Preface
2021 was a year of significant milestones for the cryptocurrency market — particularly for Bitcoin, whose fundamentals were strengthened as never before in 2021.
2021 saw the first sovereign nation to consider Bitcoin as legal tender; the world’s first cryptocurrency exchange, Coinbase, landed on traditional securities markets via IPO; Tesla announced the purchase of Bitcoin as a reserve asset, and attempted to allow the adoption of Bitcoin to purchase Tesla electric cars; social media giant Twitter launched a Bitcoin bounty feature; and El Salvador adopted volcanic energy mining. These were all historic firsts and mark a whole new era for Bitcoin — the era of institutional adoption.
At the same time, we also witnessed China’s crackdown on the cryptocurrency market, including on mining and trading. The Chinese mining industry has since become a historical memory and the US mining industry has taken advantage of the opportunity to emerge and rise with a large number of mining groups, with the great migration of the mining industry basically complete.
Due to strict controls by the Chinese government, there was a large outflow of Bitcoin from local exchanges in China this year, with Huobi and OKex being the two exchanges with the largest outflows and most of the Bitcoin going to Coinbase. Coinbase became the centralized exchange with the largest amount of outflows, and the largest BTC balance come year end. Four of the top five centralized exchanges in terms of BTC reserve balance were from the US.
Despite strong regulation, we are still seeing robust demand in the market, with long-term holders accumulating 13.35 million Bitcoin. The computing power of the entire network has returned to the level prior middle of the year, and institutions around the world — including funds and corporations — added a total of 182,000 Bitcoin over the year.
Looking at Bitcoin from a valuation perspective, current indicators such as NUPL, CDD, Realized Cap Hodl Waves, and Asopr all reflect very strong fundamentals for Bitcoin, with the broad cycle still not having peaked.
We have reason to believe that BTC is playing a positive role as a reliable Store of Value (SOV) at a time of increasing uncertainty in the global macroeconomic and globalization dimensions of human and social development, providing a new means of risk hedging and store of value for people around the world. We believe that Bitcoin will continue to perform well in 2022.
Ⅰ. On-chain Data
1. Deposit & Withdrawal
The Bitcoin Reserve Balance in 2021 continued the downward trend we observed in 2020, with a cumulative net outflow of 67,000 Bitcoin across the year. In terms of the time dimension, the exchange’s Bitcoin continued to decrease between January and April 2021, with outflows ceasing mid-year and turning into net inflows, followed by the market experiencing significant selling pressure. At the end of July, the exchange inflow trend was declared over, and the Bitcoin price bottomed out. The fourth quarter then saw a low and sustained oscillation in exchange BTC reserve balances. As of December 31, 2021, the centralized exchange BTC balance was 2,554,800, or approximately 13.5% of total circulation.
Chart 1: Cumulative net outflow of 67,000 BTC balances from centralized exchanges in 2021.
Chart 2: With the exception of May, June and the end of September, the change in BTC positions on centralized exchanges basically showed a net decrease throughout the year.
In terms of segmented stock structure, as of December 31, 2021 Coinbase holds first place in BTC reserve balance of centralized exchanges with 690,000; Binance is in second place with 585,000; Gemini rises to the third place with about 290,000 BTC reserve balance; Among the top five, four of them (Coinbase, Gemini, Bitfinex, Kraken) are all US-based exchanges. Okex and Firecoin slipped to 9th and 13th place respectively.
Chart 3: Coinbase holds first place in centralized exchange reserve balances with 690,000 BTC, OKex and Huobi slipped to the 9th and 13th place respectively.
From the perspective of the breakdown of traffic structure, the centralized exchange staged the BTC “Escape to the West” in 2021. Due to the unprecedented increase in China’s supervision, a large number of local Chinese exchange users have withdrawn BTC to relatively safer transactions. Under this trend, a large number of Bitcoins flooded into exchanges such as Binance, where the BTC reserve balance on the Exchange showed a continuous expansion trend throughout the year. From January 1, 2021 to December 31, 2021, the Binance Exchange had a net inflow of 271,300 BTC, making it the centralized exchange with the largest inflow of BTC.
