The decline in the Bitcoin Fear and Greed Index to neutral is likely driven by volume increases, Bitcoin’s on-chain data, and the decoupling of BTC’s price from stock markets. While not all analysts believe the bottom of the market is within, let’s dive into the data.

Trading volume and return volatility
Bitcoin’s price hike has been accompanied by an exponential growth in trading volume. Over the past week, BTC has more than doubled in volume, reaching $10.8 billion, up 114% over the seven days.

Bitcoin trading volume. Source: Arcane Research
Increased trading is usually associated with increased volatility. While the current volatility levels of 2.4% for the seven-day period are still below the 2022 seven-day average of 3.1%, bitcoin has held steady through the 2023 rally.

BTC volatility 30 days and 7 days. Source: Arcane Research
Centralized exchanges (CEX) suffer from lower trading volume, which means lower fees for business, which leads to layoffs. The increase in trading volume for all exchanges is likely to be welcome news.

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Increases in trading volume coincide with the return of profits
Bitcoin’s on-chain gain is retesting the adjusted production profit ratio (aSOPR) value of 1.0, which some analysts believe is a key resistance level. The aSOPR measure historically shows a change in the overall trajectory of the market as profits are absorbed by trading volumes.

BTC aSOPR 7-day exponential moving average. Source: Glassnode
According to Glassnode,

“A SOPR penetration upwards, ideally a successful retest of 1.0, often indicates a meaningful shift in the system, where profits are being made, and enough demand flows to accommodate them.”
Reversing a trend that began in May, the on-chain realized profit/loss ratio for BTC has climbed above the 1.0 level, reaching 1.56 P/L on January 16.

When more traders are in the green when buying bitcoin and they are making a profit without the price going down, it indicates market strength.

Realized profit and loss percentage for BTC. Source: Glassnode
On-chain analytics is also showing positive signs that a Bitcoin recovery may be on the way. The greater the market’s ability to absorb selling pressure without price capitulation, the lower the overall market fear and potential macro turnaround.

Related: Bitcoin on-chain and technical data are starting to suggest that a BTC price bottom is in place

Soften Bitcoin’s correlation with stocks
Volatility, profits made, and trading volume help separate Bitcoin from stocks. As reported by Cointelegraph, Bitcoin’s price action is usually closely correlated with US stocks.

Bitcoin’s 30-day correlation with the Nasdaq reached 0.29 on January 17, which is the highest divergence between BTC and stocks since December 2021.

Vetle Lunde, Senior Analyst at Arcane Research, explains what decoupling means in the bitcoin market.

“Softening of relations is a positive development in the market.”
Bitcoin’s previous correlation may have resulted from institutional investors pooling BTC with other risky assets and large growth companies such as Tesla Holdings.

Now that institutional investors and growth companies are holding less bitcoin, there may be less correlation to the markets in the future.

Stock markets can continue to fluctuate due to the resilience of high inflation, but Bitcoin’s difference from the stock market can help BTC become an investment hedge. According to some analysts, if Bitcoin can become a stock hedge, institutional investors may return to the market.

Source: CoinTelegraph