Hindsight is a wonderful thing

Trading setups using inflows and outflows

Yo, it’s Beef back again dishing up some delicious on-chain data.

I just want to kick off with a quick story about the benefits of hindsight. I used to be a skater kid, inline blades to be precise.

During the summer my older brother and I used to spend day after day at the local skate park.

I used to be able to do a lot of fancy tricks like two wheel manuals, spins, ramp jumps, grinds, but there was one key thing that eluded me for a while and that was the half pipe. Specifically the ability to drop into the half pipe from the top.

The half pipe we had at our local skate park was a pretty big one to be fair, and the height really didn’t help the situation.

One day I plucked up the courage to give it a try, needless to say things didn’t go well. I leaned back as I dropped in, rolling onto my back wheels and ended up banging my head on the grind pole that sits on the lip of the ramp. I was completely dazed and ended up going to hospital to be checked for a concussion.

Despite the head injury, I remember the reason why this happened. It was because I was nervous about carrying too much speed to the other side of the pipe and flying out the top too high and having an accident. So I didn’t lean into the drop with a lot of speed. I felt pretty silly for plucking up the courage to try the drop in only to mess it up because I was too scared to properly commit.

I returned to the skate park just 2 days later, leaving my mother worrying at home that I would injure myself again. I knew what I needed to do now, it was a painful lesson but there was no other way. Hindsight is a wonderful thing.

I climbed to the top of the half pipe, positioned myself on the lip and dropped in, leaning forward to try and get as much speed as possible, bending my knees and tucking my arms.

Before I knew it I was going up the other side, popped out the top and landed on the opposite platform. Smooth. Easy. That’s how it’s done.

And so whilst on-chain often gets a bad wrap for simply being a tool for hindsight trading and struggling to predict future price moves, hindsight and post-mortem analysis is vitally important to learning the ebbs and flows of the market.

That’s what I have experienced this week watching the inflows and outflows from spot exchanges, learning.

Often people ask me why I always talk about inflows so much on twitter and don’t talk about outflows. I always reply saying that I’ve never managed to translate outflows into trading setups.

But this week it really clicked why that’s the case. Let me explain.

We knew the supply this week, but we didn’t know the demand, or did we? In hindsight, I think maybe we did.

On the 8th of June we got the announcement from Microstrategy that they were going to acquire another $500m of bitcoin and at the start of this week on June 14th we got the announcement that they completed the offering i.e. they had raised the money.

I’m using a great new feature of Trading View here where you can copy the link of any tweet, paste it onto your chart and it will pin it to the chart by date. In between these two announcements, bitcoin’s price rose by around $7.5k. I’m not saying they’re correlated, it looks that way in the chart below.

Exchange flows

Taking a look again at those inflows of bitcoin onto spot exchanges, there was certainly a big increase in these inflows since the first announcement on June 8th.

Throughout the week this was looking quite bearish, big inflows into spot exchange usually translates into more selling pressure because supply is increasing.

This translated into an increase in BTC reserves, i.e. netflow was positive and supply appeared to be greater than demand.

And since Monday, it seems we have seen that selling pressure take hold with BTC performing a slow bleed from 40k down to 34k this weekend.

But amidst all of this you might notice in the chart above of spot exchange reserves that there was a big decline.

If we look at bitcoin spot outflow mean, we can see those huge outflows show up clear as day.

This prompted me to post a bullish QuickTake over on CryptoQuant: https://cryptoquant.com/quicktake/60cf0f6941fd5a3d518bca80

Because if inflows are bearish then surely outflows are bullish?

Shortly after, price smashed through the 35k support, sinking into the 33k zone. Proving my point that I haven’t been able to translate outflows into trading setups before and making me feel silly for my bullish post.

In hindsight, it has become obvious to me why outflows don’t translate into trading setups, especially not like inflows do.

It’s because inflows describe new supply entering the market and can immediately translate into selling pressure, it’s predictive.

Whereas outflows describe old demand that have left the market, it shows us the buying that already happened, it’s hindsight.

I argue that the bullish equivalent of BTC inflows is not BTC outflows, it’s actually stablecoin inflows.

Stablecoin inflows can describe new demand entering the market which can immediately translate into buying pressure, predictive.

So similarly, stablecoin outflows can describe old supply leaving the market, hindsight.

Indulge me for a second

Now onto the highly speculative part and the real example of hindsight in this case.

I got an alert from CryptoQuant on Saturday about these outflows:

It’s the value of these outflows which are of great interest to me, $455m at the price they were transferred off the exchanges. This is spookily close to the $500m BTC that Microstrategy were looking to acquire this week.

And for me this puts those inflows into more context, often we know the supply but we don’t know the demand, But in this case, everyone knows that there was at least $500m worth of demand for bitcoin in the market.

In a market where demand is thin on the ground and everyone is worried about an impending bear market. If you want to sell a large amount of bitcoin it could be a difficult thing to do, you have to be very aware of liquidity across exchanges.

In hindsight, this situation has really highlighted to me why outflows are likely long-term bullish indicators and maybe even short-term bearish ones.

It’s going to be really interesting if Microstrategy announces tomorrow that their purchase of bitcoin is complete. I would also expect further downside in the market because it would signal to the rest of the market that the largest chunk of demand has now left the market.

Trading setups

I’d like to leave you with a table of the inflows and outflow, descriptions and how I think they can translate into trading setups.

Remember to use technical analysis along with on-chain analysis for best results.

I’ll caveat all of this with the fact that assets can be used for a variety of purposes particularly on derivative exchanges. BTC can be used to short on token margined contracts, stablecoins can be used to long on USDT margined contracts. You can earn interest on your assets or you might be responding to margin calls.

Serving up on-chain cuts