Bitcoin and Ethereum might expertise a liquidity disaster

The central theses

  • Exchange rate balances have fallen sharply in the past two days.
  • Research by Jarvis Labs analyst Benjamin Lilly points to an impending liquidity crisis for Ether on the stock exchanges.
  • Compared to the previous two upward cycles, the market flow data indicate a higher upward trend.

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Bitcoin and Ethereum are being taken out of exchange in large quantities. Given this trend, on-chain analysts suggest that prices for both cryptocurrencies could rise higher.

Visible signs of a bubble

In a bullish phase, the market runs hot and cyclically cools. Altcoin prices are rising and entering a bubble-like market. Traders recognize spikes and correction cycles and make higher highs and lows each time.

After all, the market runs out of steam and the local top becomes a generation top. During this boom, liquidity flows towards altcoins, resulting in abnormal profits in the absence of fundamentals.

Again, these are signs of a bubble as altcoins have an irrational exuberance. For example, the Stellar blockchain went out for a short time yesterday, but its native XLM token stuck to the previous day’s 25% gains. Meanwhile, despite the pending securities litigation filed by the SEC, XRP has reached $ 1.

However, on-chain analysis of the two major cryptocurrencies – Bitcoin and Ethereum – suggests that the market has not yet peaked.

Ethereum liquidity crisis

Benjamin Lilly from the on-chain research company Jarvis Labs mapped the connection between the reduction in the stock exchange offer and the ETH price. According to Lilly, ETH is “preparing for a historic run”.

He found that there were 44% fewer Ethereum balances on the exchanges in 2017 and users were pulling ETH back into personal wallets. This time the stock exchanges saw a 25% drop in supply. In addition, the total supply from ETH is 38% higher than last time, which represents greater overall liquidity on the supply side.

The ether supply shifted from the stock exchanges. Source: Jarvis Labs

In addition, exchanges aren’t the only companies holding ETH. Other illiquid ETHs are trapped in DeFi applications (11.5 million ETH), Grayscale reserves (3.17 million ETH), and Ethereum 2.0’s beacon chain (3.7 million ETH). A total of 18 million ETH (15% of the total offer) are locked up.

Lilly predicts that demand will increase and cause explosive price effects. This is thanks to the “growing institutional demand due to the unethical management of the dollar, the gray scale effect” as well as the general acceptance of crypto in NFTs, the base layer for stablecoins and other FinTech applications.

Bitcoin continues buying trend

Similarly, Bitcoin has shown no signs of a long-term cycle spike. Bitcoin’s age distribution bands metric has historically been a robust indicator of market spikes.

The metric, also called HODL waves, separates the Bitcoin addresses based on the last deposit and withdrawal time.

A wide short-term supply band indicates buyers are hyperactive, which has already happened twice near the top of the market. “36% of the offer was active in the last 180 days and was still well below the high of around 50% in January 2018,” wrote Coinmetrics’ Nate Maddrey.

Bitcoin HODL wave display. Source: Coinmetrics

Maddrey drew a similar conclusion from two other metrics: Market Value vs. Realized Value (MVRV) and Spent Output Ratio (SOPR).

Alongside this trend is a large amount of Bitcoin left the exchanges in the past two days when BTC fell below $ 59,000. The steep drop in the yellow line is the biggest increase since November 2020.

Bitcoin offer in exchange vs. offer. Source: Glassnode

The worsening liquidity crisis due to the strong demand intensifies the upswing after short-term consolidation.

At the time of writing, this author owned bitcoin and altcoins valued at less than $ 15.

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