The top three centralized exchanges for BTC outflows were Coinbase, Huobi, and Okex, with Coinbase having a net outflow of 283,500 Bitcoin throughout the year. The main reason for the large outflow is the continued strong investment demand coming from large institutions. Since Coinbase is the first cryptocurrency exchange in the United States, and the world, to IPO in the traditional securities market, its compliance and security are relatively higher and meet the requirements of institutions for self-custody and security. Most institutions, such as Mircotrategy, Grayscale, Meitu, etc., complete their investment and withdrawals through Coinbase. The huge withdrawals of Huobi and OKex are highly related to China’s regulatory policies. Among them, Huobi will fully complete the withdrawal of stock users in mainland China at the end of 2021, which is the main reason for the sharp drop in its BTC reserve balance.
Chart 4: Changes details of BTC reserve balance of mainstream centralized exchanges in 2021
Chart 5: Coinbase was the largest centralized exchange in terms of outflows for the year, while the largest net inflow was to Binance.
If we divide the number of Bitcoins outside the centralized exchange with the centralized exchange Bitcoin balance, we can get a multiple of Bitcoins outside the exchange, which we call the “Exchange Supply Shock Ratio (ESSR)”. An increase in the ESSR indicates an increase in off-exchange Bitcoin and a decrease in on-exchange Bitcoin. Since exchanges are currently the main centralized market for trading Bitcoin, it can be approximated as a fluctuation in the number of tradable chips in the market, so fluctuations in the ESSR indicator can also be used to measure the supply and demand for Bitcoin in the market.
In 2021, the ESSR indicator experienced roller coaster-like fluctuations, showing a trend of first rising, then falling, and then rebounding throughout the year, meanwhile showing a high degree of coincidence with Bitcoin price fluctuations. This kind of highly correlated relationship is also better understood in principle — when the index rises, the numerator (Bitcoin outside the exchange) increases, the denominator (Bitcoin inside the exchange) decreases, and the Bitcoin supply of remaining exchange decreases, and the Bitcoin demand has been increased without changing or even increasing. When the demand remains the same, or the change cannot keep up with the exchange’s short-term supply of a large number of chips, the ESSR indicator falls, leading to increased selling pressure and Bitcoin price falling.
Chart 6: The ESSR indicator has experienced an upward-fallen-rising trend in 2021
Chart 7: From the perspective of the big cycle, the volatility trend of the ESSR indicator has a high correlation with the Bitcoin price
In general, the exchange BTC reserve balance is still in a low position, owing to the intensive accumulation of funds at a low level. The main force driving this trend comes from long-term investors. The total number of Bitcoins held by them will reach 13.5 million in 2021, which is a record high. The current long-term holders hold approximately 13.35 million Bitcoins, a drop of 150,000 Bitcoins. Since long-term holders usually collect chips in a bear market or a shock market, they distribute chips to take profit in rising markets. Therefore, through this relationship, we can think that the long-term holders’ chip distribution actions may indicate that a new round of upward cycle is about to begin, while the current position status reflects that they are still dissatisfied with the current market price and have not reached a significant condition of distribution.
Chart 8: The current long-term holders hold about 13.35 million Bitcoins, which is at a historical high. Long-term holders usually only distribute chips during the rising phase.
1.Network status
Network status is an important dimension for evaluating the activeness of the Bitcoin network. This report will analyze the number of active addresses, on-chain trading volume, mempool memory pool status, mining difficulty, and the highly anticipated Lightning Network in 2021. Details as follows:
Number of Active Addresses is an important indicator for assessing Bitcoin network activity, which counts the number of unique addresses in the network that are active as senders or receivers, and only addresses that are active in successfully completed on-chain transfer transactions are counted.
Looking at the trend of the fluctuating distribution of the number of active addresses throughout the year, there is a great contrast between on-chain activity before and after May.
Chart 9: The number of active addresses rebounded in the second half of the year, but there is still a certain distance from the first quarter of 2021.
Total Transfer Volume (transfer amount on the chain) can reflect the scale of the number of Bitcoins transferred on the chain. If the buyer and seller have a large amount of funds, the Total Transfer Volume is usually relatively high. In the first half of 2021, Total Transfer Volume will generally be 2 million or less. We have observed that this trend has changed significantly in the second half of the year, and Total Transfer Volume has been significantly higher. Due to the sharp fall in the middle of the year, the Bitcoin price is down and the introduction of regulatory policies has led to the clearing of a large number of retail investors.
