Although investors expect a short-term pullback after Bitcoin’s recent, rapid rise, the medium-term outlook remains strong.
Three on-chain indicators and volume trends suggest that the overall demand for BTC is rising: rising Bitcoin activity, growing institutional volume, and the breakout of BTC above $15,000 across high time frame charts, including the weekly and monthly charts. These trends emerged as BTC surpassed $16,000 for the first time since 2017.
Bitcoin Activity is Growing
The price of Bitcoin rose as high as $16,492.64 on Binance on November 13. Since the daily candle of Bitcoin opened at $13,802.94 on November 1, the November 13 high marked a 19.4856% gain in the span of just two weeks.
Bitcoin is a decentralized blockchain network and a peer-to-peer protocol at its core. Hence, the level of the usage of the blockchain is often considered a key fundamental metric by investors. When the BTC price rises in tandem with user activity, it indicates that the rally is organic, backed by an actual increase in user demand.
According to data from Glassnode, on November 11, the number of active addresses on the Bitcoin blockchain network achieved levels unseen since January 2018. This means that the user activity on the Bitcoin blockchain is at parity with levels last seen during the rally towards Bitcoin’s all-time high near $20,000.
When the user activity of Bitcoin rises in tandem with a decline in exchange reserves, it’s a good sign for the token’s medium-term prospects. User activity on Bitcoin increases when users send and receive Bitcoin. If this activity coincides with the reserves of Bitcoin on exchanges declining, there is a high probability that users are transferring funds stored in exchanges to personal wallets.
Arcane Research analyst Vetle Lunde said Bitcoin deposits at major deposits dropped 19% since March 15th, which is when Bitcoin crashed to sub-$3,600 on BitMEX. The outflow of Bitcoin from exchanges signifies a drop in the number of investors with the intent to sell in the near term.
Investors deposit Bitcoin into exchanges to sell for fiat currencies other cryptocurrencies. As such, when BTC moves out of exchanges, it typically means that investors do not plan to sell in the near term.
Institutional Volume Grows as CME Trading Activity Spikes
In its weekly report published on November 10, researchers at Arcane Research noted that open interest in CME’s BTC futures has been growing since October 3.
In the futures market, the term open interest refers to the sum of all active long and short positions. It is a useful metric to gauge the trading activity in the futures market as it shows the total amount of capital that is being used within the futures market to predict the price of Bitcoin.
From June to mid-August, Arcane Research said that open interest in CME’s BTC futures rose substantially to $948 million. But, from August 17 until October 3, the open interest fell 64% to $344 million.
But starting October 3, the researchers found that the open interest began to rebound. From $344 million on August 17, within two months, open interest grew back around $900 million. Based on this trend, an argument can be made that institutional Bitcoin trading volume is rising.
CME’s Bitcoin futures are used to measure institutional interest in Bitcoin because the platform tailors to institutions and accredited investors in the U.S. Retail investors in the U.S usually rely on Bitcoin spot exchanges, such as Coinbase and Gemini.
“The open interest is currently just below the highs of August, and we are once again on path to surpass the $1 billion milestone. The growth on CME has been accompanied by renowned macro investors going long bitcoin as an inflation hedge, first Paul Tudor Jones, and now Stanley Druckenmiller,” researchers at Arcane wrote.
Bitcoin Breaks Out of Weekly and Monthly Charts on Paper
Although the price of Bitcoin surged past $16,000 on November 12 and peaked at $16,492.64 on Binance, the weekly, and monthly charts have not definitely closed above $16,000. However, Bitcoin closed above $16,000 on the 16th and has remained above that figure.
The daily candle can close above $16,000 if the price of Bitcoin is above $16,000 when a new daily candle opens (every 24 hours). This means that Bitcoin was not above $16,000 for enough time for these high time frame candle charts, which include the daily, weekly, and monthly charts.
But, both daily and weekly candle charts closed above $15,000, which still marks an important breakout for Bitcoin. Prior to this, the cryptocurrency had not seen a daily or a weekly candle close over $15,000 since the run up to $20,000 in December 2017.
The main risk Bitcoin faces in the short term is its overextended rally on higher time frame charts. In technical analysis, 5-day, 10-day, and 20-day moving averages (MAs) are considered short-term MAs. The weekly and monthly candle charts of Bitcoin remain significantly above all three MAs, which could indicate that it might be overbought.
Data from Santiment also shows that the number of Bitcoin addresses “normalized” after reaching its 34-month peak on November 13. Currently, there are around 1.2 million active addresses interacting with the Bitcoin blockchain.
In the near future, the confluence of normalizing active Bitcoin addresses and some overbought signals on high time frame charts could raise chances of a Bitcoin pullback. But, in the long term, volume trends, on-chain activity, and momentum show that there is room for a broader rally.
Google Trends data also demonstrate lacking interest from the mainstream, compared to the 2017 rally. If sidelined capital stored in stablecoins like Tether, and institutional investors are mainly driving the ongoing uptrend, when mainstream investors enter the cryptocurrency market, a bigger rally could materialize.
At least in the medium term, the prospect of the entry of mainstream investors remains as one of the key potential catalysts for a major upside price movement.