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Bitcoin is over 40% below its ATH, but on-chain analysts say it is “starting to bottom.”

The cryptocurrency market has experienced another rollercoaster week, with Ether (ETH) price falling below $3,000 and Bitcoin (BTC) price hitting a new multi-month low at $37,700. Equity markets also saw a sharp sell-off, mainly due to investors’ fears of possible changes in the size of the US Federal Reserve’s next rate hike.

To date, bitcoin price is down 41.72% from its all-time high of $69,000 and while the price may be in a bear market, a deeper dive into various on-chain and derivatives data shows that a drop in inflows and The pivot of institutional investors are the main factors impacting the BTC price action.

Perpetual futures dominate the trading volume

A lot has changed in the crypto market since 2017, when the Bitcoin market was dominated by spot trading and derivatives markets accounted for a small fraction of trading volume.

According to a recent report by on-chain market research firm Glassnode, Bitcoin derivatives “now represent the dominant venue for price discovery,” with “future trading volume now representing multiples of spot market volume.”

This has important implications for the current price action for BTC as futures trading volume has been declining since January 2021. The metric is down more than 59% from a peak of $80 billion per day in the first half of 2021 to its current volume of $30.7 billion per day.

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Bitcoin futures volume. Source: Glassnode

During the same period, perpetual futures have overtaken traditional calendar futures as the instrument of choice for trading because they more closely match the spot index price and the costs associated with buying BTC are significantly lower than traditional commodities.

According to Glassnode, “Current open interest in perpetual swaps equates to 1.3% of Bitcoin market cap, which is nearing historic highs.”

Despite this, the overall transfer of funds and leverage from calendar-expiring futures has resulted in a declining leverage ratio, which “suggests that a reasonable volume of capital is indeed exiting the Bitcoin market.”

The reason for this capital rotation is likely related to the fact that the yields available in the futures markets are currently just over 3.0%, which is just 0.1% above the 2. 9% and well below the 8.5% US consumer price index (CPI) inflationary pressures.

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Bitcoin Annualized Perpetual Funding vs. 3 Month Basis. Source: Glassnode

glassnode said,

“It’s likely that declining trading volumes and lower open interest are a symptom of capital fleeing Bitcoin derivatives towards higher returns and potentially lower perceived risk opportunities.”

Related: Trader advises to keep an eye on BTC price levels as Bitcoin still risks an “ultimate bottom” of $30,000

On-chain data points to adoption of large entities

Away from the derivatives markets, positive signs for Bitcoin’s future can be found by delving deeper into the chain’s volume data.

As of October 2020, the percentage of transactions over $10 million has increased from 10% of remittance volume on a good day to the current average daily dominance of 40%.

According to Glassnode, this indicates significant growth “in value settlement by institutional investment/trading firms, custodian banks and high net worth individuals.”

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Breakdown of relative bitcoin transfer volume by size. Source: Glassnode

Using aggregate transaction volume coupled with the Network Value to Transactions (NVT) ratio, Bitcoin’s current value is between $32,500 and $36,100.

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Bitcoin NVT pricing model. Source: Glassnode

According to Glassnode, both the 28-day and 90-day NVT models are “beginning to bottom out and potentially reverse,” with the 28-day breaking above the 90-day, which has historically been the case “a constructive medium to long-term signal was .”

The total cryptocurrency market cap is now $1.791 trillion and Bitcoin’s dominance rate is 41.5%.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.