On-Chain Data Bullish for Bitcoin as Whales and Retail Accumulate

On its own, Bitcoin’s on-chain data has been bullish for the last couple of months. However, after the Fed’s hawkish policy announcement foiled the coveted $100k, and transcendental downturn across all markets including cryptocurrency—is Bitcoin ready to be out of the woods?

Historically, cryptocurrency markets tend to be highly volatile and go through bullish and bearish cycles. During these swings, at the height of fear sentiment and when the Bitcoin price bottoms, many investors also rush to buy the dip. Or, as billionaire Warren Buffet puts it:

“Be fearful when others are greedy and be greedy when others are fearful.”

However, what has been happening with Bitcoin’s price for the last month is an unexpected anomaly. Instead of gaining towards the $80k – $100k price range at the end of 2021, as most analysts were forecasting, Bitcoin depreciated by 26% over a month, from $50.9k on December 25th to $37.4k on January 25th.

BTC Exchanges Saw More Outflows than Inflows

Yet the on-chain data shows a different story than the price action. From 75% BTC illiquid supply to dormancy flow indicator, top Bitcoin indicators remain bullish. The Bitcoin exchange reserve, which tracks the amount of BTC exchanges held, is shown below.

The more bitcoins are transferred from wallets to crypto exchanges, the more likely it is that they are placed there to be sold. Yet, we are seeing the opposite. Previous BTC price hikes were accompanied by decreased exchange reserves. This time, during a steep downturn, Bitcoin reserve across all exchanges keeps declining.

As of Monday, the exchanges’ total supply stood at 2.366 million BTC, despite spot price action sitting at its lowest since July. This could indicate that investors are acting with the expectation that a BTC price hike is just around the corner.

Whales Buy the Dip

This seems to indicate a repeat of the post-May crash when new Bitcoin holders were panic-selling while crypto whales were buying the dip. The same scenario seems to be unfolding now.

Likewise, to determine the panic effect on long-term Bitcoin holders, we can look at the BTC HODL waves. When we include bitcoins that have never moved (purple), the dormant BTC supply remains at 60%. The only BTC HOLD wave percentage that has significantly increased comes from the 180 – 1 year range, having nearly doubled from 8.83% in June to 16.3% in January 2022.

Moreover, seeing crypto whales move in, smaller retail investors are also following their lead. There has been a significant uptick in the number of addresses holding tiny amounts of ETH (under 1 ETH) and BTC (under 0.1 BTC). Spurred by massive NFT adoption, ETH addresses even crossed a 20 million milestone.

Compared to the beginning of 2021, under 0.1 BTC addresses have increased by 20%, while under 1 ETH addresses have increased by 103%. This disparity growth is predictable given that Ethereum offers thousands of dApps, while BTC is reserved for long-term storage of value. Nonetheless, the top two cryptos show increased intake even when the market is down and the sentiment is at extreme fear.

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Retail Traders Are Accumulating Too

In January 2021, when the BTC price was around $31k, retail investors were warned to avoid panic-selling. Interestingly, at that time, the Fed’s stated inflation goal was a 2% annual average. As of December, that rate more than tripled, at 7%, representing the highest rate in 39 years.

As of January, the US Bureau of Statistics will tweak how the Consumer Price Index (CPI) is calculated. This move, alongside the Fed’s tapering program, is intended to deal with inflation. As displayed by the interaction between President Biden and a reporter, inflation has become a hot-button issue.

However, because the stock market has been addicted to the Fed’s cheap money, i.e. near-zero interest rate for borrowing, it may upset the stock market too much.

Already, Nasdaq has fallen by 14%, while S&P 500 by 7% since December. Because of so many institutional investors, Bitcoin accompanied those drops, correlating more than ever with the stock market.

According to Goldman Sachs’ report to their clients this weekend, investors should expect four interest rate hikes in 2021, instead of the original plan for three. The first one should commence in March.

“We see a risk that the [Federal Open Markets Committee] will want to take some tightening action at every meeting until that picture changes,”

the Goldman Sachs analysts projected.

“This raises the possibility of a hike, or an earlier balance sheet announcement in May, and of more than four hikes this year.”

If the Fed follows through, and the stock market taper tantrum subsides over each one, the same should apply to the crypto market as well. However, this excludes black swan events like the Russia-Ukraine escalation, which may bring the global economy to a standstill.

Do you think Bitcoin will gain resistance to the Fed-induced FUD this year? Let us know in the comments below.