Glassnode Content Director: Market "Depression" After the "Halving"

Original Title: "Finance Bridge: Post-Halving Blues"
Written by: Marcin Miłosierny, Glassnode Content Director
Translated by: Chris, Techub News

Abstract:

• Monthly Briefing: In April, despite active market trading at the beginning of the month and significant inflows into ETFs leading to a bullish outlook, Bitcoin's price fluctuated between $60,000 and $66,700, overall showing a consolidation phase. This was primarily due to substantial selling by short-term investors. Meanwhile, changes in staking rules within the Ethereum ecosystem sparked intense discussions, reflecting market concerns and anxieties about its future as a scaling platform and monetary asset.

• Market Dynamics: According to Glassnode's latest dynamic composite index, the market seems to be entering a cooling period. Several core indicators have shown a downward trend, indicating a decline in market demand and a slowdown in positive momentum.

• Key Indicators: The miner income momentum indicator assesses the demand in the blockchain space by comparing the ratio of miner fee income and uses a two-year rolling "Z-score" to mark key turning points in the market. A high "Z-score" indicates increased network activity and system congestion, while a low "Z-score" may suggest declining demand and a potential market cooling.

In April 2024, the behavior of digital asset market investors was primarily driven by two sentiments: anticipation of Bitcoin's upcoming fourth halving and concerns about its potential to lead to weak price performance. Historical data shows that while halvings are generally viewed as a long-term bullish factor, such events often trigger panic selling in the short term.

Past experiences, such as the Bitcoin halving events in 2016 and 2020, indicate that although prices may rise in the long run, initial reactions often lead to brief market corrections. This year, macroeconomic uncertainties and geopolitical tensions have intensified the market's response to this event, resulting in a 16.09% price drop for Bitcoin in the weeks following the halving.

At the same time, Ethereum also experienced significant price volatility, dropping by 17.80%, partly due to ongoing uncertainties in the U.S. market. Additionally, expectations regarding Ethereum ETF approvals and community debates over staking policy changes have also influenced market sentiment.

These phenomena reflect the market's high sensitivity to major events, with investors often taking profits before such events occur, leading to short-term selling pressure. In this issue of "Finance Bridge," we will also explore the ongoing impact of the U.S. market and how, despite the overall market adjustment, spot ETFs still supported relatively high trading volumes in April. Furthermore, we will discuss some recent factors that may affect Ethereum's monetary properties and its technical adaptability in the DeFi space.

Monthly Market Overview

In the first few weeks of April, Bitcoin performed well due to a significant increase in spot market and on-chain trading volumes. Following a peak of $14.1 billion in spot trading volume in mid-March, Bitcoin's price fluctuated between $64,000 and $73,000. The main driving force behind this price range came from U.S. spot ETFs, which have become a key factor in driving the market, introducing a large amount of new market demand and supporting prices at high levels.

Although daily spot trading volumes have decreased from the mid-March peak to around $7 billion, this level still reflects the trading intensity observed during the 2020-2021 bull market. The market's sustained optimism is reflected in the cumulative trading volume delta (CVD), which measures the net amount of buying versus selling, highlighting ongoing speculative interest and a prevailing bullish sentiment among traders.

Additionally, trading flows (both inflows and outflows) were very high, averaging $8.19 billion per day, significantly exceeding the peak levels observed during the last bull market. Binance, while still holding a substantial market share in spot trading (37.5%), has seen its dominance decline from the higher levels of previous years, indicating an expansion of market activity across various platforms.

Impact of the Halving

In mid-April, Bitcoin underwent its fourth halving event, reducing the daily supply inflation rate by 50% and the annual issuance rate to 0.85%. This reduction reinforced Bitcoin's status as hard currency, marking the first time Bitcoin surpassed gold in terms of issuance scarcity.

At the same time, the reduction in block rewards did not significantly impact the overall market dynamics. Compared to global trading volumes, the proportion of newly mined tokens is minimal, with spot and derivatives trading volumes remaining the dominant forces in the market, accounting for less than 0.1% of the total capital flow.

On other fronts, the Bitcoin network achieved new milestones across several key indicators. The fundamentals of the entire network showed positive development trends across various metrics. As miners invest in more efficient hardware and optimize their operational costs, the network's hash rate has reached an all-time high, ensuring that even with reduced issuance, the security budget of the network remains unaffected. This investment activity indicates that even with reduced subsidies, it does not pose a significant barrier for miners.

