The Kraken Intelligence team has analysed on-chain data for bitcoin and ethereum.
Certain indicators are key to determining whether the bull run will resume in the near future or not.
The Federal Reserve is having a bigger impact on crypto markets now than it has done in the past.
Bitcoin has roughly halved in value from its $69,000 peak in November to sit at around $35,000 as January draws to a close.
This precipitous fall for the original crypto and many others is nothing out of the ordinary for the most volatile of asset classes, but it has still shaken confidence amongst investors and there are plenty of people proclaiming it is the start of a long
bear market
.
This is far from a unanimous view though, with some experts seeing recent market movements as just the inevitable short-term period of profit-taking that follows a strong run up in prices. After all, bitcoin is still up almost 1,000% over the last three years, despite the slide from November's all-time high.
Something else to be mindful of is that crypto has begun trading with a much closer correlation to tech stocks than in the past, and therefore is being impacted by interest rate rise expectations.
Prices have stabilized over the past week and determining whether the dip is bottoming out or if there's another big fall coming is the key question all crypto investors are wrestling with.
One of the world's biggest crypto exchanges, Kraken, has a team of analysts dedicated to finding answers to questions such as this.
In a research note from the Kraken Intelligence team dubbed "On-chain digest" the analysts described the status of the crypto market as "hodlers' last chance."
"Market participants contend that the latest market weakness stems from increased concerns of hawkish policy from the
Federal Reserve
," the Kraken team said. "Though prices have been falling since November, the drop didn't accelerate until the release of the Federal Open Market Committee (FOMC) meeting minutes on December 14 to December 15, 2021."
The meeting contained hints that an accelerated pace of tapering, interest rate hikes, and potential quantitative tightening to lighten the central bank's balance sheet was coming. While the Fed's hawkish tone has some convinced that a bear market may be ahead, it's crucial to observe on-chain data to paint a complete picture of the crypto markets and where they are heading."
There are four major on-chain data points the team is watching like a hawk.
HODL waves
These reflect the percentage of bitcoin's circulating supply that hasn't moved wallets over a specific timeframe.
When plotted against bitcoin's price it shows which market participants — long-term, medium-term, or short-term holders — may be fuelling selling pressure. There are three main categories. "Ancient or lost coins" that haven't moved for over five years, "old coins' that haven't moved for over 6 months and "young coins" which has only been static for 6 months or less.
"BTC's HODL waves show that long-term holders have been accumulating coins since April 2021 and may have begun taking profits during November 2021," the Kraken team said.
"From April 30, 2021, to November 24, 2021, young coins rapidly shifted into the long-term holdings category. While long-term holding conviction appears stronger than ever, network activity shows that both Bitcoin and Ethereum are seeing less on-chain demand," they added.
Network Activity
This refers to the number of people active on a blockchain and is measured by the numbers of bitcoin or ether addresses that are actively transacting on the blockchain.
"In addition to a reduction in long-term holding behavior, on-chain data shows that network activity for both Bitcoin and Ethereum fell month-over-month, evidenced by the drop in monthly active addresses," Kraken's team said. "Since early November 2021, Bitcoin's number of monthly active on-chain addresses has fallen meaningfully, ending a 3-month uptrend."
SOPR and MVRV
The SOPR is the spent output profit ratio. The SOPR measures whether market participants are selling at a profit or loss. It is calculated by taking a spent output and dividing its realized dollar value by its dollar value at creation.
MVRV is ether's market value to realized value. The MVRV Z-Score compares the difference between a cryptoasset's
market cap
and its realized value relative to the standard deviation of its market cap.
"While long-term holding conviction and network activity are slowing, on-chain indicators such as BTC's SOPR and ETH's MVRV Z-score suggest that the broader macro trend isn't necessarily over yet," Kraken's team said.
"Though BTC's SOPR shows that market participants are mainly selling at a loss, the situation was much worse during bitcoin's latest retracement from $65,000 to $30,000 from May 2021 to July 2021 after which the market made a strong comeback."
"The crypto market is currently going through another test amidst broader macroeconomic uncertainty relating to global interest rate policy and repricing of risk-on assets," added Thomas Perfumo, Kraken's head of business operations and strategy.
"More than ever, this market environment highlights the importance of on-chain fundamentals, which is the focus of our report. In particular, we highlight signals that indicate investor sentiment in crypto markets is greater than when markets briefly turned over eight months ago. Long-term confidence in the prospects of both assets has not disappeared as some might argue."
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