Market Sentiment Is Not As Strong As On-Chain Activity

Market sentiment is the public interest in the underlying assets and the behavior of traders on derivatives markets. Thanks to sentiment analysis, one can identify the attitude of long-term investors, as they always sell during the uptrend to short-term speculators and buy the dips with a statistically positive expectation. On the contrary, the crowd psyche is irrational, as they often buy with spiking candlesticks in fear of missing out and dumping in the downtrend.

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In a bull market, there is an increasing liquidation in correlation to the rise in price. The current total amount of liquidated long and short positions in the derivatives market is relatively low compared with the previous bull runs.

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One of the most significant factors of the derivatives market is open interest (OI) defined as the number of open positions currently on a derivative exchange’s trading pairs. The increasing OI from March 8 to March 28, 2022, is overheated and deliberately driven by the short-term traders as there was an open-ended capitulation that initiated at the peak of $48,000 on March 28. Hence, it’s not capable of supporting a possible uptrend.

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But more importantly, it may not be the retail’s activity as the exchange outflow addresses count has plummeted since May 10, 2021. It suggests that not many retail investors move those coins off of exchanges but could be whale accumulation instead.

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In addition, the downtrend in exchanges’ reserve and overheated OI make the estimated leverage ratio higher, calculated by the exchange’s open interest divided by their bitcoin reserve. It reveals that higher leverage is used by users on average, that is, more investors are taking high-leverage risk in the derivatives trade.

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Last but not least, net unrealized profit and loss (NUPL), the difference between market cap and realized cap divided by market cap, indicates the capitulation phase has begun since May 2021. The maximal value of the ratio of investors who are in profit was that day, and a sell-off has ensued. At the moment, bitcoin may be in the middle of this phase with the plausible reason to take profit until no more selling pressure.

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On balance, market sentiment is not as strong as on-chain activity. There is the likelihood that we are in a semi-bear market wherein the ongoing capitulation has taken effect since May 2021, and the continuing accumulation phase has appeared to wipe out the short-term speculators.

This is a guest post by Dang Quan Vuong. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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