Despite a slowdown in the growth rate of network statistics as the ecosystem expands, the absolute values of these indicators have still reached new highs. Notably, over the past four years, the value transferred and settled through the Bitcoin network has accumulated to $106 trillion. This astonishing figure highlights Bitcoin's capacity as a primary settlement network, demonstrating its resilience against volatility and cyclical adjustments, maintaining its core position.

Responding to Market Adjustments

In the last week of April, the Bitcoin market entered a consolidation phase following the block reward halving event. After reaching a peak of $73,000 in March, the price fluctuated between $60,000 and $66,700. During this period, selling pressure in the market increased, primarily driven by short-term holders (STH) who had purchased Bitcoin recently (within 1-6 months).

Although the market faced selling pressure, the Net Unrealized Profit/Loss (NUPL) indicator showed that the market was still in the "excitement" phase of a bull market. However, since the price adjustment began, this indicator has also shown that the market is gradually cooling down. In particular, the selling behavior of short-term holders who have already incurred significant losses has become an important signal for a potential market bottom.

Observing the cost basis of short-term holders who purchased Bitcoin in the past week to month can serve as a key indicator for assessing market sentiment. The realized losses of this group typically peak near market bottoms, indicating that the exhaustion of these sellers may be a precursor to an impending market rebound.

Ethereum's Development and Controversies

In April, the Ethereum ecosystem was embroiled in intense discussions surrounding changes to the network's staking policies. Emerging innovations such as liquid staking, restaking, and liquidity restaking protocols have significantly boosted staking demand on Ethereum, leading to a surge in participation. Currently, over 31.4 million ETH (approximately 26% of the total supply) has been staked, primarily driven by restaking protocols like EigenLayer and liquidity restaking service providers. These developments have provided investors with additional yield opportunities, creating incentives that exceed the initial expectations of the proof-of-stake model.

Proposals to limit annual issuance to control the rapid expansion of the staking pool have faced strong opposition from community members. Supporters argue that these measures are necessary to maintain Ethereum's role as a currency and to limit the influence of derivative tokens on the network. However, opponents view these restrictions as an impediment to innovation and insist that the status quo does not need to change. As stakeholders strive to find a balance between maintaining Ethereum's monetary policy and addressing the growing demand for decentralized finance, this debate is expected to continue.

At the same time, there are concerns that the rapid growth of staking could undermine Ethereum's function as a monetary asset and potentially transfer governance power to derivative projects that issue staking tokens. The future of Ethereum's staking landscape is fraught with uncertainty, and the community faces the challenge of achieving a delicate balance between protecting the network's scalability and its function as a store of value.

Market Dynamics ------ Updates and Key Insights on On-Chain Momentum Framework

In a bull market, tracking market momentum requires in-depth analysis of key on-chain data to capture the fundamental trends and changes in market behavior. One exploratory analysis framework provided by Glassnode addresses this challenge by focusing on four main areas:

• On-Chain Activity: This metric determines the growth and expansion of the user base through network activity and usage rates. An increase in network activity is often associated with enhanced market momentum.

• Market Profitability: This metric identifies periods when market participants are realizing profits by assessing the unrealized profits held by investors, which typically indicates a healthy and upward-trending market.

• Spending Behavior: This category identifies market phases where there is sufficient demand to absorb profits realized by existing holders. Such high-demand phases usually signal sustained positive market momentum.

• Wealth Distribution: By observing the transfer of wealth between long-term holders and new participants, this metric can provide insights into market cycles and potential turning points.

By integrating these indicators into a composite index, analysts can more comprehensively assess the strength and direction of market momentum. This approach provides traders with a tool to make informed decisions based on a profound understanding of the current market conditions and future trends.

However, currently, among the eight conditions for assessing strong market momentum, fewer than four are being met, indicating that the market may be entering a cooling period. This finding serves as an important indication of current market sentiment, reminding investors that they may need to adjust their strategies.

