Bitcoin on-chain data and BTC’s recent price rally point to a healthier ecosystem

Bitcoin (BTC) had a tough year throughout 2022.

However, the latest on-chain and futures market data show positive signs that the top cryptocurrency by market capitalization has started to recover.

After a series of short liquidations, the futures market is heading towards a new equilibrium. Liquidation of short positions has wiped out unhealthy market speculators, according to Glassnode data, and on-chain and exchange data now show an improvement in spot market and exchange netflow.

A large group of previously loss-making investors is back in what Glassnode analysts call “unrealized gains.”

Large short-term liquidations lay the groundwork for new investors to thrive

Futures data is typically balanced between longs and shorts. As the market moves, investors tend to update their futures to avoid liquidation. Conversely, investors were caught off-guard in mid-January, resulting in a record 85% liquidation of his short.

Long to short ratio of futures clearing.Source: Glassnode

Short-term liquidation dominance is fueling the current Bitcoin rally. In January 2023, more than $495 million of short futures were liquidated. A liquidated short automatically buys Bitcoin, pushing the price of BTC higher. There have been three big waves of liquidations so far this year, reaching $165 million in liquidations in a single day.

total liquidation.Source: Glassnode

After a historic amount of short liquidations, the futures market is heading long. As of January 30, 51.46% of open interest is long rather than short.

long to short ratio.Source: Coinglass

The liquidation of the short sale not only contributed to the Bitcoin price rally, but also seems to suggest a return of positive sentiment to the BTC market.

Grassnode researchers said:

“For both perpetual swaps and calendar futures, the cash and carry basis is now back in positive territory, with annualized yields of 7.3% and 3.3% respectively. Most of the volatility came after backdation across all futures markets, suggesting a return of positive sentiment, perhaps with some speculation.”

Bitcoin Annualized Premium. Source: Glassnode

Centralized Exchange Net Flow Reaches Equilibrium

In March 2020, Bitcoin balances on centralized exchanges (CEX) reached all-time highs. Bitcoin has flowed off spot exchanges since reaching all-time highs. Currently, the top 21 exchanges hold around 2.25 million BTC, which is the lowest level in several years. The last time we witnessed 11.7% of the total Bitcoin supply held on centralized exchanges was in February 2018.

Bitcoin Exchange Balance. Source: Glassnode

Typically, exchange inflows and outflows have been similar and balanced throughout the history of Bitcoin. In November 2022, when the net outflow of bitcoin from exchanges reached $200 million to $300 million per day, he was thrown off balance. The massive outflow during this period was historic, reaching minus 200,000 bitcoins and leaving the exchange for the month.

Bitcoin’s net position change on the exchange.Source: Glassnode

Inflows and outflows from centralized exchanges normalized as Bitcoin began to gain bullish momentum in January 2023. Netflow is close to neutral, indicating a decline in high outflow trends.

Multiple Bitcoin Investor Cohorts Return To “Unrealized Gains” Zone

Bitcoin’s movement on and off exchanges helps analysts provide BTC acquisition price estimates for investors. In the 2022 bear market, only pre-2017 investors saw profit potential. Every investor who entered Bitcoin after 2018 suffered unrealized losses.

According to Grassnode researchers,

“Through the downtrend in 2022, only pre-2017 investors avoided net unrealized losses, while the post-2018 class was stripped of its cost base by FTX’s red candle. Prior to the 2019 class ($21.8k) we are back in unrealized gains.”

Bitcoin Average Withdrawal Price. Source: Glassnode

The fact that a growing investor cohort has regained profitability is a good sign, especially after Bitcoin suffered record losses in December 2022.

The two largest investor groups that bought BTC on Coinbase and Binance have an average BTC acquisition price of $21,000. As Bitcoin continues to try to reach his $24,000 level, an upcoming correction due to macro factors could push down unrealized gains for these groups.

Average withdrawal price on the exchange.Source: Glassnode

Positive signs of bitcoin’s price recovery can be seen in on-chain, spot exchange and futures data.

The market is now showing an improvement in exchange netflows, and spot market activity suggests that investors are slowly returning to the cryptocurrency market.