Glassnode on-chain data weekly report (2nd week of September): Liquidity tends to dry up, and on-chain activities fall into silence

Written by: UkuriaOC, Glassnode

Compiled by: Deep Wave TechFlow

Liquidity in the digital asset market continues to dry up, with both on-chain and off-chain transaction volumes reaching historic lows. While HODLing remains the market’s top choice, a significant percentage of supply is on the verge of massive losses.

Summary

• Liquidity, volatility and trading volume in digital asset markets continue to compress, with many indicators falling back to pre-2020 bull market levels.
• The supply of stablecoins continues to decline, with all major stablecoin assets except USDT experiencing redemptions.
• Long-term holders hold assets firmly and rarely trade.
• On the other hand, short-term holders are on the verge of losing money, having acquired most of their supply at prices above the current price range.

The digital asset market has returned to a very tight trading range and we are experiencing a period of volatility compression and extremely low trading volumes. In this issue, we take a closer look at liquidity depletion and how on-chain data can be leveraged to better describe this market structure.

Supply is steadily declining

We will study the inflow of funds into the industry from a macro perspective. Here, we consider the total investment capital held in three major assets: Bitcoin, Ethereum, and stablecoins.

• 🟢 Since April 2022, the supply of stablecoins has continued to decline as redemptions began following the collapse of LUNA-UST.
• 🟠 Bitcoin (BTC) and 🔵 Ethereum (ETH) have both experienced net capital inflows since the start of the year, with their realized market capitalization growing by a whopping $6.8 billion (BTC) and $4.8 billion per month respectively.
• However, all three assets have seen a return to neutral or negative inflows since late August, suggesting a degree of stagnation and uncertainty has set in.


If we analyze stablecoins individually, we can see that a total of $43 billion has been redeemed, equivalent to a 26% drop since the March 2022 high. This can be explained both as a result of capital leaving during bear market conditions and as a reflection of the opportunity cost of higher interest rates that are not passed on to non-yielding stablecoins.


Breaking down the three largest stablecoins, we can see that these dynamics are not evenly distributed:

• 🟢USDT supply has actually increased by $13.3 billion since the cycle low in November 2022.
• 🔵 The supply of USDC dropped by an almost equal $16.7 billion, which may partly reflect US institutions moving funds to markets with higher interest rates.
• 🟡 BUSD supply dropped significantly by $20.4 billion (89%), primarily due to issuer Paxos entering redemption-only mode following the SEC’s execution.


If we look at it from the perspective of relative dominance, we can see how important Tether's market share expansion is. Tether now accounts for 69% of the stablecoin market, a sharp contrast from its June 2022 low of 44%.

BUSD’s dominance has dropped to 2.1%, and USDC’s dominance is only 21.7%, a significant decrease from the peak of 38% just over a year ago.


In the short term, we can observe the relative buyers and sellers of the three main assets flowing into exchanges. Here we make a simple set of assumptions:

• We assume that the dollar value of Bitcoin and Ethereum flowing into exchanges represents “sell-side” pressure.
• We assume that the USD value of stablecoins flowing into exchanges represents “buyer” pressure.

The chart below calculates the net USD difference between stablecoin inflows (+value) and Bitcoin and Ethereum inflows. What we focus on is not the magnitude of the absolute numbers (since these assumptions will have a margin of error), but any significant shifts.

• 🟢 Positive values indicate a net buyer system, where buyers of stablecoins exceed sellers of Bitcoin and Ethereum.
• 🔴 Negative values indicate a net seller system, where there are fewer buyers of stablecoins than sellers of Bitcoin and Ethereum.

The 2021 bull cycle is clearly dominated by net seller pressure, with investors taking profits in the frenzy of the uptrend. The collapse of LUNA-UST and 3AC in mid-2022 marked a return to net accumulation as investors struggled to establish a market bottom.

However, since April this year, the market has returned to a relatively neutral level, consistent with the slowdown in Bitcoin and Ethereum inflows and the market becoming increasingly apathetic and uncertain.


Very quiet on the chain...

Despite the price falling to $26,000 during the recent sell-off and renewed volatility following Grayscale's successful SEC challenge, actual volatility remains very low. The market remains in a historically low volatility environment, which is often a precursor to increased volatility in the future.


