Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry.
This week, we cover Bitcoin’s on-chain indicators showing strength despite the price retracement. On the other hand, we dive into the crash experienced by Chainlink and some of the warning signals it had been showing.
Bitcoin Sustains Above $10K as Markets Decline
Bitcoin’s price has been relatively stable following a market-wide correction in early September. Despite dropping approximately 8% in September, Bitcoin has managed to achieve a record: it has closed above the $10,000 mark for its longest streak of 64 days and counting.
With prices trending sideways for the past couple of days, traders are unsettled on whether this is the beginning of a larger correction or if prices are ready to climb back. By analyzing on-chain activity, we are able to obtain a clearer picture of Bitcoin’s current state and what may come next.
Daily active addresses, for instance, provide a valuable metric for Bitcoin’s usage. While the number of addresses does not necessarily equate to the number of Bitcoin users, this indicator still provides a valuable approximation to Bitcoin’s daily activity. As we can see in the graph below, Bitcoin daily active addresses hit a two-year high a few days ago:
This is a clear indication that demand to use Bitcoin has been growing steadily, as reflected in the number of active addresses. Moreover, Bitcoin saw a similar pattern in early July when daily active addresses also reached a high while prices were trending sideways. This increase in demand preceded a 20% break-out.
Another key Bitcoin indicator has been reaching new highs: its hash rate. In this case, the hash rate has hit several all-time highs in 2020. The hash rate — which measures the aggregate computing power contributed by Bitcoin miners — is a key indicator of Bitcoin’s security.
The growing hash rate is even more remarkable when considering the Bitcoin halving reduced the amount of Bitcoin rewarded to miners by 50%. Despite the reduced profitability, miners continue to contribute more resources to mining Bitcoin, potentially signalling their bullish stance on the decentralized cryptocurrency.
While these indicators offer an optimistic outlook on Bitcoin, it still has several levels of large resistance before crypto traders go back to talking about lambos and moons. By analyzing all the prices at which Bitcoin was purchased on-chain, IntoTheBlock is able to assess holders’ profitability and identify key areas of support and resistance. This data is displayed in the In/Out of the Money series of indicators.
The In/Out of the Money Around Price shows price levels where Bitcoin addresses have previously bought, categorizing addresses as in the money (profiting) or out of the money (losing money). The size of these clusters represents the volume of Bitcoin held in current positions that was purchased in this price range. Here, we can see that over 1.1 million BTC was purchased by 1.48 million addresses between $10,400 and $10,700. This is expected to (and has been) an area of strong support as there will be buying pressure from holders to sustain this key range.
On the other hand, there are two areas of strong resistance for Bitcoin based on on-chain data. The first one is the current resistance it is facing around the $11,000 mark, where 626K BTC has been bought by 1.17 million addresses. This creates resistance from many of these addresses looking to close their positions to break-even. After that, there is another similar resistance level between $11,400 and $11,700 as shown in the graph above. The good news is that past these resistance levels, there is likely to be less selling pressure past $12,000.
Overall, Bitcoin has seen remarkable growth throughout 2020. Despite the recent price retracement, key indicators such as its daily active addresses and hash rate continue to signal bullish momentum. While these do not necessarily predict price will break-out right away, they do highlight the sustained optimism in Bitcoin’s outlook. In order to continue its positive price action, though, Bitcoin must first overcome the strong resistance levels below the $12,000 mark.
The Chainlink Aftermath
Several decentralized finance (DeFi) and oracles tokens have crashed by over 50% from their yearly highs in August. Chainlink, which had been one of the best performers this year, has been no exception, with LINK’s price dropping as much as 60% from its high around $20.
While the crash coincided with a broader market retracement in crypto and equities, Chainlink and DeFi tokens had been flashing signals of traders being overly exuberant. For one, the number of short-term addresses had spiked dramatically following LINK’s price action in the summer.
Traders, which IntoTheBlock categorizes as addresses that have been holding tokens for under 30 days, increased by over 7x compared to the number seen in January. This pattern points to high speculative activity, and can also be seen in many other oracles and DeFi tokens.
By analyzing transaction activity, we can see that large players appeared to be selling LINK near the highs. Large Transactions Volume, which aggregates the volume in transfers of over $100,000 on-chain, reached an all-time high a few days prior to LINK’s peak.
Large transactions also jumped over $300 million following the confirmation of a lower high in early September, pointing to the likely closing of whales’ positions. These values have since settled even as LINK continues in a downward trajectory.
While LINK does have actual usage from its many partnerships, it is fair to say that speculative traders got ahead of themselves. As seen in the graph above, it appears that large players benefitted from the parabolic price action by selling towards the highs.
Overall, this does not negate Chainlink’s success as a bridge between off-chain and on-chain data, but it does point to the aftermath of a potential bubble. Ultimately, while the use-case for oracles remains bright long-term, its short-term price action remains risky and traders should proceed cautiously.
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