Crypto Markets Analysis: Is Bitcoin Heating Up? Looking at On-Chain Data for Clues

In Tuesday’s column we looked at technical analysis highlighting signs of increasing volatility in crypto markets. Thursday’s conversation will likely deal, at least in part, with the release of the U.S. Consumer Price Index (CPI) report for December, as investors seek clues on the outlook for Federal Reserve monetary policy based on the latest inflation reading.

On Wednesday we are looking at a few pieces of on-chain data for signs of hope or concern on the bitcoin (BTC) market. Like many things in financial markets, we’ll likely find a bit of both.

At stake is whether bitcoin's mini-rally this week above $17,000 is sustainable.

An initial area of potential concern is a recent downturn in new bitcoin addresses. Data from Glassnode shows that higher prices for BTC tend to result in more bitcoin wallets as interest increases, and vice versa.

What may be concerning is the decline in addresses in November while BTC traded relatively flat. This could signal a couple of things:

• Markets at the time didn’t yet think bitcoin prices had reached a bottom.
• Whether BTC had bottomed or not, investors felt better opportunities existed elsewhere.

What ultimately may be more useful is to examine when the number of new addresses starts to move higher again. Optimism seemed to appear in August, when the number of addresses began to increase with BTC at $22,000. The pivot downward appears in November, shortly after the FTX fallout began.

Bitcoin transfer volumes

Declines in transfer volumes on the Bitcoin network also warrant concern, particularly related to institutional investment in crypto assets.

Higher aggregate amounts of BTC being transferred implies that larger investors are purchasing bitcoin. Between August and now, the total amount of BTC transferred declined from $48 billion to $5 billion, implying that large investors have slowed participation substantially.

Part of this is certainly a byproduct of declining prices, but the 90% decline in transfer volumes significantly exceeds the 23% decline in price since August.

Transfer volume by size also implies that larger players are on the sidelines, with transactions in excess of $1 million falling from 68% of daily activity in August to 45% of daily activity currently.

The recent increase in prices certainly provides short-term gains for bullish investors.

Ultimately, the verdict is still out on what bitcoin does next.