Navigating the stormy seas of the bitcoin markets can be a challenge. Luckily, Bitcoin uses a publicly available blockchain that contains valuable information about all transactions that were ever made on the network. By combining this on-chain data with other price and market data, bitcoin holders are more equipped to understand why its markets behave the way that they do, giving them tools to make more informed decisions or the confidence needed to keep sailing. This article is the fifth installment in a series of monthly market analyses that started out as a Twitter thread that was transformed into this article upon request.
This bitcoin market analysis looks at three overarching questions:
- Why did we dip (again)?
- Is there still demand?
- Is there still room for growth?
Before we dive into those questions, let’s first have a look at the price chart (figure 1). Bitcoin started the month strong, rallying to a new all-time high at ~$69,000 but then dropped to ~$47,000 (-27.56%), where it found a lot of confluence for support (e.g., a key Fibonacci level, a large volume in the UTXO realized price distribution and large whale inflows).
Upon writing my monthly market analyses, I noticed a trend: I am writing about a price dip that happened near the end of the month. William Clemente III has recently noticed that same pattern (figure 2).
1. Why Did We Dip (Again)?
Based on responses on Twitter, an explanation for this phenomenon should be sought in the options markets. As explained here, this is related to something called “max pain,” which is essentially the art of making one’s trading counterparty suffer the most to reach optimal personal profitability. After the bitcoin price had rapidly risen in late 2020, an increasing number of options traders were expecting continued price growth. This created a scenario in which it became profitable to take the other side of this trade if price indeed went down.
The rapid bitcoin price growth is particularly visible in the Bitcoin Price Temperature (BPT). As can be seen in the second chart in figure 3, temperatures rose at a much faster pace so far this cycle (orange line) in comparison to the previous one (yellow line). As a result, price reached temperatures of around six (orange line in the other charts in figure 3) at an earlier post-halving date than during the 2017 bull run. Therefore, some exhaustion of price could be expected around these price levels.
Similarly to the options markets, an increasing number of futures market participants became excited about bitcoin’s prospects and took leveraged bets at an increasing rate, causing open interest on futures to skyrocket (figure 4). Not just the bitcoin price and its temperature needed to cool off — so did the leverage in the futures markets.