Bitcoin’s bear market is far from over, but data points to improving investor sentiment

It's been a near-unprecedented year of extremes and black swan events for the crypto market, and as 2022 draws to a close, analysts are reflecting on lessons learned and trying to identify trends that may point to bullish price action. in 2023. .

the Terra Luna collapse, Capital of the three arrows Y ftx created a credit crunch, a severe reduction in capital inflows, and a heightened threat that other major centralized exchanges could collapse.

Despite the severity of the market downturn, some positives have emerged. The data shows that long-term hodlers and smaller wallets are actively accumulating during this period of low volatility.

Let's dive into the positive and negative data points.

Low liquidity and losses abound

When liquidity flooded the market in November 2021, Bitcoin (BTC) hit an all-time high and investors raked in $455 billion in profit. By contrast, as liquidity tightened in what many investors expected to be the darkest days of the bear market, $213 billion in realized losses led investors to give back 46.8% of peak bull market gains. The magnitude of realized gains vs. losses is similar to the 2018 bear market, when the rate of profit retracement reached 47.9%.

In the following thread, Cumberland, a major liquidity provider within the cryptocurrency sector, highlighted the liquidity challenges facing the market:

There are many sources of concern for market participants: volumes and liquidity have dried up and are at year-lows by various metrics. While this might be a festive phenomenon, the sentiment is dark:

—Cumberland (@CumberlandSays) December 12, 2022

According to Cumberland, the limited liquidity is the result of large-scale capitulations, leaving bankrupt companies with no remaining coins to sell.

CoinSharesAnalysis of weekly fund flows also showed trading volumes hit a new two-year low of $677 million for the week. Low trading volumes combine with crypto funds flowing from digital assets, making upside potential even more difficult.

Historically, centralized exchanges (CEXs) have been a source of fiat onboarding that helps attract more capital into the crypto asset space. Because regulatory concerns and CEX fearsbringing in new funds has become a challenge.

While the data above is very bearish, the market also has some data points that may indicate a reversal.

Minimal improvements appear in investor sentiment

While the merchants are looking forward to a positive Federal Reserve meeting that will reverse the downtrend in the near term, there are data points on-chain that show sentiment is making some marginal improvements.

CoinShares claims that even with CEX fears and smaller volumes, inflows are improving:

"Bitcoin saw inflows totaling $17 million, sentiment has steadily improved since mid-November with inflows since then now totaling $108 million."

While these numbers are not revolutionary, Bitcoin's low volatility offers investors the opportunity to dollar cost average and wait for a possible trend reversal. Current volatility is at multi-year lows for Bitcoin, reaching figures last seen in October 2020.

All-time lows in volatility are paired with a new all-time high in the long-term Bitcoin hodler cohort. Even though the BTC price remains on a downward trend, 72.3% of all circulating Bitcoin supply is now held by long-term hodlers.

Glassnode notes that the data shows:

“The near-linear uptrend in this metric is a reflection of the large coin buildup that occurred in June and July 2022, on the heels of the deleveraging event inspired by 3AC and failed lenders in the space.”

Adding to this perspective, former BitMEX CEO Arthur Hayes believes that Bitcoin has bottomed out after a handful of bankruptcies kicked irresponsible entities out of space.

While the pickup in sentiment and institutional investor inflows is not substantial enough to trigger a trend reversal, the positive data points show some signs of recovery.