This low liquidity and low volatility environment is also reflected in the Bitcoin network’s settled transaction volume. Bitcoin trading volume in USD terms stalled at a cycle low of $2.44 billion per day and is back to October 2020 levels.


If we look at the on-chain realized value (i.e. the difference between the purchase and sale price of a coin), we see that this is still very calm. The market as a whole has very little profit or loss locked in, suggesting that the majority of coins traded are close to their original purchase price.

Realized profits and losses were comparable to 2020 market levels,** highlighting that the 2021 bull market exuberance may have completely disappeared. **


We can also track low liquidity and apathy on-chain by looking at the proportion of wealth held by the most active and liquid part of the market – the “hot supply” group (coins that have moved in the most recent week).

Currently, the realized value held by the “hot supply” group is at historically low levels, indicating that few coins older than a week are currently trading.


It’s also very quiet off the chain...

In the over-the-counter derivatives market, we can see futures trading volumes suffering a similar fate, reaching an all-time low of $12 billion per day. The only period with lower trading volume was a lull in late 2022, when Bitcoin price fluctuated in the $557 range for more than two weeks.


However, we noticed an interesting divergence in the options market, with trading volume growing significantly in 2023 and now reaching $437 million per day. This may reflect the market's greater tendency to use the leverage and capital efficiency of options to express their views during periods of tighter overall liquidity.

It is important to note that although the options market now has comparable position sizes relative to the futures market, options trading volume is still an order of magnitude smaller.


Likewise, despite several days of wild swings last month, implied volatility in the options market remains relatively low. The initial rise in volatility premiums was short-lived, with 1-month implied volatility once again back to its all-time low of 33.9%.


Long-term holders

With both the on-chain and off-exchange sectors unusually calm, the supply of Bitcoin held by the long-term holder community reached a new all-time high, reaching 14.74 million BTC. Conversely, the supply held by the short-term holder group, which represents the more active part of the market, has fallen to its lowest level since 2011.

Holding remains the dominant move in the market, which both demonstrates the strong conviction of existing holders and highlights that these investors may be the only ones left.


We can find consistency in the “Activity” metric, which elegantly compares the overall balance of coin-days destroyed versus coin-days generated. In other words, "activity" represents the relative balance of "investor holding times" in the market.

Consistent with the net seller’s market we mentioned above, 2021 saw a significant increase in “activity” as older coins were spent and profited. With the advent of the bear market between May and December 2022, a strong downward trend has formed. This marks an inflection point from a market of traders to a market of holders.

“Activity” has now returned to late 2020 levels and is showing a gradually intensifying downward trend. This suggests that overall “investor holding time” is increasing, with investors becoming increasingly reluctant to spend and part with their holdings.


A key insight from this work is the development of true market average prices, which we believe is the most accurate “cost benchmark” model for active Bitcoin investors. The model currently sits at $29,600 and has formed a psychological resistance level since April this year. With a traditional realized price of $20,300, both models have capped most of the price action this year.


Market Sensitivity

If we apply these two pricing models to the URPD chart and use them as psychological boundaries, we can better describe the supply situation we get between these two models. Currently, more than 4.81 million BTC have a cost base between $20,300 and $29,600.

We can also see that with the price just under $26,000 at the time of writing, short-term holders 🔴 are almost completely in the red. Suffice it to say, this makes this more price-conscious group a little nervous.


The chart below shows the percentage of short-term holder supply that is profitable. We can see that the vast majority of their supply is stuck in unrealized losses, with only 16.3% of holdings still remaining "profitable."


For the long-term holder group, their profitability is gradually increasing, although it is still at historically low levels and only broke out of the negative one standard deviation range a few months ago. While this is a positive trend, over 26.7% of long-term holder supply is at a loss relative to their purchase price, well below historical averages.

While 2023 represents a fairly reasonable recovery for Bitcoin and digital assets, these findings suggest there are still several psychological cost benchmark hurdles to overcome.


Summarize

Volatility, liquidity, trading volume, and on-chain settlement volume are all at historically low levels. This increases the likelihood that the market will enter a period of extreme apathy, fatigue, or even boredom.

The group of long-term holders remains steadfast and has barely given up on their token holdings. On the other hand, the short-term holder group is teetering on the edge of profitability, with many coins having cost bases above the current $26,000 trading range. This shows that this group is becoming increasingly price-sensitive and that there are many psychological price levels that still need to be overcome.