Bitcoin and Ethereum Market Liquidity Contracts, Shifting Investor Risk Appetite

Recently, the cryptocurrency market has shown signs of liquidity contraction and a shift in investor risk appetite

The cryptocurrency market has shown signs of liquidity contraction and a shift in investor risk appetite after a period of bull market prosperity. Key indicators from on-chain data and the derivatives market indicate that the market is transitioning from a state of high volatility and speculation to a more cautious, low liquidity phase. On-chain activity for Bitcoin and Ethereum shows a significant decline in "hot supply" and a noticeable decrease in exchange inflows.

Is the current market at a turning point? Is it a bull retracement or the beginning of a bear market? How can investors seize opportunities amidst shrinking liquidity and adjusting risk preferences? This article will analyze the current market environment based on on-chain activities of Bitcoin and Ethereum, exchange fund flows, and market dynamic data.

According to Glassnode data, Bitcoin's on-chain activity has dropped to levels not seen in months, with a significant decrease in transaction volume, which often indicates a market undergoing a consolidation phase after high volatility.

The "Hot Supply" of Bitcoin, which measures and quantifies active capital in the market—specifically, the supply of Bitcoin held for less than a week—has decreased from 5.9% to 2.8% over the past three months, showing a decline of over 50%. This further corroborates the phenomenon of liquidity contraction.

From the perspective of on-chain transaction numbers, Bitcoin's on-chain activity has also dropped to levels not seen in months, indicating that the market is entering a cooling period or experiencing a decline in short-term interest. The decrease in transaction volume seems to imply a reduction in speculative activity. If long-term holders are not selling and new inflows are limited, the market may enter an accumulation phase.

Meanwhile, the share of Bitcoin miners in the total on-chain transaction volume has dropped to 4.23%, the lowest level since November 2022. This data reflects a significant decline in miners' participation in on-chain trading activities. A lower trading share may indicate that miners are reducing their selling behavior, opting instead to hold their coins to cope with market volatility, thereby reducing the selling pressure caused by miner sell-offs.

The relative decline in miner transaction volume may also suggest that other market participants (such as long-term holders or institutional investors) are more active, leading to a change in the overall on-chain trading structure. Against the backdrop of market shifts and declining mining revenues, miners may be adjusting their strategies, reducing frequent on-chain transactions, and concentrating resources to optimize their revenue structure.

In the futures market, the total open interest has declined from an ATH of $57B to $37B, a drop of about 35%, indicating a significant reduction in hedging and speculative activities in the market.

At the same time, after the launch of the US spot ETF in 2024, institutions had gained arbitrage profits through cash arbitrage (long ETF + short futures) in an upward market. However, as market confidence weakened and long-side arbitrage positions were unwound, arbitrage trading gradually exited, leading to outflows from the ETF and further downward pressure on the spot market.

According to data from the crypto market analysis firm Santiment, due to the appeal of DeFi protocols and staking products, the available ETH supply on exchanges has dropped to 8.97 million (equivalent to $1.78 billion at current prices, accounting for less than 7.5% of Ethereum's current market cap), the lowest level in nearly a decade (the previous low was in November 2015). Compared to just seven weeks ago, the ETH on trading platforms has decreased by 16.4%.

The drop in Ethereum's exchange supply to a near 10-year low indicates a significant tightening of market liquidity. A lower exchange supply means less ETH available for sale in the market, reducing potential selling pressure, but it also makes prices more susceptible to large trades, increasing volatility.

However, from the current state, although the decline in exchange supply shows that the asset locking effect is strengthening, the overall market environment and multiple factors still exert downward pressure on prices. The current uncertainty in the macroeconomic environment, the shift in market risk appetite, and the withdrawal of some institutional funds have further tightened market liquidity.

At the same same time, volatility in the DeFi space and the development of competitive public chains have also negatively impacted market expectations for Ethereum. In this context, although the lower exchange supply reduces potential selling pressure, the adverse factors of overall market sentiment and external environment continue to push prices downward.

If we assess the current state using indicators, according to IntoTheBlock data, ETH's MVRV (Market Value to Realized Value Ratio) has currently dropped to around 0.8. This level is uncommon in Ethereum's history and typically occurs during bear markets.

MVRV is usually used to compare the "relationship between market value and realized value" of a token, reflecting the supply and demand dynamics of that token in the