the coin supply having been accumulated below the current price.

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On an absolute coin volume basis, STHs still do not appear particularly motivated to send coins to exchanges just yet. Total STH-Exchange volume is oscillating between 15k and 21k BTC/day, a similar range it has been in since June 2021.

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Lastly, we turn to the Long-Term Holder (LTH) cohort, who dominate losses locked in by investors during the darkest periods of bear markets. The chart below shows the gradual increase in LTH loss dominance, as top buyers of the prior cycle are progressively shaken from their position until the final washout. This final capitulation typically peaks near the final bottom of a macro bearish trend and right as the cycle starts to turn around.

Of all realized value on coins sent to exchanges, LTHs in loss have declined dramatically from a cycle peak of 58% in mid-Jan, to 21% today. Similar sharp declines in the metric can be seen in each prior cycle as LTHs find the necessary hope to HODL, once again.

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Summary and Conclusions

The initial wave of Inscriptions on Bitcoin has crossed a total of 100k files immutably stored on the Bitcoin blockchain, highlighting a brand new and unexpected source of demand for blockspace. Inscriptions are unique in that they do not require large volumes of BTC to be transferred, despite their value for discerning owners and buyers.

Despite net growth in on-chain activity, and an ATH in total UTXOs, transfer volumes are remarkably subdued, both for Long and Short-Term Holders. Filtering only for coins sent to exchanges, we can also see that several indicators point to a turning of the cycle and a marked shift in investor behavior patterns.

Disclaimer: This report does not provide any investment advice. All data is provided for information and educational purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

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