Where is Bitcoin Headed Next?
Price Action Analysis based on Changes to Address & Coin Holdings
I wanted to tweet what I see happening in recent price action (PA), but I quickly realized I need a whole lot more than 280 characters to explain the following charts. Hence this short analysis via Substack.
Below is a chart of the percent-change in addresses for each major Bitcoin investor group between February 1 of this year and today (July 15) based on the data I capture daily from bitinfocharts.com.
As shown above, and despite some Twitter reports to the contrary, network adoption began leveling off mid-April and has been in mild contraction since. Specifically, Minnows steadily increased in number until the mid-April correction but have since leveled off and even slightly started contracting in number. On the opposite end of the spectrum, whales (both Blue Whales & Orcas) steadily decreased in number until the steep crash in early May, when their numbers actually briefly spiked, only to fall back down by June. Their numbers have been level since.
Other categories (Great Whites, Tiger Sharks, Fish) have more or less been stable over the same period, but it is important to note that their numbers are partially impacted by changes in the boundary groups (e.g., Some whales have devolved into sharks; some minnows have evolved into fish).
The most important takeaway with respect to address changes is that network adoption has stalled. i.e., BTC demand has stalled due to a lack of new market participants, which explains why volume has been anemic for weeks now. That said, given that price is currently 50% lower than the all-time high reached in April, it is actually quite remarkable that network participation has remained as robust as it has throughout this correction. If you are looking for a silver lining in the current market, it is that the participants who arrived this year have stuck around for the most part.
When viewed holistically - stagnant network adoption among retail investors combined with a modest contraction in institutional participation – it is little wonder BTC has been subjected to steady downward pressure on price. Moreover, BTC for better or worse is an institution-led market at these price levels (> $30K), so without new institutional adoption, price simply will not go up, at least not sustainably. Conversely, if whales and/or sharks continue to leave the network, then price will go down. It’s just that simple. And this is true almost irrespective of changes in Minnow adoption, as I explain further below.
In light of this reality, it is frankly somewhat surprising that BTC has remained at/above $30K for as long as it has. I believe the following chart illuminates why.
As shown, the Blue Whales (BWs) that remain active network participants have been steadily adding to their stockpiles throughout 2021, at least until mid-June. In other words, despite a steady decrease in the number of BWs throughout 2021, remaining BWs have absorbed most of the coins vomited by the departing BWs. It is also important to note that even though several BW wallets are exchange wallets, exchange flows have been neutral over this same time period, so it is non-exchange BWs that have been doing all of the accumulating. Remaining Orcas have also been steady accumulators, as were Great Whites, at least until mid-March, when their accumulation leveled off.
This continued accumulation by remaining whales and sharks is in fact the reason price hasn’t completely cratered. Every time a few whales or sharks have left the network, longer-term whales and sharks have stepped up to absorb their distribution. In this respect, $30K could very well continue to hold as a price floor - but only if this existing trend continues. A looming crisis, however, can be seen in the fact that accumulation by existing BWs peaked mid-June and has been in slight decline since. This is likely the reason price declines have slowed recently but nevertheless have continued more or less unabated over the past 30 days: existing BWs are either running out of capital or patience, which means that if other whales and sharks continue leaving the network, price could eventually collapse.
In sum then, the reality is this: BTC needs to see an increase in network adoption soon, and particularly by new whales and sharks, or price could be in store for an even more painful downturn. Existing whales and sharks are certainly doing their best to hold the line, but this line will eventually cave without some reinforcements. And as I mentioned earlier, Minnows simply lack the purchasing power to provide such reinforcement, even if returning to the network in droves. To illustrate this point, look at the table below.
As shown, the average Minnow holds BTC valued at $828, whereas the average Orca holds BTC valued at $79.8M. i.e., 1 Orca has the purchasing power of more than 96,000 Minnows ($79.8M / $828). This is the reason almost no amount of retail FOMO can sustainably move price. i.e., Even when there are massive increases in Minnows within a very short period of time (e.g., when @elonmusk added Bitcoin to his Twitter profile), such resulting moves in price are sustainable only if backed by commensurate institutional investment. Otherwise, they ultimately fade.
Stated more positively, retail adoption of the BTC network is critically important over the long term with respect to its network effect and Lindy effect – the more people who use it, the more likely others will begin to use it, thereby ensuring the network not only survives but thrives over time. I have no doubt this will prove to be the case over the coming years/decades. On the other hand, BTC’s price now moves mostly to the beat of whales and sharks, so sustained upward price movement simply isn’t possible without a steady influx of new institutional investment. When whales and sharks return, so too will the bull market.
The question, then, is when might that be? I of course have no crystal ball, but I do believe in the “Sell in May and go away” narrative that has applied to US equity markets for decades, so I think we’ll begin to see US institutions return to the BTC market in September. For this reason, I think BTC PA for the remainder of 2021 will look somewhat similar to that of the second half of 2020 – false starts between now and October, followed by a spectacular run-up in Q4. This thesis also coincides with another long-standing thesis of mine, which is that the current cycle is more similar to that of 2013 than 2017, meaning it will be a double-peak cycle. The only question I really have is when the second peak might occur. Like I said, I expect upward PA to resume in Q4 2021, but where it eventually stalls out, I have no idea. Q1 2022? Possibly. But more proximately, we longs need to figure out how to survive the rest of the summer because, at least from where I sit, our pain may be far from finished.
Here’s to hoping for some miracle before summer’s end, whether that be renewed institutional investment or an approved US ETF. Either way, long and strong, all. And of course…
Go BTC.
Thanks for this really interesting and informative take on how the various entities (BWs, Orcas, GWs, etc) drive BTC price. I’ve heard claims that BTC’s price volatility will decrease through time as BTC network adoption grows and is stabilized by the big money that will be brought in by institutional players. This hypothesis makes perfect sense to me; however, it seems that in these early days of institutional adoption, the institutions are noncommittal and their somewhat frequent entry and exit from the network may actually be creating more pronounced price volatility than we’ve seen in past cycles. Admittedly, I make this statement with the assumption that the recent -50% pullback in price is a 2013 style mid-cycle correction. However, if the ~$65K price in May was the ATH for this cycle, then perhaps we’re not witnessing more pronounced volatility, but just the typical capitulation that follows an end-of-cycle peak? I guess we’ll find out in the coming months!