The Decline in Bitcoin’s Active Addresses Could Signal Increased Price Instability
After reaching a peak about a month ago, Bitcoin’s [BTC] performance has been lackluster, with the digital currency struggling to maintain its upward trajectory. Over the last fortnight, BTC has been trading below the $100k mark.
It’s not just the price movements of Bitcoin that are concerning, but also the dwindling number of active users. Notably, prominent cryptocurrency analyst Axel Adler has pointed out a sharp decline in Bitcoin’s active addresses recently.
Adler highlighted that following BTC’s price spike to $107k a week back, there has been a noticeable decrease in the volume of active addresses on the Bitcoin network. The number of active addresses has now fallen below the yearly average, hitting a low of 1.1 million.
This downward trend raises red flags for BTC as it indicates a decrease in overall network activity, with fewer investors actively engaging in transactions.
Observers at CryptoCrypto have also noted this reduced network activity, citing Bitcoin’s NVT Ratio, which has surged from 89 to an all-time high of 978.
Such elevated NVT Ratio levels suggest that Bitcoin might be undergoing a phase of speculative price inflation that could be unsustainable. Historical data shows that extreme NVT ratios have typically been followed by price corrections.
Further reflecting the diminished investor interest is the decline in daily transaction volume from 402k to 350k over the past three weeks.
This drop in transaction volume corroborates the earlier observation of reduced user interaction with the Bitcoin network. Historically, an increase in active addresses aligns with bullish markets, while a decrease often foreshadows market corrections, particularly when accompanied by low transaction volumes and a rising NVT Ratio.
Implications for BTC
The shrinking number of active addresses has coincided with heightened volatility for Bitcoin, making it challenging for the cryptocurrency to maintain a consistent upward trend while user activity declines.
These market dynamics hint that the decrease in active addresses has impacted the demand side of Bitcoin, which is crucial for sustaining positive price movements.
If the subdued demand persists over an extended period, institutional players might resort to selling to cover their operational expenses, potentially exerting further downward pressure on BTC’s price.
If the current trend persists, Bitcoin could potentially dip to $94,992. Conversely, a recovery in Bitcoin’s demand side might see the price attempting to reach $98,830.