A Volatile Road to Nowhere

Executive Summary

• Volatility, volume, and realized value are at multi-year lows, suggesting liquidity is increasingly thin, and investor apathy is now firmly in play.
• The undercurrent of BTC supply continues to flow out of exchanges, miners and and whale wallets, and towards HODLer entities of all sizes at a healthy rate.
• Comparisons to past cycles suggests that the market is likely within a transitional period, characterized by investor apathy, and boredom. However, the halving event creeps ever closer, now just 305-days away.

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

The Road to Nowhere

This week, the Bitcoin market experienced price swings in both directions, however made little progress overall. The market traded down to $24.8k early in the week, rallied to $26.7k on news of the ETF application by Blackrock, before returning almost back to the opening at $26.3k. Whilst prices were volatile intra-week, on the broader scale, the market remains on a road to nowhere.

If we compare the the 30-day price range, we can see that quiet periods like this are few and far in between. The majority tend to occur during the apathetic hangover period that follows a bear market, aligning with our observations of market apathy last week (WoC 25)

Naturally, this is also reflected across 1-month Realized Volatility, which has reset to 39.6%, one of the lowest recordings since the 2021 bull market. We can see such events are typically experienced during the long, sideways grind as the market finds its feet after a prolonged bearish trend.

Implied volatility across option contracts from 1-week, to 6-months out have also reached a cycle lows. Near-term 1-week implied volatility is at the second lowest value (36%) on record, whilst 3-month and 6-month contracts are at all-time-lows of 42% and 46%, respectively.

Trading volumes in futures markets have also declined to $20.9B/day as liquidity across digital asset markets continues to drain.

This phenomena is also observed across the Ethereum futures markets, suggesting that this decline in liquidity is an industry wide contraction. The only period in the last 30-months experiencing lower aggregate trade volume was during the 2022 end of year lull.

A similar story is true on-chain, we can see the absolute value of profit and loss taking events has declined to cycle lows of $268M. This returns to October 2020 levels (BTC prices were ~$10k), highlighting just how quiet capital flows have been both in and out of the asset class year to date.

HODLers Are HODLing

We have established that digital asset liquidity is very thin across both the on-chain and off-chain domains. In the next section, we shall investigate how this translates across to the behavior of existing market participants.

Liveliness provides a big picture view into the propensity of Bitcoin holders to spend or hold their coins. Currently, Liveliness is in a multi-year macro downtrend, having peaked in May 2021 when bear market first set in. We can see a similar structure has formed to the 2018-20 cycle, as coins slowly but surely migrate into cold storage and are removed from the market by the HODLer cohort.

These HODLers are currently accumulating coins at a rate of around 42.2K BTC/month, suggesting that the price insensitive class are absorbing a non-trivial portion of the currently available supply.

If we compare this behavior to prior cycles, we can see that this regime of steady and gradual accumulation commenced just over 2-years ago, and suggests that another 6 to 12-months may be ahead of us.

This observation is further supported by the divergence between exchange balances, and the volume of coins held in illiquid wallets, being those with little to no history of spending. Illiquid supply reached a new ATH of 15.2M BTC this week, whilst exchange balances have fallen to the lowest levels since Jan 2018 at 2.3M BTC.

Around 146K BTC/month are currently flowing into these illiquid wallets, supporting the case for a gradual and steady accumulation taking place.

To get a sense of scale, we can compare the balance change of various wallet size cohorts to the volume of new coins issued to miners.

By this relative measure, we can see that entities with a balance under 100 BTC are increasing their holdings meaningfully, absorbing an equivalent to 254% of mined supply over the last month (2.54 x ~900 BTC/day = 2,286 BTC/day).

Shark entities (100 to 1k BTC) are also seeing positive balance change, absorbing volumes equivalent to 36% of mined supply. Whale entities on the other hand (> 1k BTC) join Miners as net distributors, releasing a volume equivalent to 70% of the mined supply from their holdings.

Overall, the market appears to be in a period of quiet accumulation, which suggests an undercurrent of demand, despite the regulatory headwinds of late.

An Arduous Road Ahead

In an attempt to find a yardstick for what may lie on the road ahead, we can gauge previous market phases on the basis of duration. The chart below shows number of days spent in the following phases:

• 🔵 Bull Market measured from cycle low until cycle peak.
• 🔴 Bear Market measured from cycle peak to cycle low.
• ⚫ Transition measured from cycle ATL until setting a new ATH.

If we assume the lows established in Nov 2022 hold, we can argue that the market has been within a transitional period for 221 days. Past transitional periods lasted between 459 days, and 770 days, suggesting that the patience of investors may be tested, on the order of 8 to 18-months, until a new market ATH, if history is any guide.

These transitional periods tend to see prices bounded between the Realized Price 🟠, and the Realized Price + 0.5 standard deviation band 🔵. Since setting each cycle low, the following proportion of trading days have been between these boundaries:

• 2012-13 Cycle = 79%
• 2015-17 Cycle = 64%
• 2019-21 Cycle = 78%

This framework would suggest a price range between $20.1k (-23%) to the downside, and $45.0k (+71%) to the upside over this period.

With the Bitcoin halving just 305-days away, we can also see the relationship between these transitional periods and halving events, which tend to occur around two-thirds of the way through the journey.

From this, we can index the price performance of prior epochs, starting at 305-days from the halving. The range of prior market performance on the date of the halving are as follows:

• 🟠 Epoch 1 = +126% with a max drawdown of -44.8%
• 🔴 Epoch 2 = +179% with a max drawdown of -23.3%
• 🔵 Epoch 3 = -6.4%  with a max drawdown of -53% in March 2020

The first two Epochs both saw very positive price appreciation, whilst the third Epoch was far more challenging for investors to navigate, not least with the exogenous shock of March 2020.

Finally, we conclude our analysis with an assessment of price performance over the year that follows each halving event.

• 🔴 Epoch 2 Price Performance: +7358% with a max drawdown of -69.4%
• 🔵 Epoch 3 Price Performance: +393% with a max drawdown of -29.6%
• 🟢 Epoch 4 Price Performance: +366% with a max drawdown of -45.6%

A diminishing returns effect is clearly noted across Epochs, a natural expectation as the market size, and capital flows grow in size over time.

Summary and Conclusions

Across most measures of market energy, digital asset markets are displaying excitement in few of them. Volatility, volumes, and realized value are all at multi-year lows, as liquidity and excitement give way to investor apathy.

However beneath the surface, the classic pattern of wealth transfer towards the price insensitive HODLer cohort remains uninterrupted. If past cycles are any guide, it it suggests that a period of apathetic sideways boredom may well define the road ahead, potentially lasting between 8 to 18-months in duration.