Authors: UkuriaOC, CryptoVizArt, Glassnode; Compilation: Tao Zhu, Golden Finance

Summary

• Since the ATH in March, market demand has significantly decreased, with the market consolidating sideways in this price range, gradually reducing investors' attention.

• On the supply side, available tokens are also contracting, with multiple 'active supply' indicators compressed to relatively low levels.

• Historically, the tightness of bitcoin's supply side has always been a harbinger of increased volatility.

• It usually describes the balance reached between new demand and the wealth held by existing holders, but this balance often does not last long.

Weakening demand side

Since the $0.073 million ATH set in March 2024, the rate of new capital inflow has been steadily declining. Due to the peer-to-peer nature of the bitcoin network, buyers and sellers match on a 1-1 basis. Therefore, metrics of realized profits or realized losses can serve as proxies for the scale of new capital entering or exiting the network.

By using this framework, we can see that the bitcoin market currently has a daily inflow of approximately $0.73 billion, which is significant but significantly lower than the peak of $2.97 billion set in March.

On October 8th, in the original, unfiltered variant of this indicator, a interesting significant peak in realized profits can be observed. However, when looking at Glassnode's proprietary adjusted variant, the same peak did not appear.

This profit surge is due to BitGo migrating the ownership structure on-chain, leading to a large amount of internal transfers within the WBTC cluster.

Glassnode's proprietary cluster heuristic approach successfully identified these uneconomic transactions and correctly discounted them from the cleaned dataset, providing a specific view of the advantage of entity-adjusted filtering of on-chain transaction data.

The time-point variant of our WBTC balance shows strict additional indicators, where the historical records of the balance are immutable, capturing the status of clusters while recording data points.

From this perspective, we can observe the initial drop and subsequent recovery to the previous level of the WBTC balance at the time of occurrence, as Glassnode's automatic clustering algorithm correctly reclassified transfers as internal transfers.

Returning to our demand side assessment, we can use the binary CDD indicator as another indicator of demand side pressure. This indicator tracks the expenditure of "holding time" in the market, tracking when previous holders of supply make large trades (balancing with new buyers entering).

We can now see that the daily destruction volume is relatively small, indicating that long-term investors are still relatively inactive within the current price range.

Our measure of demand side strength indicates relatively less attention from investors and new demand inflows within this range, and there has not been a second significant wave so far this year.

Supply tightness

After identifying a certain degree of weakness in the demand side, it is necessary to carefully assess its opposing force, the supply side. Here, we consider "supply" as the amount of tokens market participants are willing to consume and trade.

The chart below outlines several measures of "available supply," including short-term holders and high liquidity supply. We compare these with measures of "preserved or stored supply," such as long-term holders or custodial supply.

We can see that our "storage supply" indicator has been growing for several months, highlighting the existing holders' preference for long-term holding. This has led to a subsequent decrease in the "active supply" indicator, indicating a reduction in the number of tokens easily traded within the current price range.

We can also increase the granularity of the "available supply" measure. We can evaluate the "warm supply" queue, which uses a "coin age" heuristic to assess supply and explicitly focuses on tokens moved within the last month.

In our long-term and short-term holder classification research, we quantify the probability of spending closely related to the time holding tokens. Therefore, "warm supply" captures an effective subset of tokens that we can reasonably expect to change hands quickly.

We can also consider open futures contracts and trading volume as a form of "supply exposure" in derivative markets where we expect active trading.

Overall, since the ATH in March, this positive supply measure has actually halved. This indicates a net decrease in investor speculation and attention, highlighted by low on-chain transaction volume and reduced activity in the futures market.

The vitality indicator is an elegant tool for assessing the historical balance between coin day destruction (spending) and coin day creation (HODLing). We note a significant increase in spending activity from July to August, including the redistribution of Mt Gox tokens to creditors.

The activity indicators are currently in a continuous declining trend, highlighting the strong preference of market participants for long-term holding of supply, which further limits the supply measures available to us.

Investors in the ongoing cycle

We have now identified a decrease in demand and supply tightening. We can support this assessment by examining the proportion of network wealth held by these two groups. We consider the behavior of these groups within the following framework.

• Short-term indicators [<1 month] (in red) the realized capital or wealth traded in the last 30 days. This group is closely related to demand, including new investors injecting new capital into the market.

• Long-term indicators [1-2 years] (in blue) this portion of the supply peak formed at the bottom of the bear market. This group represents long-term investors who accumulated and held during the bear market, insensitive to price.

Directly comparing buyer pressure with holder beliefs in wealth, we note that new demand has increased but also decreased. New demand is far higher than during the bear market in 2022, but much lower than the peak reached in March.

We have not yet seen a sharp and sustained surge in new demand, which typically accompanies cycle peaks. Likewise, we have not yet begun to experience an increase in holding pressure, a situation that has occurred during historically deep bear markets.

This puts the current market in a relatively unique equilibrium period, almost the midpoint between two extreme cycles.

We can further examine this wealth balance through the realized HODL ratio. The above midpoint is also reflected here, with an increase in RHODL indicating the presence of new investors, but not yet reaching a peak consistent with demand saturation.

Confidence in market trends among new investors also remains in the neutral range, highlighting that the spending of new buyers does not differ significantly from the original acquisition price.

Despite recent market volatility bringing slight negative sentiment, the confidence level of new investors is significantly higher than in the 2019-2020 and 2021 markets.

The lack of unrealized losses among new investors further emphasizes this conservatism, emphasizing that we have not seen a significant decrease in investor profitability. This suggests that financial pressures and fears experienced by bitcoin holders are limited, reducing the likelihood of entering a deep bear market.

Summary

The significant divergence between supply and demand continues to widen. Since the all-time high in March, market demand has significantly decreased, while multiple indicators of "active supply" continue to contract and tighten. In terms of historical precedents, previous instances of severe supply-side tension in bitcoin have been precursors to increased volatility.