On-Chain Analysis: The Whales are Buying Again
Cody Garrison | 7/19/2021
Since it’s abrupt correction nearly two months ago, Bitcoin and the broader cryptocurrency markets have been rangebound 50%+ off their May all time highs. While analysts, traders and pundits from across the institutional and retail aisles have tried to identify where the market is moving next, bitcoin volatility has reached a yearly low – a phase in the market known as consolidation – a typical precursor to a big move up or down in an asset.
This begs the very apparent questions in the market right now with Bitcoin hovering right around $30,000 support at the time of writing: Will support collapse, causing a cascade of selling into the mid-to-low 20k range? Or will a macro catalyst emerge bringing steam back into Bitcoin, Ethereum, and the broader market’s engines?
While no one has a crystal ball to know for certain where the market is heading, on-chain data (or information extracted directly from the blockchain) such as transactions, capital flows from exchanges, and buying trends seen across individual wallets, all help paint a picture real-time market activity.
The Whales are Accumulating
“Smart money” refers to institutional investors, market mavens, central banks, funds, and other financial professionals. This cohort typically has the resources and professional guidance to make much more informed trades than much of the public, or “dumb money,” whose primary source of research may come through anonymous Reddit message boards and Twitter threads. In the crypto markets, many of these institutions and financial professionals have used their wealth to accumulate much more Bitcoin than the average trader.
In Bitcoin’s history, a popular and traditionally accurate predictor of further price movement is the trading action of Whales – entities with > 1,000 Bitcoin in an individual wallet. While these entities make up less than 10% of total market participants, they hold 42% of the total Bitcoin in circulation. If whales on aggregate increase their balance, this is considered bullish. If whales are decreasing their balances, this is bearish. Whales utilize their access to vast amounts of data and information to make informed trades ahead of the masses.
Over the last three weeks, Bitcoin whales added 96,044 BTC to their holdings.
Chart 1. Bitcoin Whale’s trading behavior shows a close correlation with subsequent Bitcoin price.
If this cycle was actually in the midst of a 2018 style bubble pop, we’d likely see a more prolonged selling trend from Whales opposed to the recent and sharp uptick in buying behavior. If one were to “follow the smart money,” a phrase often used in the world of traditional finance, on-chain data would be telling investors to buy in the $28-30k range. This would likely be confirmed if whale’s net buying behavior is sustained.
Retail Never Stopped Buying
While the Whales overwhelming selling pressure in Q3 pushed the price of Bitcoin down, Retail investors (those who hold <0.1 Bitcoin representing 90% of total Bitcoin wallets) never stopped buying and new investors used the correction to enter the markets, depicted in the chart below. Bitcoin supply held by retail investors and total Bitcoin entities in the market both hit new all time highs this week as evidences in the below chart from Glassnode.
Chart 2. Retail continue to find their way to the markets as first time investors.
Bitcoin as an Inflation Hedge
Last week, people were quick to discredit the popular narrative that Bitcoin will act as a hedge against the inflation of the US Dollar after it’s 5% drop following the Consumer Pricing Index (CPI) report for June 2021 showing consumer prices increased 5.4% in June from a year earlier. Yet Chart 1 (above) refutes that argument, showing increased whale buying at the beginning of July by the cohort that would likely be affected most by inflation, the “smart money” whales.
On-chain analysis shows continued buying by both institutional whales and retail investors, as the Federal Reserve continues it’s exuberant money printing.
Chart 3. The FED discontinued publishing M1 and M2 money supplies to the public.
Takeaways
On-chain data analysis can provide key insights into the driving forces behind movements in the crypto markets. However, only having emerged in 2017, it remains an immature and sometimes incomplete aspect of the research process. In addition, data ingestion can be delayed multiple hours, days or weeks, thus insights may be shown from a historical or even stale perspective:
Large Bitcoin investors, aka Whales, with a balance between 1k-10k BTC showed a sharp uptick in buying behavior at the beginning of July — a possible trend reversal in their Q3 selling behavior.
Retail investors never stopped buying during the correction.
Bitcoin could still very well be a hedge against inflation, however, the narrative is not broken as some were quick to claim based on one data point.
Clearblock will continue to dive into these metrics, highlighting key trends in the on chain data and providing actionable insights for investors.
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The views above are the opinions of the author and Clearblock Insights. They are not to be taken as investment advice.
