Continuous capital inflows, will Bitcoin soon experience volatility?

Although Bitcoin temporarily reached an annual high of $31,700, the Bitcoin market is still confined within a narrow price range. Multiple indicators show that capital is slowly flowing into the Bitcoin market, with some indicators resembling those during the extremely volatile periods of 2016 and 2019-2020.


Capital is flowing into the Bitcoin market

Although Bitcoin temporarily reached an annual high of $31,700, its upward momentum did not sustain, and the price of Bitcoin returned to above $30,000 in a sideways pattern. The volatility of the current Bitcoin market remains very low, with the price range of the “Bollinger Bands” differing by only 4.2%. It can be said that it is the most stable Bitcoin market since early January this year.

Figure 1: Bitcoin Bollinger Bands

Capital is still flowing into the cryptocurrency market at a stable and slow pace. “Realized market value” is a very macro and commonly used on-chain indicator that can be used to observe the real capital flowing into the Bitcoin market. It is considered as the “on-chain value” and reflects the cumulative sum of all realized profits and losses. The “realized market value” of Bitcoin is currently slightly below $400 billion and is continuously growing, indicating that Bitcoin is being traded at higher prices and the demand for Bitcoin is increasing.

Figure 2: Realized Market Value

During bear markets, a large amount of capital tends to flow out of the Bitcoin market. In 2022, the “realized market value” of Bitcoin decreased by 18.8%, indicating how weak the bear market was last year. In previous cycles, it took 239, 193, and 95 days respectively for the “realized market value” to recover from the low point to the all-time high (ATH), while the current cycle has lasted for 188 days since the low point in 2022.

Figure 3: Decrease in Realized Market Value

Next, let’s analyze the NRPL indicator (the difference between realized profits and losses), which is a derivative indicator of the realized market value. For most of this year, the NRPL indicator has been above 0 (indicating that most of the Bitcoin traded was profitable), with a net inflow (profits minus losses) of approximately $270 million per day. This is the first time since April 2022 that it has entered into a sustained profitable state, similar to the first half of 2019 and the end of 2020. However, compared to the bull market in 2021, $270 million is not much, considering that the average daily net inflow in the bull market in 2021 exceeded $3.68 billion.

Figure 4: NRPL Indicator (7-day)

We can see that since 2023, the realized profit/loss ratio has been steadily improving, steadily surpassing the breakeven level of 1.0 in early January. This week, the ratio reached a new high point that is not so exaggerated, indicating that capital inflows have actually slowed down. If this high point is maintained, there may be market fluctuations similar to the second half of 2019-2020 and 2021.

Figure 5: Realized Profit/Loss Ratio (14 days)

We can also estimate the trend of the entire cryptocurrency market by comparing the “realized market value” of BTC and ETH with the supply of mainstream stablecoins. Based on this measure, we can see that most capital flows into the two major cryptocurrencies BTC and ETH, with inflows of $21.9 billion and $18 billion respectively since the beginning of the year. The total supply of stablecoins has decreased by $10.4 billion, mainly due to the redemption of USDC and BUSD. The above analysis shows the market’s clear preference for the two major cryptocurrencies.

Figure 6: Realized Market Value of Other Assets

The Bitcoin Market in Profit

SOPR (Spent Output Profit Ratio) is also a useful indicator for tracking the scale of profits and losses in the entire market. We usually use this indicator to judge the market state:

  • Loss Dominant State: If SOPR remains below 1.0, it indicates that investors are in a loss state and usually sell at the breakeven point (forming price resistance).

  • Profit Dominant State: If SOPR remains above 1.0, it indicates that investors are making profits and the breakeven level is usually considered a short-term value point (forming price support).

Currently, the SOPR indicator is at 1.06, indicating a profit-dominant state, which means that Bitcoin transactions have achieved an average profit of 6%. This again has similar characteristics to the periods in 2016 and 2019.

Figure 7: SOPR (7-day moving average)

Considering this, through the study of the inflow of Bitcoin on trading platforms, we found that short-term holders (STH), who have been actively trading since early February, are the main group active in the market. 78% of the 39,600 BTC flowing into the trading platform daily is related to short-term holders.

Figure 8: Inflow on Trading Platforms Related to Different Groups

When we observe the proportion of STH holdings in Bitcoin in a profitable state, we understand why STH is considered the main group active in the market-they currently account for more than 88% of the proportion. In historical cycles, this proportion is related to the macro upward trend, so the Bitcoin price may continue to rise. As the price rises, the STH group is more likely to sell their Bitcoin holdings and make profits.

Figure 9: Proportion of profitable STH holdings in Bitcoin

In contrast, the proportion of profitable Bitcoin holdings among long-term holders (LTH) is not as high, at about a little over 73%. This indicates that approximately one-fourth of the Bitcoin held by LTH was acquired at prices higher than $30,000 during the 2021-2022 cycle.

Figure 10: Proportion of profitable long-term holder supply

Currently, the majority of Bitcoin held by LTH and STH (at least 73%) remains profitable. This indicates the strong recovery momentum in the market since 2023. Compared to the market weakness experienced after the FTX crash, the current Bitcoin market has shown significant improvement. Following the FTX crash, 90% of all Bitcoin trades resulted in losses (the most severe sell-off in history).

Figure 11: LTH/STH realized losses (90 days)

The overall realized value of the market (profit plus loss) is still close to the cycle low point, at only $290 million per day. Although this may seem like a high amount, it is still incomparable to October 2019 and 2020 (when Bitcoin prices were 50% lower than they are now). This indicates that holders with higher levels of profit and loss are unwilling to trade their Bitcoin, despite the current market value being approximately twice what it used to be.

Figure 12: STH/LTH total realized value

Overall, the majority of Bitcoin holders remain stagnant and continue to hold onto their Bitcoin without making additional purchases. The proportion of BTC circulating in the market is still very small.

Short-term holders dominate

Typically, it is not common for the purchase price of LTH to be higher than that of STH. However, such events have indeed occurred in previous cycles and are related to selling activities during deep bear markets. During these periods, even experienced buyers would sell off Bitcoin and exit the market, especially those who bought near the cycle peak and experienced the entire downward trend. With the strong performance of Bitcoin since early 2023 and the increasing dominance of STH, the SOPR ratio has started to decline for the second time, providing us with a macro perspective on investor behavior reversal. There was a rebound in this indicator in March 2020, rising above 1.0 and then remaining below 1.0 for the next two years.

Figure 13: Long-term and short-term SOPR ratios

Summary and Conclusion

Despite briefly reaching a new annual high of $31,700, Bitcoin trading remains confined within a narrow price range. The Bollinger Bands are extremely tight, with a difference of only 4.2% between the upper and lower boundaries, indicating low market volatility and realized value at a low point. Currently, short-term holders dominate the inflow on trading platforms, with over 88% of Bitcoin in a profitable state. However, from a macro perspective, investors seem reluctant to sell their Bitcoin. Several indicators at present resemble the market cycles of 2016 and 2019-2020, both of which were highly turbulent.

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