Using indicators while trading helps build a clearer narrative, but using only indicators is a surefire way to fail. The same goes for determining Bitcoin price cycles. Looking at on-chain indicators is helpful, but if you ignore the real driver – demand – you will not be able to accurately estimate anything. Demand in the financial market creates Bitcoin’s price movements. Everything else is just a way to gauge sentiment.
Many people don’t quite understand how exchanges play such a crucial role in the cryptocurrency ecosystem. You can think of exchanges as gatekeepers that can decide who has access to crypto and who doesn’t. Of course, this can be bypassed with P2P trades, but exchange clout doesn’t come from a place of unilateral power over access – it comes from their liquidity and their ability to draw in large traders.
Large traders, obviously, come with large profits for the exchange. Whether the trader themselves are profitable or not is another story, but the exchange makes their dough on trading fees.
Even a 400 BTC order has the ability to move markets across various exchanges. For an illiquid altcoin, even a few BTC of volume can push price 10s, if not 100s, of percentage points up. All of Bitcoin’s price action was a pure function of orderbook mechanics. Not utility, not censorship resistance, but demand and supply.
Now to boil it down, utility and everything else have a direct effect on demand and supply. However, this doesn’t change the fact that demand and supply are the two most important factors. Whatever drives orderbook mechanics, if there’s a demand surplus, price will go up; if there’s a supply surplus, the Bitcoin price goes down.
On-chain metrics are a great way to track activity and sentiment. More often than not, these metrics are able to provide detailed insights as to how people are acting and using Bitcoin. But one should understand, this does not necessarily mean it correlates to a proportional move in demand. For instance, we could have an incredibly low NVT ratio, implying the market is due for a move up, but a massive sell wall could show up and dwarf demand, leading price to go down.
Analyzing on-chain data is not as simple as you would expect. It is a very nuanced field, and even pioneers like Willy Woo go wrong with their price predictions more often than not. On-chain data, the fear and greed index, and other tools are great as supplements to economic mechanics and price action. But they have no role as standalone price predictors.
As a result, once again, it boils back down to demand and supply. These two things affect everything. And although humans have a tendency to link events together and idealize them as fundamentally tied, this just isn’t true.
Bitcoin price is established on orderbooks. Any exchange can drive the price, and the rest follow suit thanks to a crude version of the law of one price kicking in.