An Overlooked Source of BTC Support: The Price Floor

As surely as the earth spins on its axis, spring comes after winter. This also applies to markets, and few markets have had such a brutal winter as crypto assets. It’s not just the price crash that hurts, it’s also the implosion of key components of the market infrastructure, starting with the Terra ecosystem and ending with… well, that remains to be determined.

The two threads of the downfall – a weakening macro environment and structural fragility – fed each other, with price falls exposing misdisclosures, risk practices and incentive structures, leading to further price falls and further unmasking. Until they didn’t anymore. That’s the part I want to focus on here: Why prices stopped falling.

Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is an excerpt from her Crypto is macro now newsletter, which focuses on the overlap between the changing crypto and macro landscape. These opinions are hers and nothing she writes should be taken as investment advice.

In early November, as the shock of the FTX revelations ripped through the ecosystem, BTC suffered what would be its final leg down, falling to around $16,000. The bad news just kept coming: The bankruptcy, the scale of the fraud, the spread of the damage , the suspension of withdrawals and subsequent bankruptcy of the industry’s “blue-chip” lender, concerns about bitcoin’s largest fund … The hits kept coming . But BTC fell no further, as it – just by the bleakness of the narrative – theoretically should have. What happened?

It has to do with bitcoins multiple use cases. Many insist that the asset is all about speculation: there is no fundamental value, the price is driven by narrative and nobody uses it. This blinkered assumption even tends to come from seasoned market watchers, which is an encouraging lesson for the rest of us (as in, no one understands everything, no matter how much of a household name they may be).

Those of us who have been paying attention know they’re wrong: Bitcoin isn’t just for speculation. It’s a speculative asset, for sure. Trading volume picked up from local lows at the start of the year. Although still relatively low, the volume is $13 billion daily on recognized exchanges, according to data from The Block. While we don’t know who is behind these trades, on-chain data tells us that the vast majority of BTC moved on any given day was last moved in the previous 24 hours (the light yellow-dark yellow area in the chart below). In other words, most of the activity in the chain is short-term churn. While some of this may be payments, we can probably assume that at least most of it for now is the result of speculative moves.

However, this accounts for less than half of the bitcoin in circulation. Most BTC held in addresses do not move much. Over 67% have not moved for over a year, almost 50% have not moved for over two years, as so far this year most of that cohort could be sold at a profit. Even by being conservative and removing all coins that have been dormant for more than 10 years because they can be considered “lost”, over half of the outstanding BTC has been dormant for over a year.

Although some of these holdings can be sold at any time, and many are likely to be if the BTC price continues to rise, these address holders are not pure speculators. For them, BTC is a long-term investment, a store of value, a hedge – whatever you want to call it, for them bitcoin has utility beyond short-term speculation.

A caveat to using address-based analysis: With the recent mass exodus from stock exchanges, given the concerns about market structure, it’s harder than ever to read address sheets. For example, the number of non-zero addresses is shooting up – but this does not necessarily mean that activity is increasing, it could just be people moving coins outside the exchange. In other words, these are not necessarily new users, they are just moving coins around. Or they may be new users. We just don’t know. But when we look at bitcoin that hasn’t moved in a while, we can be relatively confident in what we’re seeing – you can’t hide a lack of movement. If anything, the HODLer positions are probably undervalued – many investors may have held their BTC on exchanges until the market drama. They are long-term owners, but on the chain they appear as short-term owners.

Back to the thread…Bitcoin is a speculative asset, and a long-term investment. For some, it is a payment tool, judging by the growth of the Lightning Network. Bitcoin is all of these at once, and perhaps in the future it will also be an NFT (non-fungible token) platform. Who knows? This multifaceted use case provides support. When bitcoin’s price was at the local floor, accumulation raised selling pressure from miners and exciting speculators. That provided some price support and largely explains why the price didn’t fall further, even amid more terrible news.

The table below from Glassnode color codes accumulation according to address size. Purple represents large holders gathering, yellow shows smaller participants becoming more active. Back in November, after BTC fell to $16,000, large holders bought the dip. Some of this could have been for speculation. But then the feeling was as bleak as I have ever seen it. Volatility moves suggested traders were stamping for the exits, and speculators generally found more attractive risk profiles elsewhere.

Not only does this multipurpose bag provide strong floor support, it also explains why even seasoned traditional market watchers don’t “get it.” Can you think of other assets that have multiple uses? Gold and real estate come to mind – art, perhaps. But these have millennia of understanding behind them and are rarely confused with speculative assets because their prices are not volatile. These assets are also not particularly liquid (with the exception of gold, although it could be argued that physical bars are only liquid at certain times of the day, and certain days of the week, if held in a centralized repository, which introduces new vulnerabilities). It is not easy to imagine a liquid, always active asset that represents different things to different people. This further emphasizes how “unusual” bitcoin is – it is speculative and volatile, it is also treated by many as a long-term investment, and history has shown that this provides support to the asset floor while providing ample upside.

Another reason many seasoned investment veterans don’t “get it” is what they read in the media. Sharp price movements, uncovered fraud, exploits and examples of hype create dramatic headlines, which get clicks and keep the media’s business models afloat. It’s easy to see how those without the time or interest to dig deeper will take it as the whole story, especially when they’re used to feeling “smart.”

But bitcoin’s theoretical and demonstrated price floor is a key feature of the asset’s asymmetric risk – at these levels, the potential upside far outweighs the potential downside, especially now that we know the floor isn’t $0. Really smart investors go beyond the headlines, even when it means stepping outside their comfort zone.

Also, bitcoin’s use cases are still evolving – one example is the network’s possible use as a base for NFTs, another is the potential application of smart contracts. This will not only affect the debate around “intrinsic value”, it will also add more layers to the price floor. More traditional assets, even those that are also ready to benefit from the return of liquidity, do not have this development built into the asset itself.

This implicit price floor goes a long way to explaining why BTC has risen so strongly this week. The price floor development also positions the asset as an exciting long-term investment. The narrative shifts again.