How bad is the FTX collapse for Bitcoin? On-chain analyst explains

The FTX collapse has hit the crypto ecosystem hard. Prices are depressed, confidence shaken, and we still haven't reached the end of this crisis. But besides price action, how bad is the current state of crypto? Have we reached a capitulation point and is there any silver lining to feel the pulse of the crypto market? We looked at data on the blockchain with On Chain analyst Will Clemente. I'm Giovanni. On this show we challenge the ideas that shape the world of crypto. In each episode, we assess a crypto narrative, a macroeconomic outlook or a potentially disruptive technology. Only the most solid ideas will make it to the other side. But before we get started, as always, don't forget to like the video and subscribe to our channel. Let's get into it. So the situation in the market looks very grim. Probably one of the darkest point that we have ever reached. From your point of view as on Chain analyst, have we reached capitulation moment or there is still room to go?

Sure, yeah, it's a, it's a great question. It's kind of the trillion dollar question. Right. I think one of the metrics you can look at is something called net realized profit and loss. The way this is measured is essentially by looking at when's the last time a coin moved. Right. So a coin last, let's say Last moved at 60K, now moves at 16K. Well, you know that that coin has obviously moved at a much lower price than where it previously did. So therefore it realized a large loss. And so when you look at kind of the aggregated sum of all the profit and loss, we can get what's called the net realized profit and loss. So we can look at that raw value which is measured against historical measures, you know, right along every other historical capitulation for Bitcoin. We can also take it a step further and adjust it for Bitcoin's market cap to basically adjust for the size of Bitcoin's growing market cap over time to basically get a gauge of how large is this capitulatory behavior on a relative basis. And that's also showing very similar signs of being on par with historical measures of deep capitulation. High level of everything I'm saying is there's immense losses being realized. And you can see that on chain. And there's also a large amount of market participants that are now underwater, which you can also see on chain.

Yeah, actually I read that Right now over 50% of Bitcoin addresses are in the red. Can you confirm that?

Yeah, that's Correct. And we can also look at long term holders, supply and profit or sake conversation supply and loss. The percentage of supply of long term holder supply and loss has reached an all time high over the last few weeks. So that's another measure where when you look at kind of that reading in 2014, 2018, we've just reached an all time high, but similar levels during those time periods.

Let's look at the silver linings. So let's start with bitcoin. You put out a few interesting charts in the last couple of days where you make the point that the bitcoin hodlers are doubling down on their position. So tell us more about that.

Yeah, sure. You know, you have long term holders profitability at an all time low. You have their holdings reaching an all time high, which shows that they're doubling down. We can also look at measures such as the amount of supply that hasn't moved in at least a year has reached all time highs. You know, things like that.

They are doubling down. How significant is this piece of data for the average viewer that maybe got into Bitcoin six months ago? What, why should, why should you care about it?

Yeah, sure, great question. You know, I think like a lot of people like to talk about whales, right? And this is something we hear a lot, you know, what are the whales doing? And you know, at least from an on chain perspective, when we look at whale behavior, what you see is that they tend to be very momentum driven. So whales don't necessarily like set the bottoms, they tend to kind of come in after the bottoms, got confirmation and then you know, they exit towards the top. You know, who, who really sets the floor in terms of like these broader like cyclical dynamics, you know, these like multi year cycles. Like who's setting the floor of these cycles? It's the long term holders. And so what we see is that long term holders buy heavily into the bear market, they kind of set the floor, come to kind of the buyers of last resort and then those long term holders distribute their holdings to new market participants in the bull market. And so what I think is more important than necessarily looking at whales is what are the long term experienced market participants, what are the OGs of the market doing? And by looking at that cohort of market participants, what we see is that they're doubling down aggressively on their holdings.

At the moment some people are criticizing the argument that there are this cohort of long term holders that still huddle on their bitcoin. They say that this doesn't necessarily mean that there is confidence in crypto or in bitcoin, but just that these people don't want to sell right now because they would sell at a loss. So they, they're just kind of forced to huddle further.

Sure. I mean I, I guess that's kind of just conjecture like I'm not really sure exactly, you know, what the reasoning why people are or aren't selling. Right. I mean I think you could have some of that. But also I would argue that more people are likely to be driven by fear than say I'm down 70%, I'm not going to sell. I think more likelihood, higher likelihood is if you have a lot of money invested in something and you don't have conviction in it and it goes down 70%, you're going to panic and sell it. But even regardless, I, I don't really think that that's like a conversation that really matters because you know, regardless like they're not selling and so you know, bare market bottoms are you know, set. When you know, sellers run out of supply to continue to sell onto the market rather than necessarily like you know, a new amount of buyers coming in, it tends to be more so of know when do, when did the sellers just run out of coins. And so you know, regardless of kind of the reasoning, which I would kind of push back on that frame of thinking because I just don't know like how data driven that is. But I would say that you know, regardless the you know, amount of supply that's being held by long term holders is at all time highs and you know, the amount of supply that hasn't moved in at least a year is at all time highs as well.

