Glassnode: Which group has been impacted by the recent downward trend in the crypto market?

Author: CryptoVizArt, UkuriaOC, Glassnode; Compiler: Wuzhu, Golden Finance

Summary

• Binance, Bybit, and OKX remain industry leaders in the perpetual swap market, accounting for around 84% of total open interest.

• We introduce a new model to track the sensitivity of futures market leverage and open interest relative to changes in spot Bitcoin price.

• Prices have recovered above the short-term holder cost basis, providing much-needed help to new investors, with over 75% of supply having been re-converted into profits.

Perpetual Futures Market

The perpetual futures market is the deepest and most liquid trading venue for digital assets. Volumes are typically orders of magnitude higher than spot markets and are the go-to tool for executing trades, speculative positions, and arbitrage strategies.

In this section, we aim to introduce a framework for identifying market pivot points using perpetual futures markets. It attempts to identify points where over-leveraged speculators are liquidated during bull market corrections.

In 2024, open interest in perpetual futures ranged between 220,000 and 240,000 BTC. This value typically drops rapidly during deleveraging events and rises during more speculative periods. Recently, open interest has risen to the 260,000 to 280,000 BTC range, indicating high speculative interest since early June.

To better understand the mechanics of the perpetual contract market, we measured the share of the top three exchanges based on open interest.

As shown below, Binance, Bybit, and OKX account for about 84% of the market share, so we will focus on the metrics related to these exchanges for analysis.

Turning points in the perpetual swap market often result in a significant drop in open interest, often as a direct result of margin call liquidations for traders holding highly leveraged positions.

The chart below highlights periods where open interest on the top three exchanges dropped by more than 5% in a week. We have encountered 10 such perpetual swap liquidation events in the past 12 months.

To assess the size of the forced liquidation, we measured the total liquidation volume during these deleveraging events. The chart below shows that total liquidation volume (long and short) surged above the typical bull market baseline of $200 million per day. This shows the role of margin call liquidations in the decline in open interest in the above chart.

Directional Bias

During market turmoil, deleveraging events can occur when the market moves in either direction. However, in this case, we specifically isolate potential pivot points during bullish corrections and therefore divide liquidations into two subsets:

• Long dominated liquidations, where more than 50% of liquidated positions were long of the contract (green)

• Short dominated liquidations, where more than 50% of liquidated positions were short of the contract (red)

In the recent sell-off to $55,000, we can see an ideal long liquidation candidate pivot point recorded. Here, over-leveraged long positions were liquidated, causing a sharp drop in open interest across the top three perpetual futures exchanges.

Next, we can build a framework to spot these pivot points using perpetual swap funding rates. This approach utilizes the 7-day moving average of funding rates across the top three exchanges.

This is a very insightful indicator that provides information about the directional bias of positions in the perpetual swap market. When the weekly average of funding rates is above the neutral level (0.01% every 8 hours), it indicates that there is a strong demand from market takers to open long positions.

After setting the current ATH at $73,000 in March 2024, the demand for long positions in the perpetual contract market has been weakening. Apart from this, the sentiment briefly turned positive during the second attempt to break through $73,000 in May. However, the overall sentiment has remained neutral to negative since then.

The latest rebound from the $54,000 area is a good example of over-leveraged long positions being liquidated near the local lows. The funding rate below the neutral level of 0.01% suggests that there has been no rush to open new long positions since the July lows were formed.

Short-term profitability improved

The recent price surge has also brought relief to Bitcoin short-term holders (STHs), who represent new demand and recent buyers.This group of Bitcoin holders lost more than 90% of the Bitcoin supply at the end of July, putting them under financial pressure.

The rally has now breached the STH cost basis and has left 75% of its holdings in unrealized profit. This can be seen in the STH-MVRV indicator, which has now returned above the breakeven level of 1.0.

We can add more granularity to our assessment by examining the individual coin age breakdown of the short-term holders MVRV indicator. We can use this perspective to understand how profitability has changed for subgroups of recent buyers. The coin ages we analyze range from recent buyers (1 day to 1 week) all the way to buyers who are about to turn into long-term holders (3 to 6 months).

1 day-1 week MVRV: 1.05 (red)

1 week-1 month MVRV: 1.1 (orange)

1 month-3 months MVRV: 1.0 (blue)

3 months-6 months MVRV: 1.07 (purple)

Currently, all short-term holders have returned to profitability, which highlights the strength of the current uptrend. This could have a positive impact on overall investor sentiment.

Finally, we can assess the net realized profit/loss for each sub-group, which can be viewed as a measure of net capital flows. This indicator also shows signs of constructive improvement, with capital flows in most coin age groups being positive, with the only exception being the January-March coin age group.

The January-March coin age segment has borne the brunt of recent range-bound volatility and downward price action, and is one of the larger coin age segments in this study.

Summary

The perpetual futures market is the most liquid and deepest instrument in the digital asset market, making it a valuable source of market information. As BTC prices fell to the $53,000 region, it led to a major deleveraging event as many long traders were liquidated near the lows.

The price rebound was also very strong, leaving most short-term holders with unrealized profits. This provided much-needed financial help and was supported by a period of net positive capital inflows in recent weeks.