What does a slowdown in BTC supply mean?

summary

• After a considerable period of distribution following the ATH, a cool-down and consolidation period has begun, and the sell-side pressure is waning significantly.

• In addition to weakening sell-side activity, capital inflows remain relatively mild, although still profit-led and sufficient to stimulate local price movements.

• Various volatility metrics have been compressed during this correction, as on-chain conditions have reached equilibrium, typically leading to larger market moves.

Supply-side slowdown

Strong Bitcoin markets naturally attract sell-side pressure as rising prices prompt long-term holders to allocate a portion of their holdings. We can see this through the large drop in supply throughout March and April in the 1-2 year period as the long-term investor community distributes tokens to meet new demand ahead of the ATH.

However, the supply held by the 3+ year investing group continues to increase, indicating that this group is typically waiting for prices to rise before selling their tokens. As of this writing, more than half of Bitcoin holders have not transacted on-chain in the past two years or more.

Last active supply 1+ year: 65.8% (red)

Last active supply 2+ years: 54.9% (yellow)

Last active supply 3+ years: 46.4% (green)

Last active supply 5+ years: 31.3% (blue)

The Long Term Holder (LTH) Binary Spending Indicator is another tool we can use to analyze and visualize the intensity of holder allocation pressure. We noticed a significant and sustained decline in LTH supply in March to an ATH of $73k.

However, as of the past few weeks, this distribution pressure has eased significantly, providing bulls with more breathing room and less overall resistance.

The flip side of the LTH supply reduction is a sharp increase in supply held by short-term holders (STH), who represent new investors who recently purchased the token.

Local divergences are beginning to emerge between LTH and STH Supply, exacerbating the situation where allocation pressure is cooling among sophisticated investors.

Activity indicators also reflect this change in market characteristics and show that the Bitcoin network is creating more Bitcoins per day than destroying them. In other words, the market is now more inclined to hold coins for the long term rather than actively distribute them for profit.

Demand remains mild

Realized Cap is a metric unique to Chainalysis that measures the cumulative USD liquidity “stored” in the asset class. It is currently valued at $574 billion.

Currently, the rate at which new capital flows into the Bitcoin network have slowed significantly from its peak as the market digests recently allocated supply.

Therefore, the rate of change in realized cap per day can be used as a measure of capital inflows. The recent injection of liquidity during the ATH was fierce, ultimately reaching $3.38 billion/day. This exceeded the peak of the 2021 bull run, which has since cooled significantly.

Currently, the indicator is still in the positive profit-taking zone and is returning to equilibrium. However, as the selling resistance of mature investors weakens, this wave of mild demand is enough to stimulate price action.

Volatility Compression

As supply-side pressures and capital inflows ease, it becomes prudent to turn to our volatility tools to ground our expectations of where to move next.

To this end, we can employ a sell-side risk metric that assesses the total value locked in tokens spent on-chain (realized profits + realized losses) relative to the size of the asset class (realized cap).

• High values ​​indicate that investors are spending tokens at large profits or losses relative to their cost basis. This situation indicates that the market may need to re-balance and often sees high volatility price movements.

• Low values ​​indicate that most coins are spending relatively close to their breakeven cost basis, indicating that a certain level of equilibrium has been reached. This situation usually means that the "breakeven" within the current price range has been exhausted, and generally describes a low volatility environment.

We can see that the sell-side risk ratio has dropped significantly in recent weeks, which suggests that the market has found a degree of balance during this correction.

We can also assess market volatility by the percentage range between the highest and lowest price changes over the past 60 days. By this metric, volatility continues to compress to levels typically seen after a long period of consolidation and before a large market move.

Tracking Too Many Investments

Finally, we can use the URPD metric to assess the density of a token with a cost basis around the current spot price. We use this concept to identify market sensitivity points, where market moves are likely to inspire a reaction from a large number of investors.

As the price moves towards the end of the distribution, we notice that approximately 15.9% of the token supply is slightly below the current spot price, which may provide strong support.

In contrast to the dense cluster of tokens below, only 1.1% of circulating supply remains above our current spot price, suggesting that continued inflows of demand could catalyze a period of price discovery.

The STH supply currently stands at 3.36 million BTC, and during the recent correction, over 2.14 million BTC were in unrealized losses (63.2%). However, as the market rebounded above $70,000, this number has dropped to just 230,000 BTC, or about 6.8% of the total supply.

This shows that although tokens are highly concentrated around the current spot price, very few of them have unrealized losses, which greatly reduces the risk of too much investment.

in conclusion

After the massive allocation from sophisticated investors towards the $73K ATH, there has been a clear drop in seller pressure. This has resulted in less overhead resistance, allowing even modest demand to spur positive price action.

Beyond this, volatility continues to compress on longer timeframes, while a dense supply cluster has formed below current spot prices, potentially providing a solid base.