Bitcoin (BTC) had a rough year throughout 2022.
But new on-chain and futures market data show positive signs that the leading cryptocurrency by market capitalization has started to recover.
Following a wave of short liquidations, the futures market is pointing towards a new equilibrium. According to Glassnode data, short liquidations removed unhealthy market speculators, and on-chain and exchange data now point to improving spot market and exchange net deposits.
A large group of investors that were previously in losses are now back in what analysts at Glassnode call “unrealized gains.”
Mass short liquidations lay the foundation for new investors to thrive
Futures data typically maintains a balance between long and short positions. When the market moves, investors tend to upgrade their futures to avoid selloffs. By contrast, in mid-January investors were surprised, leading to an all-time high of 85% short liquidations.
Short selling dominance has helped fuel the current Bitcoin price rally. In January 2023, more than $495 million in short futures were settled. Liquidated shorts create automatic Bitcoin purchases, thus boosting the price of BTC. The year-to-date liquidations have three big waves that peaked at $165 million in one liquidation day.
Following the historic number of short liquidations, the futures market is trending towards long positions. As of January 30, 51.46% of open interest is more long than short.
The liquidation of short positions not only helped the Bitcoin price rise, but also seems to suggest a return of positive sentiment in the BTC market.
Glassnode researchers said:
In both perpetual swaps and fixed date futures, the cash and carry basis has returned to positive territory, with annualized returns of 7.3% and 3.3%, respectively. This comes after much of November and December saw backwardation across all futures markets, and suggests a return of positive sentiment, and perhaps with a side of speculation.”
Centralized exchange deposits break even
In March 2020, Bitcoin balances on centralized exchanges (CEXs) reached an all-time high. Since the all-time high was reached, Bitcoin has exited spot exchanges. There are currently approximately 2.25 million BTC on 21 major exchanges, which is a multi-year low. 11.7% of the total Bitcoin supply held on centralized exchanges was last observed in February 2018.
Typically, throughout Bitcoin’s history, exchange deposits and withdrawals are similar, creating an even balance. The balance was broken in November 2022 when net Bitcoin withdrawals from exchanges reached between $200 million and $300 million a day. The large Bitcoin withdrawal flow during this period was historic, reaching -200,000 Bitcoin leaving exchanges during the month.
As Bitcoin started to gain bullish momentum in January 2023, deposits and withdrawals on centralized exchanges have normalized. Net flows are now closer to neutral, showing a reduction in the high outflow trend.
Several groups of Bitcoin investors return to the zone of “unrealized profits”
The movement of Bitcoin in and out of exchanges helps provide analysts with an estimate of the acquisition price of BTC from investors. During the 2022 bear market, only pre-2017 investors saw potential profits. Investors who came to Bitcoin after 2018 were all at an unrealized loss.
According to what Glassnode researchers said:
“Through the 2022 downtrend, only investors from 2017 and earlier avoided hitting an unrealized net loss, with the class of 2018 onwards seeing their cost base taken out by the red FTX candle. The current rally, no However, it has pushed the class of 2019 ($21,800) and earlier back to unrealized gains.”
The fact that a growing number of investor cohorts have returned to profitability is a good sign, especially after Bitcoin posted record realized losses in December 2022.
Two of the largest investor groups, those who bought BTC on Coinbase and Binance, maintain an average BTC purchase price of $21,000. With Bitcoin still trying to reach $24,000, any upcoming corrections caused by macro factors could push unrealized gains in these groups lower.
On-chain, spot and futures data show positive signs of Bitcoin price recovery. The futures market indicates renewed equilibrium after a record number of short liquidations.
The market is now showing improved net flows from exchanges and spot market activity suggests that investors are slowly returning to the cryptocurrency market.
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