James Bennett, CEO of ByteTree, provided an overview of on-chain and off-chain activity, with a special focus on mining trends and their potential impact.
Bull Run and Volatility
Volatility has been falling since late January. It sits at 80% annualized volatility after the recent bitcoin high of $60,000 and its regression back to USD 54,000-55,000 on March 23. This bull run is seeing lower volatility than previous peak cycles. Looking at the 700% price increase since March 2020, you could be forgiven for thinking we’re close to a top somewhere in this range, James said.
In previous bull cycles such as late ’17 and again in mid-2020, bitcoin’s volatility was up to 150‑170%. This is indicative of a more mature market where we see the involvement of rational investors and long-term allocators.
[1:40] “Overall [there is] very high volatility compared to other commodities and assets. But for bitcoin at this stage, it’s actually looking pretty promising,” said James.
Fees as a percentage of total revenues have been easing alongside bitcoin network activity. They are essentially paid for blockspace, so higher fees mean there’s higher competition and higher demand for blockspace. The gold line above represents fees as a percentage of revenues.
In the last few months, there’s been a sharp correction from around 17% to 12%, but historically you see that 12% is still a much higher minimum than what we saw at the end of January. These fees appear to be easing at this time, James said.
Onchain Settlement Value
[3:01] With total settlement value, or the amount sent and received over the Bitcoin network, we’ve seen on-chain volume push up to USD 14 billion a day in late February and then regress to the USD 8 billion level, where we’ve seen a few lows and where we sit today. This metric is strongly correlated to price. But when we see a divergence between price and on-chain activity, we know that on-chain activity is actually falling away whilst price is increasing, again indicative of slower or lower secondary market demand on bitcoin.
Off-Chain Activity in the US and Europe
[4:10] The big story here in off-chain activity centers around the Grayscale fund in the US, which started trading at a discount. Grayscale announced it would buy back USD 250 million of GBTC shares with the aim to return its product back to net asset value.
It’s difficult to get a flavor for changing sentiment outside of looking at the premium discount because a lot of these funds are closed ended, meaning bitcoin can only go in, James said. This means Grayscale holds USD 40 million of bitcoin that it can’t sell based on its mandate. So if people want to sell GBTC, they move to a discount but the bitcoin won’t leave the fund.
[5:09] In Europe, there’s better liquidity and less limitation, meaning investors can put money in and withdraw, with the consequence of total bitcoin dropping in those funds when they’re selling off. This means the European model is more liquid and we can see the trend has been positive since mid-2015, which we continue to see. If the European picture starts to drop off or go negative as in January ’17 and December ’17, we will see a subsequent impact on price, according to James.
Mining and MRI Metrics
[6:44] The overall market trend involves miners selling less bitcoin. A tool developed by ByteTree to track sentiment reveals that miners’ rolling inventory is trending back toward 100%.
[6:58] “When MRI is above 100%, it means…they’re selling more bitcoin than what they’re generating, so their net inventory is declining. When MRI is below 100%, it means they’re mining more than they’re selling, so their net inventory is increasing. We can see that miners typically sell heavily into a strong market bid, so when the price is going up they sell heavily. And we can see that particularly since the beginning of this year… MRI peaked at 165%, so they’re selling 65% more than they’ve been mining,” explained James.
Miners have been sitting on their inventory. And since we hit that peak toward the end of February, they’ve been holding back, perhaps waiting for a stronger price or another cycle, suggests James. It’s too early to say what their motives are, but we can look at the historic trend from miners’ inventories to get a better feel for what they might be indicating to us.
Long-Term Mining Trends
[8:15] During bull markets, inventories get depleted heavily. The rate of inventory decline is accelerated in those periods (highlighted by these darker green blocks on the graph). After those sell-offs — for example January 2014 and January 2018 — you can see another change of pace where price starts to weaken and fall, moving to a bear market. Without speculating that this is where we are now, miners have consolidated their positions since March with a distinct tapering following the heavy selloffs of miner inventory.
[9:48] “I think it’s a little bit too early to call a top. But I would say that we’re looking at these metrics very closely… in particular the fund flows and MRI on the ByteTree terminal,” concluded James.