Original title: Establishing Equilibrium

Original author: UkuriaOC, CryptoVizArt, Glassnode

Original translation: Tao Zhu, Golden Finance

Summary:

· Despite the chaotic price action, investor profitability remains strong, with an average unrealized profit of about 120% per coin.

· The demand side is sufficient to absorb sell-side pressure and HODLer withdrawals, but not enough to promote further upward growth.

· Spot and arbitrage trading continues, especially with the increase in institutional traders, which temporarily strengthens expectations of range trading.

Market profitability remains strong

Sideways price fluctuations are often manifested as investor boredom and apathy, which seems to be the dominant reaction in all Bitcoin markets. BTC price is consolidating in a mature trading range. Investors remain generally well-positioned with over 87% of circulating supply in profit and cost basis below spot price.

Using the MVRV metric, we can assess the size of unrealized profits held by the average investor.

Currently, unrealized profits held by the average coin are around +120%, which is typical of a market that traded near the ATH of the previous cycle. The MVRV ratio remains above its yearly baseline, suggesting that the macro uptrend remains intact.

We can use the MVRV ratio to define pricing ranges to assess extreme deviation points of investor profitability relative to the long-term average. Historically, a breakout of 1 standard deviation has coincided with the formation of a long-term macro top.

Currently, BTC price is stabilizing and consolidating within a 0.5 to 1 standard deviation range. This once again highlights that despite the recent volatility in market conditions, the average investor is still holding statistically high profits.

When the market decisively broke through the 2021 ATH, there was a large amount of investor allocation, mainly driven by the long-term holder group. This reflects significant profits, which helps increase active trading and liquidity supply.

Typically, after a new ATH, the market takes ample time to consolidate and digest the introduced supply glut. This results in a decline in realized profits and sell-side pressure as equilibrium is established.

The reduction in sell-side pressure and profit-taking naturally reduces market resistance. Despite this, BTC price has been unable to sustain significant upward momentum since the March ATH. This suggests that while the demand side is stable enough to keep the market range-bound, ultimately the growth is not enough to re-establish upward momentum.

Low Volume

Despite healthy investor profitability, the volume of transactions processed and transferred on the Bitcoin network has fallen significantly after hitting a new all-time high. This highlights a weakening of speculative appetite and a rise in market indecision.

A similar picture can be observed when assessing spot volumes across major centralized exchanges. This shows a strong correlation between on-chain network settlement volume and trading volume, reflecting investor fatigue.

Exchange Activity Drops Sharply

Going one level deeper, we can examine on-chain inflows to exchanges denominated in BTC, and we again notice a significant drop in activity.

Currently, short-term holders are sending around 17,400 BTC/day to exchanges. However, this is significantly lower than the peak of 55,000 BTC/day recorded when the market reached a high of $73,000 in March, when speculative levels became excessive. Conversely, long-term holder inflows to exchanges are relatively low, currently seeing negligible inflows of just 1000+ BTC per day.

We can visually see the sharp drop in LTH investor activity by the percentage of long-term holder balances sent to exchanges.

LTH sent less than 0.006% of its total holdings to exchanges, suggesting that the group has reached equilibrium and that higher or lower prices are needed to stimulate further action.

Currently, there are more tokens moving in profit (11000 BTC) than in loss (8200 BTC). This suggests that, albeit relatively small, there is still an overall bias towards profit taking.

Currently, the average token sent to the exchange has realized a profit of approximately +55k USD and a loss of -735 USD, respectively. This makes the average profit 7.5 times higher than the loss, with only 14.5% of trading days recording a higher ratio.

This means that HODLers are still withdrawing funds, and the demand is enough to absorb the selling pressure, but not enough to push the market price higher. This suggests that the market structure is more favorable for range traders and arbitrage strategies, rather than directional and trend trading strategies.

Cash and Arbitrage Basis Trading

Another tool that allows us to describe the spot market is the Spot Cumulative Volume Delta (CVD). This metric describes the net deviation of the market taker buy volume from the sell volume, measured in USD.

Currently, a net seller bias dominates the spot market, but the market continues to trend sideways. This is consistent with the above view that the demand side is roughly equivalent to the selling pressure, keeping the market range-bound.

Assessing the futures market, we note that open interest continues to rise and currently stands at over $30 billion, just below the previous high. However, as highlighted in WoC-23, a large part of this open interest is related to market-neutral spot and carry trades.

In a range-bound market, an increase in open interest can mean an increase in volatility capture strategies as traders can extract premiums from perpetual swaps, futures and options markets.

CME’s open interest has grown significantly, highlighting the growing participation of institutional investors.CME now holds over $10 billion in open interest, representing nearly one-third of the global market share.

In stark contrast to the increase in open interest, futures volumes have seen a similar decline as the spot market and on-chain transfers. This suggests that speculative interest is relatively low, while fixed basis trades and arbitrage positions dominate.

Summary

Despite the volatility, the average Bitcoin investor has remained largely profitable. However, investor decisiveness has declined, with volumes shrinking in spot and derivative markets, as well as on-chain settlement.

Demand and sellers appear to have established a balance, resulting in relatively stable prices and significantly lower volatility. The stagnation of market movements has led to a degree of boredom, apathy, and indecision among investors. Historically, this suggests that decisive price movement in either direction is necessary to stimulate the next round of market activity.

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