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

2022 was an almost unprecedented year of extremes and black swan events for the crypto market, and now that the year is coming to a close, analysts are reflecting on the experience and trying to identify the trends that could point to bullish price action in 2023.

The collapse of Terra Luna, Three Arrows Capital and FTX created a credit crunch, a severe reduction in capital supply and an increased threat that several large centralized exchanges could collapse.

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

While the market continues to see red, positives are emerging.

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

Low liquidity and losses abound

When liquidity flooded the market in November 2021, the BTC price reached an all-time high and investors realized $455 billion in profits. Conversely, as liquidity tightened in what many investors hoped were the darkest days of the bear market, $213 billion in realized losses led investors to return 46.8% of their peak bull market profits. The size of the profit versus realized losses is similar to the 2018 bear where the ratio of withdrawal from gains reached 47.9%.

In the thread below, Cumberland, a major liquidity provider in the crypto 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, according to various calculations, at their lowest level of the year. While this may be a holiday phenomenon, the sentiment is dark –

— Cumberland (@CumberlandSays) 12 December 2022

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

CoinShares analysis of weekly fund flows also showed Coin shares trading volumes hit a new 2-year low of $677 million for the week. The low trading volumes are coupled with crypto-funds flowing out of digital assets, further hampering potential upside.

Historically, centralized exchanges have been a source of fiat onboarding that helps bring more capital into the cryptoasset space. Due to regulatory concerns and CEX fears, raising new funds has become challenging.

While the data above is very bearish, the market also has some data points that could point to a reversal.

Minimal improvements in investor sentiment are shown

While traders are hoping for a positive Federal Reserve meeting to reverse the short-term bearish trend, there are data points on the chain that show sentiment is making some marginal improvements.

CoinShares states that even with CEX fears and lower 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 aren’t groundbreaking, Bitcoin’s low volatility gives investors an opportunity to dollar-cost average and await a potential trend reversal. Current volatility is at multi-year lows for Bitcoin (BTC), reaching levels last seen in October 2020.

Record low volatility is coupled with a new all-time high in the long-term Bitcoin hodler cohort. Although the price of BTC remains in a downward trend, 72.3% of all circulating Bitcoin supply is now in the hands of long-term hodlers.

Glassnode notes that data shows:

“The near-linear uptrend in this metric is a reflection of the heavy coin accumulation that occurred in June and July 2022, right after the payoff event inspired by 3AC and failing lenders in the space.”

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

Although the rise in sentiment and institutional investor inflows are not significant enough to trigger a trend reversal, the positive data points show some signs of improvement.