LOTS of Panic Sell-offs Last Night - Good for the Market?

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Dec 10, 2020

During yesterday’s market-wide pullback, I wrote about a significant uptick in the amount of ETH moving to known exchange wallets, signaling short-term ‘shakeout’ and some weak hand sell offs:

ETH, exchange inflow, past month (Source: Sanbase)

As it turns out, this was not an isolated event. A number of popular mid and high-cap alts recorded a very similar spike in sell-side pressure at or near last night’s bottom.

Like I noted yesterday, these exchange inflow bumps - recorded during a downtrend - can often have a surprisingly positive effect on the coin’s short-term PA. Strong rallies and bounce backs often need clear signs of market ‘pain’ to boot, which is why we often see people cashing out en masse at some local bottoms. That is, of course, provided there’s enough bulls around willing to ‘buy the dip’.

To capture the scale of yesterday’s FUD-induced sell offs, here’s a dozen different altcoins with a notable uptick in their respective exchange inflows:

Exchange inflows for BAT, ENJ, ZRX and MANA (Source: Sanbase)
Exchange inflows for LINK, UNI, REN and GNO (Source: Sanbase)
Exchange inflows for SNT AND YFI (Source: Sanbase)

While sustained rise in sell-side pressure would likely prove worrisome, short-term spikes like these indicate a growing level of concern about the market’s near and mid-term potential, which is often both healthy and necessary.

No sell-offs at these interim pullbacks would (in my view) point to extreme greed and irrational confidence by token holders, and on average signal overvalued market conditions. Some investor fear is good!

And by the way, it’s not just exchange-bound data that went haywire last night. For a number of coins, I’ve also noticed a cluster of Age Consumed spikes emerge during the downtrend, suggesting new activity of previously dormant coins. In other words, plenty of long-term HODLers awoke from their slumber in the past 24 hours.

Most veteran investors tend to execute trades based on extensive analysis or intimate market knowledge, which is why sudden changes in HODLer behavior (i.e. Age Consumed spikes) often coincide with shifts in market conditions and upcoming price volatility.

As you’ll notice below, several DeFi heavyweights like MKR, UNI and YFI all saw increased Age Consumed activity during last night’s dip, which might've suggested a close-forming bottom and potential trend reversal:

Age consumed for MKR, REN, UNI and YFI (Source: Sanbase)

And finally, one of our metrics that does a great job of capturing ‘market pain’ is Network Profit/Loss (NPL for short), which computes a daily network-level ROI based on the coin’s on-chain transaction volume.

Here’s how it works: for each coin on the blockchain, NPL takes the price at which it was last moved and assumes this to be the coin's acquisition price. Once the coin changes addresses again, NPL assumes it was sold.

As a result, strong spikes in a coin’s NPL indicates that its holders are (on average) selling their bags at significant profit. On the other hand, strong dips imply that the coin’s holders are (on average) realizing losses, suggesting panic sell-offs and investor capitulation.

Unsurprisingly, some of the most popular DeFi coins including UNI and YFI recorded strong dips in their respective NPL last night, signaling that its holders were - on average - selling at a loss for the first time in a while:

UNI, Network realized profit/loss, past month (Source: Sanbase)
YFI, Network realized profit/loss, past month (Source: Sanbase)

Pair these NPL dips with the abovementioned spikes in alts’ exchange inflows and age consumed, and you get a sense of growing fear and uncertainty in the crypto market. Just for comparison, go back through these charts and look at the activity around the last market-wide pullback on December 4-5th. You’ll see way less anxiety in the coins’ on-chain data relative to last night.

So what does this mean for the market? Well, like I mentioned in my ETH insight yesterday, these spikes in exchange inflow and age consumed “could suggest a short-term bottom starting to form”, which has already materialized. On a longer stick, they reveal growing concern - and real ‘pain’ - felt by altcoin investors, which could bode well for the market’s growth potential.

What we don’t want to see is no fear, all-in mentality. For now, at least, this doesn’t seem to be the case.

If you want to keep an eye on these indicators going forward, I made a chart template that shows all three of them - exchange inflow, age consumed and network profit/loss. Stay safe out there!

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Dec 10, 2020

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