Taking a deep dive on how the Bitcoin fundamentals look on-chain as the dust settles from the FTX fallout

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Price drawdown from ATH compared to previous bear markets

Bit­coin is cur­rent­ly down 75% from its all-time high (ATH), with a max draw­down of 76.9% from the fall­out of FTX on Nov. 9th. How­ev­er, this is not unusu­al in Bitcoin’s his­to­ry. Dur­ing the 2014–15 bear mar­ket, Bit­coin retract­ed over 85% from its ATH, and last­ed for around 286 days in max capitulation.

A sim­i­lar event hap­pened dur­ing the 2018–19 bear mar­ket, which also saw an 84% draw­down for 136 days. The 76% draw­down start­ed in mid-Novem­ber, so based on his­to­ry, this could con­tin­ue into Q1 2023.

Price Draw­down from ATH: (Source: Glassnode)

2022, a different bear market compared to 2014 and 2018

The cur­rent 2022 bear mar­ket is dis­sim­i­lar from the bear mar­kets of 2014 and 2018 for many dif­fer­ent rea­sons, pri­mar­i­ly due to Bit­coin becom­ing a main­stream currency.

Epoch 2 – Sec­ond Halv­ing (2012–2016)

Dur­ing the 2013 bull run, when Bit­coin spiked to over $1,000 – and in 2017, when the price hit $20,000 – coins were going onto exchanges rapidly.

Dur­ing the sec­ond halv­ing, or epoch 2 – which saw Bit­coin claim a high of $1,000 – almost 6.5% of Bit­coins returned to cen­tral­ized exchanges. From the begin­ning to the end of Epoch 2, a cou­ple of hun­dred Bit­coin to over a thou­sand Bit­coin end­ed up on exchanges.

Epoch 3 – Third Halving 

The  3rd epoch start­ed in the mid­dle of 2016, which saw around 1 mil­lion Bit­coin on exchanges. At the end of the third halv­ing, exchanges held over 3 mil­lion Bit­coin, just before Covid 2020. This saw the price of Bit­coin ral­ly to $20,000 at the end of 2017 but saw a low of $3,000.

Epoch 4 – Fourth Halving 

Since covid and the start of the fourth halv­ing, exchanges have seen a decline of over 4% of Bit­coin sup­ply, leav­ing around 12% of sup­ply left on exchanges. In the past 30 days, over 135k Bit­coin has been with­drawn from exchanges — a 1% deduc­tion of Bit­coin sup­ply. This is the first epoch that coins are being removed in a bear mar­ket. So far, Bit­coin has seen a low of $15,500 from its peak of $69,000.

Bit­coin bal­ance on exchange: (Source: Wicked Smart Bitcoin)

This time is different, retail are withdrawing their coins

A fur­ther deep dive into what cohorts are with­draw­ing their Bit­coin from exchanges:

As can be seen since Bitcoin’s incep­tion, a flur­ry of green to yel­low trans­ac­tions has sig­naled small trans­ac­tions. As time went on and up to around 2017, a storm of red trans­ac­tions start­ed to occur, sig­nal­ing insti­tu­tion­al adop­tion com­ing into the space.

Net trans­fer vol­ume from/to exchanges: (Source: Glassnode)

How­ev­er, fil­ter­ing to show retail trans­ac­tions below $100K, it is appar­ent that they FOMO’ed dur­ing the peak bull runs of 2017, and 2021 — with over $200 mil­lion dur­ing peak days. On the oth­er hand, over the past 30 days, the net­work has seen the most with­drawals from retail ever, sur­pass­ing $180 mil­lion. Retail may have learned a mas­sive les­son with the fall­out of FTX and the mean­ing “not your keys, not your coins.”

Net trans­fer vol­ume from/to exchanges: (Source: Glassnode)

Due to the col­lapse of FTX and oth­er cen­tral­ized enti­ties with­in the cryp­to space, self-cus­tody has been a hot top­ic, and the num­ber of coins in self-cus­tody has grown expo­nen­tial­ly in 2022 (from 14 mil­lion to 15 mil­lion). The cur­rent cir­cu­lat­ing sup­ply of 19.2 mil­lion would put self-cus­tody coins at 78%.

Illiq­uid Sup­ply: (Source: Glassnode)

Mempool was packed, people aren’t waiting for proof of reserves

Due to the num­ber of coins leav­ing exchanges, the mem­pool has seen a sub­stan­tial increase in trans­ac­tions — most notably in June and Novem­ber. A clear cor­re­la­tion can be seen in capit­u­la­tion from the fall­out of FTX and Luna.

What hap­pened last week saw a mas­sive amount of net­work vol­ume and traf­fic build­ing up on-chain. When the mem­pool gets back­logged, nodes pri­or­i­tize those with high­er fees dur­ing high volumes.

On Nov. 14th, 154 blocks were wait­ing in the mem­pool. This was the most con­sid­er­able back­log since May 2021 and such mas­sive activ­i­ty has rarely been seen out­side of a bull market.

Mem­pool num­ber of trans­ac­tions: (Source: Glassnode)
Mem­pool: (Source: Mem­pool. space)

New entities coming into the ecosystem

Healthy net­work adop­tion is often char­ac­ter­ized by an uptick in dai­ly active users, more trans­ac­tion through­put, and increased demand for block space (and vice-ver­sa). The num­ber of New Enti­ties on-chain uti­lizes our enti­ty-adjust­ment meth­ods to more accu­rate­ly gauge the mag­ni­tude, trend, and momen­tum of activ­i­ty across the network.

Dig­ging deep­er into on-chain data shows that most non-zero address­es were cre­at­ed in the past month. The 30-day sim­ple mov­ing aver­age (SMA) of new address­es sur­passed the 365-day SMA, flatlin­ing for the bet­ter part of 2022.

New address momen­tum: (Source: Glassnode)

The growth in the num­ber of new address­es trans­ferred into a high­er enti­ty momen­tum. All new non-zero bal­ance address­es had to acquire that bal­ance in the past month, dras­ti­cal­ly increas­ing new enti­ties onto the network.

The last time both new enti­ty and new address­es were above their 365DMA was dur­ing the 2020–2021 bull run.

New enti­ty momen­tum: (Source: Glassnode)

A historic inverted U.S. yield curve

An invert­ed yield curve is when short rates are high­er than long rates, and the mar­ket tells the fed that they are too tight.

What caus­es the curve to invert? Short rates increase due to the mar­ket believ­ing the fed will keep increas­ing rates, while long rates fall below short rates on the belief that the econ­o­my will, at some point, see infla­tion fall.

Many dif­fer­ent invert­ed yield curves are looked at to iden­ti­fy reces­sions, most notably the ten-year minus two year and ten-year minus three months.

Cur­rent­ly, over 75% of the entire U.S. trea­sury curve is invert­ed; any­time above 70%, a reces­sion has occurred in the past 50 years.

US % of Yield Curve Inver­sion: (Source: Bloomberg)

Econ­o­mists believe the ten-year less 3‑month yield spread is the most accu­rate for iden­ti­fy­ing reces­sions as most research has gone into it. The curve has been invert­ed for almost two weeks which sig­nals “per­sis­tent inversion.”

When the 3mo/10yr yield curve inverts for ten con­sec­u­tive days, it is 8 for 8 in pre­dict­ing reces­sions over the last 50+ years. The aver­age lead time is 311 days or about ten months. – Jim Bian­co (Bian­co research)

Yield Curve Inver­sion: (Source: Fed­er­al Reserve and Bloomberg)

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