So the collapse of FTX has been interpreted as a warning sign that people should move their assets off from exchanges into self custody. So is this trend really happening? Looking at on chain data, is this lesson being learned according to you?

Yeah, sure. When we look at exchange balances according to Glassnode, which is the data provider that I use for most of my on chain data, it does appear that coins have been getting absolutely drained from exchanges when we look at something like the 30 day change. So you know, looking at what were exchange balances this time 30 days ago versus now, we see that that's in the strongest decline in Bitcoin's history. So you know, coins are coming off exchanges at a very high rate. I think a large, you know, reason behind that is obviously you know, the FTX situation and people are realizing that, you know, you don't have self custody of your bitcoin it's not really your bitcoin. A lot of platforms are, you know, rehypothecating your Bitcoin, lending it out to other entities in the space base. So it's great to see, you know, coins coming off exchanges. You know, one thing that I was looking at this morning was the amount of supply held by onchain entities between the size of 0.1 BTC, so a tenth of a Bitcoin and one Bitcoin. And what we see is that this is in the most aggressive increase in Bitcoin's history paired with coins coming off exchanges aggressively. And so by combining those two metrics, you get this picture that you can paint of, you know, coins coming off exchanges into these custodial wallets for, you know, kind of the average everyday retail person. And so I think that's very positive.

I guess that one way to go would be having your crypto in a private wallet and then using the exchanges only at the moment where you want to sell it or send it somewhere or exchanging it, but not using it for custody.

Completely agree.

Talking about Bitcoin. So a lot of maxis, a lot of bitcoin maximalists are saying that this crisis should also point at the fact that Bitcoin is probably the only asset that is kind of worth to invest in because the rest is just shitcoins, it's just scams and so on. So can we look at the on chain data and see whether this narrative is taking ground?

Sure, yeah. It's a good question. From an on chain perspective, what I like to look at is something called realized cap dominance. And so realized cap looks at what's the last time a coin moved. So for example, you know, if a coin is, you know, last moved at, you know, $1, you know, $1 of Bitcoin and you, you know, bought a thousand dollars of Bitcoin then and never moved them again. You know, in terms of realized cap, that's only attributing $1,000 to realized cap as opposed to in market cap terms, it's obviously much larger. So it's basically looking at what's the value stored in the network or another way to frame it. If that doesn't click with you would be kind of what's the cost basis of the market. And so when we look at Bitcoin's realized cap dominance relative to, I think coinmetrics, like looked at like the other top 10 coins or something like that, I forget the exactly how many coins they included in this. But what you can see clearly in this chart that they put out of realized cap dominance is that, you know, bitcoin is, you know, the 800 pound gorilla in the room. And it's realized cap dominance continues to trend upwards over time. Over the last year and a half was you had a lot of these, what are called low float high FDV tokens. So, you know, the VCs that would put out a lot of these tokens, for example, you know, some of the tokens that were involved with RTX, they would put out, you know, 5% of the circulating supply. Right. And then, you know, the fully diluted valuation, meaning instead of multiplying, you know, supply price times the circulating supply, you're multiplying it by the total amount of supply that will ever exist for the, for the asset. And so, you know, the FDVs on some of these tokens would be in the, you know, 10, 20, $30 billion range, when in reality, you know, there was nothing of, you know, that level of liquidity that was supporting the asset whatsoever. I think regulations are probably on the horizon. I think kind of the age of, you know, listing illiquid low, you know, float high FDV tokens is probably behind us now.

Final question I wanted to ask you. Is there any other piece of data on chain that our viewers should look at in order to feel some hope in this dark time?

Sure, it's a good question. I think one piece of data, it's very, very basic. But just looking at active addresses, we looked at active addresses over the last 10 to 12 years. Those are up only and making higher lows throughout the last 10 to 12 years. Of course, you know, you see that active addresses really spike up in a bull market because you have, you know, new market participants that come in and, you know, are looking to get involved with bitcoin. But you know, what you see, and this is like kind of the signal and the noise is that every bear market, the number of active addresses makes a higher low. Right. So, you know, what's more important is not necessarily the amount of people that, you know, the, the tourists that come into crypto, but it's the amount of people that stick around in the bear market.

Yeah, that's definitely important to see that in each bear market, confidence in crypto grows still. With each bear market, people see that crypto is coming back stronger. Yeah. Will, thanks a lot for bringing some hope in these dark times. And hopefully next time we talk, it will be already a bull market.

Yeah, I hope so. Thank you so much, Giovanni, for having me on. I enjoyed it.