Sorcery and Supply | On-Chain Outlook, Edition #44 (07/07/2022)
Looking at the past – what does 5-year data of Supply on Exchange tell us? Get the latest coverage of crypto markets with a view On-Chain... 👇
Using Exchanges as Seeing Stones?
Following on from our previous edition of the On-Chain Outlook…
The start of June has seen a surge in Supply on Exchanges of both Bitcoin and Ethereum.
While the stagnation/decrease of supply on exchanges could imply various scenarios, practitioners should be aware of the rising supply on exchanges.
More often than not, the development of this metric implies that holders are rushing to unload their crypto on public exchanges.
Deductive reasoning from a condition
Most of us have been familiar with Andreas Antonopoulos's famous saying, "Not your keys, not your coins".
This quote states a fact proven throughout different periods of ups and downs of the crypto market: There is a need for private crypto storage from long-term holders.
Following this statement, one can generalise the idea that private crypto storage and the crypto market's development operate in tandem.
So, what does it relate to Supply on Exchanges?
Supply on Exchanges is the metric that measures the total amount of crypto held on exchanges.
In short, it is the opposite side of holding crypto privately.
Following the above logic, one can also construct a hypothesis based on the growth of Supply on Exchanges.
We have collected five years of data about the Supply on Exchanges of Bitcoin since 2017 – available in Messari to see if actual data supports our hypothesis.
Upon looking at the data, we can see the numbers do not disappoint. In the Bitcoin price chart, we define:
⦁ The "Bear" (Downtrend) market territory is the period between
⦁ (1) the historical All-time-high, and
⦁ (2) the lowest pivot between (1) and the subsequent historical All-time-high
(Please note that due to the recursive nature of price pattern and to be objective about the market, what we consider as historical Bear market territory is only correct as long as the price stays above the lowest pivot)
In this sense, since 2017, there have been three "Bear" market territories:
⦁ From 17th December 2017 (ATH 2017) to 15th December 2018
⦁ From 14th April 2021 (ATH May 2021) to 20th July 2021
⦁ From 10th November 2021 (ATH November 2021) - until now (6th July 2022)
The illustration of the Supply on Exchanges and Price could be depicted as follows:
It could be seen that Supply on Exchanges generally went up during the Bear market territory.
Although not strictly classified as belonging to the bear market conditions, the down wave in 2019 (From 26th June 2019 to 20th March 2020 – the peak of the COVID-19 Pandemic) could also display similar behaviour.
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With that in mind, increasing the Supply on Exchanges could imply a concerning condition where investors actively unload their holdings.
Therefore, a rational approach to investing in crypto would be to invest when both the price chart and on-chain data direction make sense: when the price goes up AND Supply on Exchanges goes down.
So far, the start of July has been quite a relief from the bearish pressure in June as both the Supply on Exchanges of Bitcoin and Ethereum observed a decrease.
This relief could pose a minimal-loss scenario for crypto endeavours to expose themselves in this market. For now, let the US markets lead the way. We are still in a risk off part of the rotation for the time being.
Until next time readers! -q
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