- Technical analysis suggests that the month-long consolidation period in Bitcoin price will end in 1-2 weeks.
- Miners are no longer selling Bitcoin because they have successfully covered operating costs.
- Institutions are pulling Bitcoin into long-term cold storage at a pace never before seen in previous market cycles.
- This double supply constraint suggests we are in for a price rally.
On-chain analysis examines network activity to make a case for short to medium-term price action. It can be a powerful tool when combined with technical analysis and an overall bullish narrative of an emerging asset class.
In my recent article regarding cycle end date, I examined the number of blocks mined since the halving event. This article examines two additional on-chain metrics to make a short-term determination regarding Bitcoin price action: miner net position change and balance on exchanges. Both of these metrics point to less selling pressure on the Bitcoin network and serve as bullish tailwinds.
The technical setup
Bitcoin has been in consolidation mode since reaching its all-time high of $61,556 on March 13, 2021. As the massive wedge below suggests, it will break this pattern before April 20. Technically, this is a bullish setup. When examined in conjunction with the bullish on-chain indicators below, it only reinforces the idea that we will witness a bullish breakout in the weeks that follow.
Bitcoin miners can be net sellers or net holders. In some regards, miners are forced sellers despite their bullishness on price. They must sell to cover operational costs in electricity, land usage, and equipment upgrades. The chart below indicates that mining pools have, in aggregate, stopped selling. This is most likely due to the fact they covered their costs and can now focus on accumulation.
As the chart above suggests, position changes in Bitcoin mining pools can massively affect price action. Heavy miner selling pressure in January led to a 31% correction from peak to trough. As soon as mining selling pressure relented, the price began appreciating again. Also note the two week delay from when miners began selling to a peak in price action. This delay coincides with the tentative late April chart pattern break. Mining pools entering accumulation mode as they successfully covered their operating costs is a form of supply reduction.
Balance on exchanges
The major driver of this cycle is institutional buying. Publicly listed companies such as MicroStrategy (MSTR), Square (SQ), and Tesla (TSLA) have Bitcoin on their balance sheets. Hedge funds such as Skybridge Capital, insurance companies such as MassMutual, and the New Zealand pension system have all added Bitcoin allocations. Goldman Sachs (GS) and JPMorgan (JPM) will begin offering Bitcoin to their wealth management clients in 2021 and the former has already launched a cryptocurrency trading desk. A percentage of every type of institutional investor has allocated funds to Bitcoin, which speaks volumes of the institutional entrenchment necessary to prevent hostile government action.
On average, large institutions do not take the counterparty risk of leaving coins on exchanges due to their massive positions. The chart below demonstrates that the number of Bitcoin being held on exchanges continues to reduce at a pace that did not occur in previous bull market cycles. This trend is driven by institutional buyers taking their Bitcoin offline in a process known as cold storage. In fact, $10 billion of Bitcoin has gone offline in the last four months.
Cold storage involves pulling one's Bitcoin off of exchanges and securing them offline in a hardware wallet, paper wallet, desktop wallet, or USB drive. A hardware wallet such as Ledger Nano X or Trezor is the most popular option for most investors. When held on an exchange, the exchange custodies the investor's Bitcoin and has access to his or her private keys. Most investors do not have an issue with this.
For individuals or institutions who have large positions or significant net worth tied to Bitcoin, cold storage is recommended to avoid counterparty risk. It is the equivalent of self-custody for physical gold. The investor must safeguard his or her private keys and hardware wallet device, but there is no risk of exchange hacks or the custodian somehow taking one's Bitcoin.
Institutions pulling their Bitcoin offline is significant because these Bitcoins are permanently pulled away from the market reducing the supply in circulation. Cold storage is a method of long-term safeguarding. It makes no sense for an institution to go through the process of pulling their Bitcoin offline only to put them back online months later. Hot storage (keeping Bitcoin on an exchange or internet connected mobile wallet) and cold storage is similar to a checking and savings account. Short-term money for transactions or trading is held in a hot wallet, long-term money is held on a cold wallet.
On-chain analysis indicates that Bitcoin is facing a double supply shock. Miners are pulling Bitcoin out of circulation now that they have covered operating costs and institutions are pulling Bitcoin out of circulation for long-term safeguarding in cold storage. After this necessary consolidation period, I expect a bullish continuation based on these supply shocks.
This article was written by
Analyst’s Disclosure: I am/we are long BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.