At this time, the price attractiveness is more profitable. Although the price fluctuated greatly throughout the year and the increase was small, the capital scale of the players on the chain was increasing. This shows that the second half of the year attracted more large funds to enter the market, and the scale of on-chain handovers was higher.
Chart 10: The scale of chip transfer on the chain shows that a large number of small funds investors were liquidated and left the market in the middle of the year, and the second half of the year is more attractive for large funds to enter the market.
El Salvador became the world’s first sovereign state to announce the use of Bitcoin as legal tender. This event is an important milestone in the history of cryptocurrency. The government of El Salvador has released Chivo, a universal wallet software, which is connected to the Bitcoin Lightning Network. In addition, Twitter also launched the Lightning Network reward function in 2021, also connecting to the Lightning Network. The widespread use of wallet software will make the Bitcoin Lightning Network shine in 2021.
Judging from the data on the chain, the Bitcoin capacity of the Lightning Network has increased by over 200% in 2021, from more than 1,000 at the beginning of the year to 3,300, and there is still a trend of continuous growth. The number of Lightning Network channels will more than double in 2021, reaching over 80,000.
As Bitcoin’s Layer 2 network (Layer 2), Lightning Network has extraordinary characteristics in transaction speed and transaction fees. Its almost second-to-account speed and close to zero fees are comparable to traditional centralized remittance institutions. It can far outperform many new main chains. As more and more institutions adopt Bitcoin, its payment properties of Bitcoin are gradually getting more applications, and the Lightning Network will further carry the payment functions of Bitcoin in the future.
Chart 11: The number of Bitcoins in the Lightning Network more than triples to 3,300 in 2021 and is still growing.
Chart 12: The number of lightning network channels more than doubles in 2021
3. Valuation Indicators
Bitcoin Unrealized Profit/Loss NUPL (Net Unrealized Profit/Loss) reflects the situation between unrealized profit and unrealized floating loss. When this indicator is at 0.5, the proportion of the total unrealized profit in the total Bitcoin supply, within the total market value of Bitcoin, is equal to 50%. Historically, NUPL = 0.5 was a strong support level in bull market, as was the case in the 2013 and 2017 bull markets.
When the indicator is higher than 0.75, the market sentiment is characterized by “greedy”, a periodical or cyclical top area at this time. As of December 31, 2021, the NUPL is 0.48, and the key position of 0.5 is constantly tested. Looking at the unrealized profit scale and the corresponding market sentiment characteristics, the bull market is still not over — the market sentiment characteristic corresponding to this position is “half-trusted”.
Chart 13: BTC NUPL is currently at 0.48, the most frenzied phase is yet to come.
Chart 14: In each round of the big cycle, there have been many attempts to test the position below 0.5, and this round of bull market has not reached the most fanatical area.
CDD can reflect the willingness of holders to sell Bitcoin. This indicator is the product of the holding number and the holding data when the UTXO of the holder is burned. The greater the holding number, the longer the holding time, and the higher the CDD value at the time of destruction. When the value of this indicator is at a high level, it can reflect two possibilities. Long-term holders — or “whales” — with a large amount of Bitcoin are in a sell-off state. Therefore, we can judge the cyclical tops and bottoms of the market by observing the high and low positions of the CDD indicator value.
The 90-day moving average of CDD provides us with a good perspective. As shown in the chart below, when the indicator is in the red zone, it indicates that long-term holders or giant whales are in a substantial sell-off stage, and the market is about to peak. Conversely, when the indicator is in the dark area, it means that the role of sell-off at this time is mainly short-term Bitcoin holders or small retail investors. At present, the indicator is slightly lower than 200K, which is a lower position. The market sell-off has not yet arrived, and the tone of the bull market is healthy.
Chart 15: CDD is at a low level, indicating that the current large funds have not yet entered the stage of large-scale distribution.
The Realized Cap Hodl Waves indicator reflects the distribution of the realized market value (the scale of the fiat value of the sold token) in the time dimension. For example, taking 6 months as a threshold, the Realized Cap Hodl Waves within 6 months reached 90% — indicating that 90% of HODL Waves were created in the last 6 months, and 90% of UTXOs in the market turnover in the last 6 months. Such a high turnover ratio indicates that the market is in a frenzy stage and the exchange of chips is very intense, which is often the top area at this time.
