25 Apr 2022
TradFi vehicles and wrapped bitcoin are overlooked by pure on-chain analysts
There are more liquid bitcoins in the market than on-chain macro data suggests.
By examining Bitcoin’s UTXOs aged one year or more, we see signals of accumulation, as the %-share of UTXOs aged one year or more has reached an all-time high. But is this a viable metric as the market structure has matured and BTC has been financialized and wrapped into other investment structures outside the bitcoin blockchain?Since January 2020, 1.1m BTC has been moved to funds, public companies, and other chains. These are all liquid alternatives to trading BTC, and market activity across these assets impacts BTC's price discovery.In other words, coins are moved into custody and remain idle in custody (leading coin age to increase), while traders express their views and buy and sell these "paper bitcoins". Market makers respond to the flows in these markets, and arbitrage aligns prices with spot. This leads price discovery in bitcoin to reach out far beyond the spot market. By labeling coins not moved in the last year as illiquid, you overlook coins sitting idle at exchanges and also coins being held by the entities mentioned above (Funds, public companies, WBTC/BTCB).Likewise, the declining exchange balances are also massively understating the amount of liquid and tradeable alternatives for bitcoin exposure that impacts BTC's price discovery. Following Bitwise's lead-lag analysis of the bitcoin market and our own multi-dimensional information flow analysis, the results clearly indicate that linear cash-settled CME futures have the leading role in BTC's price discovery, i.e., a market that currently has an exchange balance of 0 BTC.In essence, relying on macro on-chain data becomes less relevant with time. Traders should be very careful to rely too heavily on pure on-chain narratives without being aware of the current market structure. This does not mean that these metrics are entirely useless, but they should always be interpreted with a solid pinch of salt.