Chain Gang 6/27

Adam Gotelli
5 min readJun 27, 2021

Strong Hands vs Miners

This week’s price action for Bitcoin saw resistance of nearly 36k. The asset even traded below 29k for a matter of minutes on Tuesday. This was the lowest level Bitcoin had seen since January 2021. After a strong rebound from this dip, Bitcoin remained steady throughout the rest of the week. Support levels of 30k-31k will be vital for Bitcoin to start on a path to return to its previous all-time highs. With support levels remaining fairly consistent over the past number of weeks, it is unlikely that we are in a true bear cycle. Such a cycle would be characterized by far sharper drawdowns. Instead, the drops in price can be attributed to more FUD (fear, uncertainty, doubt) in the media, and news coming from China’s bans on mining (again). The on-chain metrics have shaped up for promising long-term price strength for Bitcoin. This does not guarantee short-term parabolic price action but rather can be seen as a repeat of setups that were seen before healthy upward movement.

As we have in previous weeks, we’ll once again take a look at the illiquid supply change. The chart shows wallets that have held Bitcoin for over 155 days, who generally have low selling behavior. When these wallets begin selling at an abnormal rate, the indicator drops below zero. In mid-May, we saw a sharp drawdown far below zero, with illiquid supply holders at nearly -200k. The recovery since then has seen an increase to levels that mimic action seen in April, with an illiquid supply at +95k.

Selling once again has been coming from short-term market participants. This “paper hands” characteristic is expected from individuals who have the goal of entering markets and making a quick dollar. Over the past month, Long-term holders have collectively added 579,940 BTC while short-term holders have collectively decreased their holdings by 521,983 BTC. This is a clear illustration of the fundamental conviction long-term holders tend to have. Even over the past week, long-term holders’ buying pace was roughly 23k over what short-term holders were able to sell. The total supply of BTC held by long-term participants currently nearly triples that of short-term holders. The recent characteristics can be compared to that of holders in mid-2013.

This week’s SOPR (spent output profit ratio) saw profound action that was surprisingly not correlated with the price of Bitcoin. This metric is simply a ratio of the price sold vs the price paid for bitcoin by individuals. SOPR formed a higher low, while BTC formed a lower low over the current timeframe. This was last seen in late February before a major price run to the upside.

Stablecoins are cryptocurrencies that are pinned to the price of fiat currency (US dollar, Euro, Yen). The price of these coins fluctuates little to none. The SSR(stablecoin supply ratio) has recently seen an influx of coins returning to platforms from cold storage. This is generally a sign of holders aspiring to put those stable coins to use, and swap into different cryptocurrencies (including BTC). The supply ratio has typically correlated with the overall price action of BTC over the past few years. The slight move-up shown over the past few weeks is akin to levels seen in late 2018, after the 2020 crash, and before the sharp winter run-up of 2020.

One possibly concerning future indicator from a mining standpoint can be seen in the miner net position change. Miners have continued a month-long trend of selling the BTC after it has been mined, rather than holding it on their own balance sheets. This metric currently does not have a bearish effect on the price of BTC. This is assuming that an average of 5k coins coming into the market over a few weeks is not substantial enough to drive the price down. This selling can be attributed to miners outside of China taking advantage of more cost-effective mining positions as China banned BTC mining. This resulted in massive mining operations in China haunting mining, and not competing on the mining networks as they look for new countries to relocate to.

The most entertaining/optimistic metric of them all, the S2F Model (stock to flow), will round out our analysis for this week. The model runs the risk of being invalidated with the price falling below model indicators as far as it ever has in the past. If this continues, the model will no longer be featured in the weekly “Chain Gang” analysis. This seems unimaginable considering how well this model has tracked the price of the asset, but an extremely sharp run-up in price is required for the model to even have a chance of remaining relevant.

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