Bitcoin's series of bear markets has clearly instilled a wave of pessimism in market participants, bordering on outright fear. The flagship cryptocurrency, which lost around 28% of its value in November this year, looks poised for the start of a full bear cycle. Interestingly, recent on-chain data was made public. This data examines several key metrics to explain the liquidity situation driving Bitcoin's price, and includes implicit references to what can realistically be expected in the short term.
As long-term demand increases, available liquidity will decrease
In a QuickTake post on CryptoQuant, analytics platform Arab Chain highlights the growing disconnect between experienced Bitcoin investors and its “smart money” market participants.
DeFi companies typically start reporting with measurements taken from the sell-side aggregate liquidity metric, which tracks the amount of Bitcoin that can be sold to the market based on the actions of parties that act as liquidity sources. According to Arab Chain, the measure of this indicator has recently fallen to around 975,000 BTC, indicating a reduction in the amount of coins that active market participants are able to sell.
In parallel, the Accumulator Address Demand Indicator shows a surge of over 355,000 Bitcoins. For context, this metric reveals how much sustained buying pressure is coming from reputable Bitcoin accumulation wallets over time. The surge to levels above 355,000 reflects a growing appetite for accumulation among the most powerful holders of the premier cryptocurrency. Aggressive accumulation behavior exhibited by market participants typically helps predict long-term sustainable price behavior.
Meanwhile, Arab Chain points to the fusion of two metrics: liquidity inventory ratio and ETF demand. The first is a measure of how long existing liquidity can sustain market activity, with a value of 2.74 months, indicating a lag in active supply replenishment. The latter indicator shows net outflows from US spot ETFs and has fallen to -51,000 BTC, indicating continued net outflows. Taken together, both indicators point to weakening institutional demand, which is in clear contrast to the increased on-chain accumulation seen in other regions.
Notably, Binance data reveals that there has been a visible drop in the correlation between price and net purchases. At the time of the DeFi company's report, Bitcoin was around $83,000, but the correlation had dropped to 0.72. Weakening correlations typically indicate that capital inflows are decreasing relative to price movements, which means market movements are based solely on increasingly fragile available liquidity. Historical data points out that in such situations, the introduction of slight downward pressure can cause an exaggerated price crash.
Bitcoin price overview
At the time of writing, Bitcoin is worth about $85,100, losing about 1.81% in the past day.
Featured images from iStock, charts from Tradingview
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