By observing this indicator, we can find that the market will usually peak when the warm-toned part quickly rises to a high level. Otherwise, it is in the bottom area. The current warm color part (the part shorter than 6 months) has begun to turn upwards, indicating that it is now at the beginning of the second wave of rising market in this round of bull market. When this proportion reaches about 90%, the market will peak.
Chart 16: The percentage of realized cap Hodl Waves within 6 months starts to turn upwards, and more than 90% are signs of peaking.
The short-term holder spent out profit ratio reflects the level of profitability after short-term speculators sell their chips. In an upward trend, if the SOPR indicator falls back to 1, it means that investors are in a no-gain-no-loss situation when they sell their chips. At this time, investors still expect the price to rise in the future, so they are reluctant to sell chips — resulting in a reduction in the amount of chips thrown into the market. The selling pressure dropped, and the price stopped falling and rebounded.
Therefore, SOPR indicator falling back to 1 or below in a bull market is a good opportunity to buy.
If the SOPR of short-term holders is in a negative number (loss status), it means that the bull market is very successful in the middle of the washout, and the short-term speculators have been “washed off”. The current indicator is already in the negative region, and washout is very successful.
Chart 17: Short term holder spent out profit ratio falls into negative value, short term speculators have been washed out of the market with losses.
4. Institutional positions
Institutions will enter the cryptocurrency market significantly in 2021, including funds (trusts, ETFs, asset management products, etc.) that have sprung up, and companies (listed companies, non-listed companies) are also buying cryptocurrencies on a large scale, of which Bitcoin is the primary standard product.
In the whole year of 2021, all the institutions that have open positions in the world will increase their holdings by 182,000 Bitcoins, and the cumulative Bitcoin holdings will reach 903,000, a year-on-year increase of 25%.
Chart 18: 2021 Global institutional (including funds and corporations) positions in publicly held Bitcoin increased by 182,000 BTC.
In the fund institutions, the increase in positions in 2021 showed an overall increase followed by a stable situation, with positions increasing by 62,000 Bitcoin throughout the year. Fund positions climbed sharply and rapidly at the beginning of 2021, then showed a slight decline in the middle of the year, before maintaining signs of a steady recovery in the second half of the year. Among them, Grayscale makes the largest contribution at the beginning of 2021 and is no longer open for subscription thereafter.
Chart 19: Grayscale contributed a large position increase to the fund’s institutions at the beginning of 2021, after which it was no longer open for subscriptions.
The corporations showed a steady increase in holdings throughout the year, adding 120,000 Bitcoins throughout the year, and almost maintaining a “HODL” status after the increase, with very little selling. Mcirostrategy made the largest contribution throughout the year, increasing its position from 70,000 to 124,000, contributing 54,000 increments to the corporate institutions.
Chart 20: Corporations added 120,000 bitcoins to their holdings for the year, with Microstrategy adding 54,000 bitcoins.
Most of the position data released by public companies have the average position price. From the data distribution point of view, 36 companies have announced their holdings of Bitcoin, of which 26 have announced input costs. Among these 26 companies, 9 companies have an average holding price of less than US$20,000, 7 companies have an average holding price of US$20,000–40,000, and 5 companies have an average holding price of more than US$40,000. Among companies with an average holding price of less than US$20,000, most of the holdings numbers are between 100–1000. Companies with an average position price of US$2–4 million have the largest holdings. Among them, Microstrategy holds more than 124,000 holdings, and Square, Tesla, and Marathon Digital Group hold thousands to tens of thousands of holdings.
Chart 21: The number of positions held by public companies that have announced that they hold Bitcoin and the purchase cost price.
4. Computer Power Market
In 2021, Bitcoin’s entire network’s computing power experienced an “N”-shaped trend, which fluctuated upward from the beginning of the year to April; the average computing power of the entire network in April was close to 200EH/s, and then fell to a minimum of 60EH/S under the pressure of Chinese supervision. Chinese miners have to execute liquidation and withdrawal, and a large number of mining machines and mine owners seek overseas mining business. With the gradual rise of overseas mining power, the computing power has recovered in the second half of the year. It is currently around 180EH/s, with the highest being close to 200EH/s. The computing power has returned to the level before the plunge in the middle of the year, and the mining difficulty has also approached 519 (May 19th) before the level.
Chart 22: The entire BTC network’s computing power has been de-sinification throughout the year, and its computing power fluctuates in an “N”-shaped trend.
