An increase in Bitcoin trading volume and positive on-chain data appear to be the primary forces behind BTC’s newfound strength.
The beginning of 2023 has provided Bitcoin (BTC) with bullish indicators and the rally to a year-to-date high at $21,647 has crypto traders hopeful that the worst part of the bear market has ended. The surge effect of BTC’s bullish price action is also carrying over to Ether (ETH) and Bitcoin mining stocks.
The reduction in Bitcoin Fear and Greed index to neutral is possibly driven by volume increases, Bitcoin on-chain data and BTC price decoupling from equities markets. While not all analysts believe a market bottom is in, let’s dive into the data.
Trading volume and volatility return
Bitcoin’s price spike has been accompanied by massive growth in trading volume. Over the last week, BTC volume has more than doubled, reaching $10.8 billion, a 114% increase over 7-days.
Bitcoin trading volume. Source: Arcane Research
Increased trading typically correlates to an increase in volatility. While the current 2.4% 7-day volatility levels are still below the 2022 7-day average of 3.1%, Bitcoin has remained consistent during the 2023 rally.
BTC 30-day and 7-day volatility. Source: Arcane Research
Trading volume increases coincide with profits returning
Bitcoin on-chain realized profits are retesting the adjusted spent output profit ratio (aSOPR) value of 1.0, which some analysts believe to be a key resistance level. The aSOPR metric historically shows a change in the overall market trajectory as profits are absorbed by trading volumes.
BTC aSOPR 7-day exponential moving average. Source: Glassnode
According to Glassnode,
“An aSOPR break above, and ideally a successful retest of 1.0 has often signaled a meaningful regime shift, as profits are realized, and sufficient demand flows in to absorb them.”
Reversing a trend that started in May 2022, the on-chain realized profit and loss ratio for BTC is up over the 1.0 level, hitting 1.56 profits over losses on Jan. 16, 2023.
When more traders are in the green on BTC purchases and realizing profit without the price plummeting, it signals market strength.
Realized profit and loss ratio for BTC. Source: Glassnode
On-chain analytics are also showing positive signs that Bitcoin’s recovery is potentially on the way. The more the market can absorb sell pressure without price capitulation speaks to the reduced overall market fear and possible macro shift.
Bitcoins softening correlation to equities
Volatility, realized profits and trading volume are helping Bitcoin decouple from equities. As reported by Cointelegraph, Bitcoin’s price action typically has been closely correlated to U.S. equities.
Bitcoin’s 30-day correlation to the Nasdaq reached 0.29 on Jan. 17, 2023 the highest BTC divergence from equities since December 2021.
Vetle Lunde a Senior Analyst at Arcane Research explains what decoupling means to the Bitcoin market.
“Softening correlations is a positive development in the market.”
Bitcoin’s previous correlation could have been caused by institutional investors bundling BTC with other risk assets and large growth companies like Tesla holding exposure.
Now that institutional investors and growth companies are holding less Bitcoin, correlation to markets may lessen in the future.
Equities markets could continue to flutter due to the resiliency of high inflation, but Bitcoin’s divergence from the stock market could help BTC become an investment hedge. According to some analysts, if Bitcoin can become a hedge to equities, institutional investors may return to the market.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.