After the Bitcoin halving event in April 2024, several key indicators in the market showed significant changes from previous trends, which may signal a short-term shift in market dynamics:

• Miner Income 2-Year "Z Score": Following the Bitcoin halving event, competition for block space intensified, especially concerning specific transactions like rune transactions, leading to a sharp increase in miner income. Although the pace of this growth has slowed, miner income levels remain above historical norms. However, recent data shows that the 2-year Z score for miner income has shown a downward trend for the first time in the past month, indicating a decrease in demand for block space.

• Exchange Inflows: Exchange inflows initially remained above the annual average, peaking in late March, and have since entered a sustained downward trend. This shift indicates that the positive momentum of capital inflows into the market is slowing and may soon reverse, suggesting that buying pressure is cooling.
  
• Profit Supply Trends: Although still showing a positive trend, profit supply has begun to show signs of reversal, both in absolute terms and in the 90-day EMA. While this indicator remains in an upward trend phase, it suggests that there are fewer holders in profit, which may affect market sentiment.
  
• MVRV Momentum: The overall Market Value to Realized Value (MVRV) momentum remains above the annual average, indicating that, on average, the valuation of holdings is still above their cost basis. However, the MVRV of short-term holders has reversed and is currently on a downward trend, suggesting that recent entrants to the market are beginning to see reduced profits, which may increase selling pressure.
  
  
• SOPR Momentum: The Spent Output Profit Ratio (SOPR) momentum is also on a downward trend, with the monthly average recently falling below the annual average. This trend has not yet been strong but indicates that the profitability of trading tokens is declining, which may lead to more cautious spending behavior among traders.

• Realized Profit/Loss Ratio Momentum: The shift of this indicator towards negative momentum highlights that realized losses have accelerated during the recent market adjustment. If the market continues to adjust, the increase in losses for recent token buyers may trigger panic selling.

Conclusion and Actionable Insights for Momentum Traders

Current market indicators suggest that Bitcoin is in a consolidation and potential adjustment phase. Key indicators such as exchange inflows, SOPR (Spent Output Profit Ratio) momentum, and the Market Value to Realized Value (MVRV) ratio of short-term holders all show signs of slowing market momentum and increasing selling pressure, thus traders should remain vigilant. Additionally, changes in miner income and the cooling of SOPR momentum further suggest that demand for Bitcoin at high prices may be decreasing.

For momentum traders, closely monitoring these downward trends is crucial. If the market shows signs of recovery or stabilization, such as reversals in indicators like SOPR and profit supply, this may present strategic entry opportunities. However, the increasing realized losses remind us to remain alert to potential panic selling. These analyses help traders better understand the current market state, enabling more cautious investment decisions.

Focus on Indicators ------ Miner Income Growth Momentum

In our analysis of market momentum trends, we particularly focused on the miner income momentum indicator. This indicator assesses the demand for block space by measuring the proportion of income miners receive from transaction fees. When users have urgent demands for block inclusion and are willing to pay higher transaction fees, fee pressure increases accordingly. Utilizing a two-year rolling Z-score to periodically standardize the data can help us identify key market turning points, such as rising fees during bear market softening or declining fees after cycle peaks.

• By analyzing miner income momentum, analysts can assess the intensity of network activity and its impact on miner behavior. A higher Z-score indicates that miner income is above average, which typically coincides with increased transaction fees and heightened network congestion. Conversely, a decline in the Z-score suggests that demand for block space is decreasing, which may indicate market cooling or reduced trading activity. This analysis provides an important perspective for understanding market behavior, aiding investors and analysts in making more informed decisions.

• Exploring Trends: The growth of miner income typically aligns with bullish market phases, as high demand for block space usually indicates increased trading activity and network usage. Conversely, a weakening of miner income momentum may signal a decline in market interest and a potential market consolidation phase.

• Historical Observations: Shortly after the Bitcoin halving event in April 2024, miner income significantly increased due to intense competition for block space. Similar income peaks have been observed during previous halving events and significant network activities, which typically signal enhanced market activity. However, the current downward trend in the Z-score indicates a shift from these peaks, suggesting that market speculation may be waning.

• Indicator Analysis: Key indicators to watch include the percentage of miner fee income, the Z-score of miner fees, and the miner capitulation risk indicator. Changes in these indicators provide market participants with important information about market direction and momentum, assisting investors and analysts in strategy adjustments and decision-making. By integrating these data, a deeper understanding of the relationship between market cycles and miner behavior can be achieved.