There is a before and after in one particular Bitcoin indicator that could be signaling bearish price action in the short term.
As stated by many experts, the current bullish momentum can only be supported by strong demand, otherwise, BTC’s price could move sideways or risk returning to its former range below $40,000.
If anything has me concerned it's this. Where is the demand? pic.twitter.com/id2a7l6tEf
— Will (@WClementeIII) August 29, 2021
The amount of on-chain activity is a useful indicator to measure say demand. As the first cryptocurrency by market cap climbed to its all-time high, above $60,000, the network saw a rise in its number of transactions.
This was probably triggered by a FOMO effect from retail investors jumping into the crypto space for fear of missing out on future gains.
This phenomenon was driven by Elon Musk promoting Dogecoin, the boom in the non-fungible token (NFT) sector, and the yield offered by some DeFi protocols competing with Ethereum.
Bitcoin benefited from this new wave of investors adopting cryptocurrencies, and digital assets. Thus, a combination of institutional and retail interest and capital allowed BTC’s price to reach a new ATH. Transactions fees at that moment skyrocketed.
This happened right until the moment when BTC collapsed in the first of 3 capitulation events spread out across May, June, and July. On-chain activity dropped with the market and has been unable to recover since.
As seen below, data from explorer Mempool.space shows that fees have gone from 100 sats/vB to around 7 sat/vB for a high-priority transaction. Via Twitter, analyst Mr. Whale said the following on the decline in Bitcoin’s on-chain activity:
Data shows there is virtually no demand for Bitcoin right now. The BTC mempool has been flatlining for weeks, which is even worrying some bulls. We’re in for another big crash, yet most are too greedy to admit that.
Bitcoin On-Chain Activity At A Low, Whales Take Over The Market?
On the other hand, pseudonym analyst “ChimpZoo” sees the other side of the coin. The analyst believes the lack of on-chain activity could be bullish for BTC’s price based on 2 reasons.
First, this indicates a decline in retail participation or that a low amount of BTC’s supply is being held by “weak hands”. The large inflow of retail investors experience in the first months of 2021, some analysts believe, led to speculation, high funding rates, and a high level of over-leverage trading positions.
All those factors accelerated Bitcoin’s dropped from its ATH and operated as bearish catalyzers. Recent price action to the upside lacks those variables, which could suggest that this rally could be more sustainable.
In addition, ChimpZoo claimed that the lack of on-chain activity and the rally point to an increase in whale activity, and in strong hands coming into the market. This is supported by Jarvis Labs’ Accumulation Trends metric.
As seen in the chart below, in the past 30 days Bitcoin whales have been accumulating more BTC than smaller investors. The more yellow and closer to 1 on this metric, the more whales have been accumulating.
Thus, this could explain the low on-chain activity. Analyst Checkmate acknowledged that the market is at an uncertain point, but tends to incline more to the bullish side:
The divergence between onchain activity and supply dynamics atm is simply insane. Activity looks like a bear. Supply looks like a juiced bull. Truly a challenging structure to assess direction in, but in my view, supply dynamics trump activity. Shows conviction and strength.