The recent price movements of Bitcoin have created a sharp behavioral divide among its various groups of investors, and this may be a sign that the market is on the verge of a turning point.
April 14 on-chain data showed contrasting signals from our different buyer types, while our broader market-flows analysis continued to point to a healthy appetite for BTC from regulated financial vehicles like spot ETFs.
Investor behavior that deviates from the norm has, in the past, been linked with local tops—temporary price peaks that come before a correction or a consolidation phase. The current data is drawing attention from analysts and traders, with some interpreting the picture as one of a market that, after several weeks of bullish price action, may be about to take a pause.
A Tale of Two Buyer Groups
The information from April 14 presented an intriguing change in market psychology. New Bitcoin buyers — those who are entering the market with fresh cash — seemed to surge to an all-time high. The 30-day relative strength index (RSI) moved up to 97.9. The reading is so high that it raised alarms in some circles that Bitcoin’s price was at risk of an imminent correction. But what could be behind the Bitcoin buying, and why now?
This sharp increase in demand indicates that interest in Bitcoin is as high as ever. It is especially strong among investors who seem to have been waiting on the sidelines for a clear breakout or trend confirmation before throwing more money into the crypto markets. Spikes in new interest from new investors tend to happen most in the late stages of an upward move, when prices are already high and when the majority of the new investors seem to be acting from emotion rather than from sound strategy.
This new demand has surged. But its source is much less inspiring than the conventional wisdom about it would have us believe.
Now, I don’t have any direct line into where this new demand is coming from. But looking around, I see two likely candidates. The first is wealthier retail investors, in part because of the great ease the current market offers for trading out of one asset and into another, and in part because of the growing appearance of what the atual Departament of Labor figures call “freedom” (i.e., the freedom to trade in one’s 401(k) during market hours).
The second potential source of this new demand is hedge funds. At least in the past, hedge funds were considered the sort of institutional players that provide the market with conviction. But unlike in the past, when hedge funds have gotten super long, individual stocks have traded very poorly in the aftermath.
Bottom line: This surge in demand looks way less solid than the conventional wisdom about it would have us believe.
The clear difference in sentiment between the excited new entrants and the careful, sometimes even grudging, seasoned investors is usually a red flag in market cycles. When the new buyers with little experience in the markets—and the kind of behavioral finance biases that make someone overconfident, for instance—are the ones driving the rallies, that bulls-eye painting of a top signal becomes ever closer. The kind of behavioral dislocation that results when the market is mostly a function of new buyers and not much else has preceded several local tops in past bull runs.
Whales Exit While ETFs Absorb
A corrective narrative has been bolstered by the behavior of large holders of Bitcoin — often referred to as whales. Since April 9, these big players have been unloading their Bitcoin, to the tune of more than 29,000 BTC, into the market. This not-so-covert operation has been very nearly one of selling Bitcoin for U.S. dollars, and oh what a pretty picture it makes for the not-so-first-time sellers of U.S. dollar-denominated Bitcoin.
Typically, during market lows, whales tend to buy. As the prices start to climb and the retail participation picks up, that’s usually when the whales start to exit. The decision to sell into strength made by whales is—usually, I’m sure there are some exceptions—an indication that the current rally may be losing steam.
Not all signals are bearish, however. On April 15, exchange-traded funds (ETFs) that hold Bitcoin saw total net inflows of $76.4 million. This figure means that demand for Bitcoin from institutional and regulated sources remains quite solid, even while the big players in the market seem to be reducing their exposure. The ETF inflows also provide a nice cover for the Bitcoin price, acting as a buffer against a potentially more severe sell-off.
Inflows into Bitcoin exchange-traded funds (ETFs) stand apart from direct accumulations in crypto wallets that hint at a Bitcoin price increase. For inflationary pressures in the crypto space, reserve currency asset managers, traditional finance players like pension funds, and hedge funds that pursue a long-term strategy now count themselves among Bitcoin shareholders.
What’s Next for Bitcoin?
Bitcoin sends out mixed signals that furnish a very complex and rather unclear picture. On the one hand, inflows from ETFs in the very near future, as well as retail fervor, propel upward forces. On the other hand, the apparent retreat of conviction buyers, together with profit-taking by whales, suggests to some of us that caution may be warranted.
The key question is whether institutional demand via ETFs can sustain the rally without the kind of high-conviction accumulation that often precedes new all-time highs and in an environment where significant profit-taking by major holders seems to be the order of the day. Excessive selling by these major holders could, of course, lead to a short-term correction or consolidation in the Bitcoin market.
It would be wise for investors to keep a close eye on the forthcoming flows into exchange-traded funds, the movements of large wallets, and the changes in buyer profiles. If those buyers with high conviction come back into the market and large sellers generally known as “whales” stop selling, the market may well continue its uptrend.
Until then, these observed divergences in behavior are a good reminder that, even in a bull market, not all buying is created equal.
Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.
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