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Despite a rocky start to 2022, there's signs that Bitcoin could make a rebound
It’s no secret that 2022 hasn’t been a great year for Bitcoin so far. The world’s biggest cryptocurrency has been in a downward trend, recording a 22.1% price drop since January 1. There’s several factors that could have contributed to the negative trend in the markets for Bitcoin and other crypto assets.
Investors have started gravitating towards a more risk-off approach, as evidenced by sell-offs in global stock markets. The S&P 500, which is widely regarded as the benchmark index for the U.S. equities markets, has declined by 5.5% since the start of the year. The Nasdaq-100 index, which has a much stronger representation of riskier tech companies, has seen a 10.5% decline in the same time period. The downturn hasn’t been limited to the United States, as evidenced by the 3.9% drop displayed by the Euronext 100 and the 7% decline in the Nikkei 225 index.
This trend away from riskier assets largely appears to have been triggered by the U.S. Federal Reserve signaling that it will begin raising interest rates in order to combat inflation. On average, respondents to a survey conducted by CNBC expected the Fed to raise rates 3.5 times this year.
The tensions between Russia and the West related to fears of a potential Ukraine invasion could have also had a chilling effect on the markets.
There have also been some cryptocurrency-specific news that could have negatively impacted the markets, for example Russia’s central bank proposing a ban on the usage and mining of cryptocurrencies in the country.
Regardless, there’s still plenty of positive signs that suggest Bitcoin has the potential to make a turnaround. These 4 indicators show that a positive Bitcoin prediction is not so unreasonable even if the market currently looks unexciting.
1. Bitcoin is flowing out of exchanges
According to data from Glassnode, there’s recently been a sharp uptick in BTC leaving cryptocurrency exchanges. In the last week of January, net BTC outflows from exchanges reached rates of between 45,000 and 59,000 BTC per month.
Image source: Glassnode
The team at Glassnode contrasted the current pullback in the Bitcoin market with the bearish period between May and July of 2021. The drawdown in 2021 was marked by a net inflow of BTC to exchanges, and a decline in the illiquid supply of Bitcoin. During the current pullback, the amount of BTC held on exchanges has declined, and the illiquid supply has seen an uptick.
Usually, BTC outflows from exchanges are seen as a bullish sign, as this suggests that more investors are withdrawing their coins to cold storage (and therefore don’t have the intention to sell in the short term).
2. Long-term investors are still HODLing
Data from the HODL Waves chart shows that BTC which hasn’t been moved in 3 years or more now represents around 37.6% of the Bitcoin supply. At the same time last year, this figure was at 35%. During the previous cycle’s peak in December 2017, coins that weren’t moved in three years or more accounted for 30.5% of the supply. We can therefore see that over time, investors that are seeing Bitcoin as a long-term bet are owning an increasing share of the BTC supply.
Image source: Unchained Capital
3. Digital asset investment products are recording inflows again
A report from crypto asset manager CoinShares published on January 31 shows that digital asset investment products have seen net inflows for two weeks in a row now. The company’s weekly reports track products like the Grayscale Bitcoin Trust, Bitcoin ETFs and ETPs, and other traditional investment products that give investors exposure to specific cryptocurrencies.
The two consecutive weeks with net inflows break a streak of 5 consecutive weeks with net outflows. The CoinShares team says the data suggests “investors are beginning to cautiously add to positions at these depressed price levels”. In the last week of January, Bitcoin investment products saw inflows of $22 million. While the figure is relatively small on its own, the flip from outflows to inflows could herald a shift in momentum for the Bitcoin market.
Image source: CoinShares
4. Comparing BTC price to on-chain investor demand shows Bitcoin is heavily oversold, according to Willy Woo
Willy Woo is a Bitcoin market analyst who’s known for basing his forecasts on data from the Bitcoin blockchain. According to a recent tweet from Woo, the relation between the price of Bitcoin and the on-chain demand displayed by investors suggest that BTC is at “peak oversold levels”. Woo says that this indicator is currently mirroring what we saw in October 2020 (when Bitcoin began its climb that would eventually break the old ATH from December 2017), and during the bottom of the “COVID crash” in March 2020, when BTC bottomed out at around $5,000.
Price in relation to on-chain demand from both speculative and hodl category of investors are now both at peak oversold levels.
— Willy Woo (@woonomic) February 2, 2022
The last time this happened was October 2020. The time before that was at the bottom of the COVID crash.
Woo’s data also shows that Bitcoin whales have been showing increasing demand for BTC recently.
Image source: Willy Woo