Chart 23: The difficulty of mining has risen to the level before 519 (May 19), and the miners are still optimistic about the future of BTC.
China’s power in Bitcoin mining has been greatly weakened. According to research data from the University of Cambridge, the United States has become the largest share of Bitcoin computing power, while China’s mining market share has fallen to zero. After this battle, the investment of the miners group is also more rational. They pay more attention to long-termism. The balance of the miners’ BTC wallet continues to grow steadily, and the mining business is gradually becoming larger and more grouped.
Chart 24: The BTC mining industry has undergone a major migration. The United States has become the main position of global BTC mining, and China’s market share has fallen to zero.
Chart 25: Miners’ BTC wallet balance continues to grow, and their willingness to hold Bitcoin is very obvious, and the miner group pays more attention to long-termism.
Ⅱ. Afternoon Outlook
From a fundamental point of view, long-term holders still hold more than 70% of the chips in the market. The large-scale distribution of chips has not yet arrived, and the market is still pouring in funds. The continued outflow of BTC balances on the exchange confirms this sign. This report believes that the market is still pouring in incremental funds, the BTC supply and demand pattern is still gradually tilting towards the imbalance of supply and demand, and the situation of short supply is still continuing to ferment. Under this trend, a short-term correction in Bitcoin price will not change the mid-to-long-term upward trend. Continuing the bullish judgment for the whole of 2022 relative to 2021 remains unchanged.
By quantifying the deviation of the weekly level BTC high from the weekly UB MAX bias ratio， it can be seen that the major cycle tops when this indicator exceeds 0.35. Currently this indicator is still at -0.22 and the top is premature.
Chart 26: UB MAX bias ratio exceeds 0.35 and peaks after the big cycle.
Rapid short-term price moves to the upside are usually accompanied by profit-taking sell-offs, leading to price pullbacks. By quantifying the cumulative return of the last 30 days of prices, we find that the risk of pullback increases substantially after the 30-day cumulative return exceeds 60%. Currently this value remains negative and is not a cause for concern.
Therefore, from a technical analysis perspective, we also believe that the broad cycle has still not peaked.
Chart 27: After the 30-day cumulative return exceeds 60%, one needs to be alert to the risk of a pullback, the value of which is still negative.
Ⅲ. Report Conclusion
2021 was a year of significant milestones for the cryptocurrency market, particularly for Bitcoin, whose fundamentals were strengthened as never before in 2021.
2021 saw the first sovereign nation to consider Bitcoin as legal tender; the world’s first cryptocurrency exchange, coinbase, landing on traditional securities markets via IPO; Tesla announcing the purchase of Bitcoin as a reserve asset and attempting to allow the adoption of Bitcoin to purchase Tesla electric cars; social giant Twitter launching a Bitcoin bounty feature; and El Salvador adopting volcanic energy mining. These are all historic firsts and mark a whole new era for Bitcoin — the era of institutional adoption waves.
At the same time, we also witnessed China’s crackdown on the cryptocurrency market, including mining and trading were not spared. The Chinese mining industry has since become a historical memory and the US mining industry has taken advantage of the opportunity to emerge and rise with a large number of mining groups, with the great migration of the mining industry basically complete.
Due to strict controls by the Chinese government, there was a large outflow of Bitcoin from local exchanges in China this year, with Huobi and OKex being the two exchanges with the largest outflows, and most of the Bitcoin going to Coinbase. Coinbase became the centralized exchange with the largest outflows and the largest BTC balance for the year. Four of the top five centralized exchanges in terms of BTC reserve balance are from the US.
Despite strong regulation, we are still seeing robust demand in the market, with long-term holders accumulating 13.35 million Bitcoin; the computing power of the entire network has returned to the level before the middle of the year; and institutions around the world, including funds and corporations, adding a total of 182,000 Bitcoin over the year, with strong momentum.
Looking at Bitcoin from a valuation perspective, current indicators such as NUPL, CDD, Realized Cap Hodl Waves, and Asopr all reflect very strong fundamentals for Bitcoin, with the broad cycle still not peaked.
We have reason to believe that BTC is playing a positive role as a reliable SOV (store of value) at a time of increasing uncertainty in the global macroeconomic and globalization dimensions of human and social development, providing a new means of risk hedging and store of value for people around the world, while the fundamental imbalance between supply and demand continues. We believe that Bitcoin will continue to perform well in 2022.
