End of August On-chain Data Analysis: Is a Big Volatility Coming?

Author: Daring Think Tank

Currently, the market speculation activities surrounding Bitcoin are relatively subdued—recently, investors have only been able to lock in meager marginal gains, and the perpetual swap market has returned to calm. However, historically, this calm is temporary and often heralds greater volatility to come.

Summary

• Currently, the net capital inflow into the Bitcoin market has clearly cooled, with investors experiencing very little profit or loss recently.
• Almost all losses have been borne by the short-term holder group.
• However, as a significant portion of short-term holders have held their coins for over 155 days, they have transitioned into long-term holders.
• Speculative activities in the perpetual swap market have returned to calm, with both the interest of speculators and the leverage of bulls cooling down.

Market Liquidity Analysis

In recent months, the net capital inflow into the Bitcoin market has begun to slow down. This indicates that investors are, to some extent, in a state of breakeven.

However, the capital inflow into the Bitcoin market has rarely been this calm—over the past 89% of days, the capital inflow has been greater than recent levels (excluding bear markets). It is also noteworthy that after similar periods of fatigue, there is often a significant rise in market volatility.

Despite this, Bitcoin's total market capitalization remains at a historical high of $619 billion, and since the low of $15,000 in December 2022, the market's net capital inflow has reached $217 billion.

Figure 1: Changes in Bitcoin Market Total Market Capitalization (Percentage)

When measuring the average unrealized profits of investors, the MVRV ratio is an extremely useful tool.

Over the past two weeks, the MVRV ratio has been 1.72, which is roughly equal to its historical average. This key level often signifies a turning point between macro bull and bear trends, and currently, on about 51% of trading days, the MVRV value is above this average.

This indicates that investors' profitability has essentially returned to a balanced position, and after the launch of ETFs, the market's excitement and enthusiasm have completely cooled.

Figure 2: MVRV Standard Deviation Range

Additionally, among the various indicators we use to measure profits, the percentage of supply reflects a similar situation.

Like the MVRV ratio, after a series of fluctuations, this indicator has returned to its long-term average. This situation has occurred at the end of 2016, throughout the volatility of 2019, and during the mid-2021 sell-off.

Figure 3: Bitcoin Profitable Supply

The seller risk ratio is another useful tool for assessing the breakeven state of the market. We can consider this indicator in the following way:

• High values indicate that when investors sell Bitcoin, they either take significant profits or incur substantial losses. At this point, market prices fluctuate wildly, and a new balance may need to be found.
• Low values indicate that when investors sell coins, they are essentially breaking even. In this case, the "profit and loss momentum" within the current price range has been exhausted, which usually means the overall market is relatively calm.

Currently, the seller risk ratio has dropped to a low level, indicating that most Bitcoin trading prices are close to their original acquisition prices. Nevertheless, significant volatility in the future may still be on the horizon.

Figure 4: Seller Risk Ratio

Short-Term Financial Pressure Analysis

A deeper look into investors' profit and loss situations reveals that their net realized profits/losses are declining.

The current net realized profits/losses amount to $15 million per day, while in March, when the coin price peaked at $73,000, this indicator was as high as $3.6 billion per day. It is noteworthy that when this indicator returns to neutral levels, it often signifies a turning point in the market, such as a resurgence of a bull trend or a reversal into a generally bearish sentiment.

Figure 5: Realized Net Profit and Loss (7-Day Moving Average)

After reaching a historical high in March, the confidence of new investors has been tested during several months of sideways price movement. During this process, a large number of Bitcoins have been held for 3-6 months.

Historically, these Bitcoins held for 3-6 months are often bought at peak prices, only to subsequently experience a deep price correction. Despite the market's volatility, some new investors have decided to continue holding, ultimately transitioning into long-term holders. Others, however, have exited their positions and cut their losses.

Currently, Bitcoins held for 3-6 months account for over 12.5% of the circulating supply, a market structure reminiscent of the mid-2021 market sell-off period and the 2018 bear market.

Figure 6: Bitcoin Static Holding Segment (Holding Duration 3-6 Months)

Next, we will further segment this group and analyze how many Bitcoins have been held for 3-6 months, and how many have returned to the market due to holders cutting losses. We will visually display the total amount of Bitcoins held for 3-6 months and see how many were sold off by investors cutting losses.

We can observe that since early July, as a large number of investors began to incur losses, the total amount of Bitcoins they held has started to decline. The scale of investors "throwing in the towel" is somewhat similar to past market turning points.

Over time, the Bitcoins held during this period are beginning to approach static holding. This means they will be firmly held by investors, waiting for better opportunities.

Figure 7: Behavior Analysis of Investors Holding for 3-6 Months

The URPD indicator is another tool for assessing how Bitcoins transition into static holding, distinguishing between long-term and short-term holders. Here, we can see that despite over 480,000 Bitcoins still being at a loss, they have transitioned into a static holding state due to the holders' firm resolve.

This also means that these long-held Bitcoins are currently in an unrealized loss state.

Figure 8: Cost Distribution of Held Bitcoins

Market Volatility Analysis

Next, we will analyze the perpetual swap market to interpret market speculation behavior and leverage demand.

Overall, compared to the frenzied market in March when the coin price reached an all-time high, recent forced liquidation events have significantly decreased. This indicates that speculative demand has declined, and currently, the market is predominantly spot trading.

Figure 9: Hourly Forced Liquidation Events

If we compare monthly price volatility with net liquidation volume, it is easy to see a strong correlation between these two factors. This illustrates that market volatility typically intensifies due to the squeezing of leveraged positions, as investors are more likely to "cross the line" and trigger liquidations during periods of high volatility.

Figure 10: Normal Exits and Forced Liquidations in the Perpetual Market

Next, we discuss the ratio between price volatility and net liquidation volume to understand investors' attitudes toward leveraging.

We find that this indicator has dropped to its lowest level since February 2022. This supports our view—that currently, investors are unwilling to take on high-risk positions, indicating that speculative impulses have completely cooled.

Figure 11: Ratio of Normal Exits to Forced Liquidations in the Perpetual Market

The same phenomenon is also observed in the broader digital asset market, where the financing rates of many other digital assets have turned neutral. This indicates that the speculative interest across the entire market has been wiped out, suggesting that the spot market is likely to dominate in the short term.

Figure 12: Binance Digital Asset Financing Rate Heatmap

Conclusion

Currently, whether in the on-chain space or the perpetual futures market, the market is trending towards balance. This is reflected in reduced trading profits and losses, as well as very low financing rates for various digital assets. This also indicates that the routine trading and speculative activities of market investors have significantly decreased.

Furthermore, as the market begins to transition into accumulation, it has been on a steady downward trend for more than five months. However, based on historical experience, this calm is temporary, and within it, a storm of future volatility is brewing.