In 2022, Bitcoin (BTC) faced many challenges.
However, recent on-chain and futures market statistics indicate that the top cryptocurrency by market capitalization has begun to show indications of improvement.
The futures market is showing signs of returning to equilibrium following a flurry of short liquidations. Data from Glassnode shows that short position liquidations removed unhealthily speculative market participants, and that on-chain and exchange data now indicate increasing spot market and exchange netflows.
Glassnode experts classify this vast group of investors who were previously losing money as having "unrealized profits."
Massive short liquidations create a favourable environment for new investors to prosper.
Longs and shorts are frequently in equilibrium in futures data. Investors typically update their futures as the market changes to prevent liquidation. In contrast, investors were taken off guard in mid-January, which led to an all-time high of 85% short liquidations.
Futures liquidation long versus short ratio. Source: Glassnode
The recent Bitcoin rise has been aided by the prevalence of short liquidations. Over $495 million in short futures were liquidated in January. Short positions that have been liquidated trigger automatic Bitcoin purchases, raising the price of BTC. Three significant waves of liquidations have taken place so far this year, reaching a peak of $165 million in a single day.
Total liquidations. Source: Glassnode
After the historic amount of short liquidations, the futures market is trending toward longs. On Jan. 30, 51.46% of open interests are long positions rather than shorts.
The closing of short positions not only assisted in the price increase of Bitcoin but also appears to indicate a restoration of bullish mood in the BTC market.
Researcher at Glassnode:
"The cash and carry basis is now back in the black for both perpetual swap and calendar futures, yielding 7.3% and 3.3% annually, respectively. This follows a significant amount of backwardation in all futures markets in November and December, and it implies a recovery of optimistic mood along with some speculation.
Centralized exchange netflows reach equilibrium
Centralized exchange (CEX) Bitcoin balances reached a record high in March 2020. After that, Bitcoin started to leave spot exchanges. A multi-year low of 2.25 million BTC are now held across 21 of the largest exchanges. The last time this happened was in February 2018, when centralised exchanges held 11.7% of the entire Bitcoin supply.
Exchange inflows and outflows have typically been comparable throughout Bitcoin's history, creating an equitable balance. When net outflows of Bitcoin from exchanges hit $200 million to $300 million per day in November, this equilibrium was upset. The historic huge outflow around this time caused 200,000 Bitcoin to leave exchanges throughout the course of the month.
The movement of Bitcoin in and out of exchanges aids experts in estimating the cost of BTC for investors. Only investors who have money invested before 2017 would potentially profit from the bear market in 2022. After 2018, all new Bitcoin investors suffered an unrealized loss.
The fact that a growing number of investor cohorts have returned to profitability is a good sign, especially after Bitcoin witnessed record realized losses in December.
Two of the largest investor groups, those who purchased BTC on Coinbase and Binance, hold an average BTC acquisition price of $21,000. As Bitcoin continues to try to reach $24,000, any upcoming correction caused by macro factors may push down the unrealized profits in these groups.
Exchange average withdrawal price. Source: Glassnode
On-chain, spot exchange, and futures data show encouraging signals of Bitcoin's price rebound. Following a record-breaking number of short liquidations, the futures market is signalling a fresh equilibrium.
Exchange netflows are already improving, and spot market activity shows that investors are gradually entering the cryptocurrency market once more.