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January 29, 2021

OnChain Reaction

Bitcoin Retraces, Soaring Volatility and Fund Flows With ByteTree


James Bennett, CEO of ByteTree, returned to provide the latest onchain insights and observations.

(00:20) The bitcoin price has retraced from the USD 40,000 level that it hit earlier in the year. Volatility has shot up to about 101% measured over 30 days annualized. The dotted line in the chart below signals the comparable period in the past when we saw volatility at that level.

1:44 “What does it mean for the price of bitcoin? Well, in our view, it looks like bitcoin has had a very good run the last 12 months or so and now is taking a bit of a rain check and starting to consolidate,” said James.

Volatility should remain high for the next couple of days or weeks.

Onchain Metrics

(2:10) This is the bottom quintile of transactions. Each block has 2,000 transactions in it. What you see in blue is the bitcoin value in the bottom fifth, or 400 transactions. The smooth blue line is the seven-day moving average of that number.

(2:47) “It really shows lackluster core or retail response to this recent price boom, which is very different to what we’ve seen in the past with bitcoin,” said James.

From January 2017, retail core traffic was quite high. As bitcoin peaked in 2017 and started to fall in 2018, there was a real surge in response to that sharp increase in price from the retail audience. Retail investors often exacerbate the big price movements that we see.

And while core traffic underpinned the bullet market for much of 2020, it started to trail off as price went up, which is unusual.

It brings us to the argument that it’s been institutional demand that’s driving this price so far. Fund flows in the below chart are an example of that, representing new dollars going to buy bitcoins in exchange-listed products.

4:50 “And what I wanted to signal is really that change in pace of fund flows that we saw from about August last year up until the end of last year. So you’re looking at the bitcoin price in black and the aggregate of bitcoin held by funds in blue…So a significant increase in fund flows and that really drove that price acceleration that we saw in the second half of 2020,” said James.

The below chart illustrates onchain activity.

(6:19) Here we’re looking at the top value of traffic that’s on Bitcoin. We’re looking at the top 400 transactions and the value of those in terms of bitcoin and as a percentage of all the flows that took place. ByteTree calls it the institutional dominance ratio (IDR).

Here there is a very similar pattern to what we saw in the previous slide with fund flows. From October to January, there’s been a sharp increase in the IDR to above 99%. So it was very much institutionally dominated. This has just started to drop-off.

(7:50) The below chart is a snapshot taken from the Bloomberg terminal, and it shows the period from the high in January. Fund flows normalized from that period to now. Similar to the onchain IDR ratio, flows went out of bitcoin funds since the new all-time high, suggesting institutional money was driving the price up and now institutional money is profit-taking.

What the chart fails to show is a significant drop in the bitcoin GBTC premium that’s happening now as new bitcoin issued in the fund is seeing less demand relative to the new supply that’s coming in. So the premium was up around 40% just a couple of months ago and is now down below 3% at last check.

(9:23) “It’s sort of a bit of a money-making machine that Grayscale fund, but it can’t go on forever. And I think we’re starting to see signs of that trend slowing and possibly soon reversing,” said James.

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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