In recent days, the price of bitcoin (BTC) has experienced a significant drop to its lowest level since February 26, reaching around the $57,000 mark. This decline has been accompanied by a high level of volatility in the market. However, analysts at Bitfinex have identified on-chain signs that suggest the leading cryptocurrency may be approaching a potential local bottom.
The correction in the price of BTC can be attributed to various factors, including significant sales of BTC by the German law enforcement agency, the Bundeskriminalamt (BKA), and the ongoing creditor redemptions by the defunct crypto exchange, Mt Gox. The BKA has been transferring large amounts of BTC to exchanges, institutional investors, and over-the-counter desks, while Mt Gox has initiated repayments of $9 billion in assets, consisting of BTC and Bitcoin Cash. These movements of coins have created selling pressure across all investor cohorts, leading to increased market fear, uncertainty, and doubt (FUD).
Despite the apparent impact of these sales on the market, analysts have cautioned that the actual effect may be less significant than initially perceived. The volume of BTC being sent to exchanges may not be as substantial as feared. Market participants anticipate a recovery after the market absorbs the excess supply of BTC, but Bitfinex has suggested that the market could rebound sooner than expected, as the impact of the sales has already been factored into the price.
Several on-chain indicators point towards a potential stabilization of the market and a potential price rebound for BTC. The Coinbase Premium Index, which measures the difference in price between BTC on Coinbase Pro and other centralized exchanges, has shown a positive trend despite the continuous decline in the price of BTC. This indicates a reduced selling pressure on Coinbase, suggesting a possible shift in market sentiment.
The Spent Output Profit Ratio (SOPR) for short-term holders has also reached a value of 0.97, indicating that this investor cohort is selling BTC at a loss, a behavior that typically precedes a price rebound. Furthermore, the average funding rate across all BTC perpetual trading pairs has turned negative for the first time since the bottom on May 1, reinforcing the notion that BTC may be stabilizing or approaching a potential local bottom.
While the recent correction in the price of bitcoin has raised concerns among investors, on-chain indicators suggest that the market may be on the verge of a potential rebound. The impact of large BTC sales and the movements of coins by Mt Gox creditors may have already been priced in, and the market could see a recovery in the near term. Investors should closely monitor these on-chain indicators to gauge the potential direction of the market and adjust their investment strategies accordingly.
