THE MARKET COMPASS

SPECIAL EDITION: INTRODUCING GNI

April 2020
 INTRODUCING A NEW FUNDAMENTAL INDEX

At Glassnode we are currently undertaking a significant research effort to study the interaction between price momentum and

fundamental blockchain measurements. It has become abundantly clear that approaching on-chain data analysis in a systematic

and coherent framework can significantly boost investment decisions. This becomes ever more important in today’s choppy

markets, thrown into turmoil by COVID-19. In this inaugural issue of The Market Compass, we will present to you GNI, an index that

is built with fundamental on-chain metrics to describe the overall state of the blockchain. Our methodology and results will be laid

out in this report in three main steps:

G lassnode On-Chain BTC Index PART 1:

THE BIG PICTURE

At Glassnode we have made it our mission to provide you

with the most wide-ranging suite of on-chain data

available. The more granular and varied the data we are

able to offer, the better. But as the richness of the data

increases rapidly, so do the accompanying evaluation

challenges. Individual metrics can only ever deliver a

fragmented view of individual aspects of the blockchain.

What has been missing up until now is a measure of the

global state of on-chain activity.

I ndex Score PART 2:

ON-CHAIN INDEX: A METHODOLOGY PRIMER

Strong Bitcoin performance can only be decoupled from

solid network fundamentals for so long. A sustained

positive bull run must be reflected in strong on-chain

fundamentals. On the flip side, as on-chain-fundamentals

worsen, so too does the outlook for Bitcoin in the nearer

term. GNI attempts to capture this dynamic by measuring,

synthesizing and aggregating a plethora of blockchain

fundamentals using scientifically rigorous quantitative

techniques.

GN M arket Regimes PART 3:

THE GN COMPASS

GNI captures on-chain fundamentals, and these in turn

anchor Bitcoin price expectations. But we also know that

:
bitcoin is a trending asset for prolonged periods the price
itcoin Quarterly % Returns

trend can deviate and overshadow fundamentals.

Analysing on-chain fundamentals can thus only get us so

far. By combining both price momentum and G NI we gain

B

a more complete insight into Bitcoin’s current trading

regime.

© 2020 Glassnode. All Rights Reserved

1
PART 1:

THE BIG PICTURE

We won’t soon forget March 2020. At the time of writing, an estimated 1.7bn people (or 20% of the world’s population) have been ordered to

stay at home as governments around the globe are taking ever more extreme measures to protect their populations from COVID-19. The public

health emergency has led to an economic and financial markets emergency. Asset prices the world over crashed: equities fell by over 25% in

mid-March before rallying towards the end of the month, commodities and credit tanked; at one point buying a barrel of oil was actually

cheaper than buying just the barrel itself! And for a shor t while - with investors frantically covering margin calls - even sovereign bonds and

the gold price fell.

YTD % Change

Global Stock Emerging Stock

Gold U.S. Treasuries Bitcoin Global Gov. Bonds S&P500 Commodities Oil
Markets Markets

20%

10%

0.00

-10%

-20%

-30%

-40%

-50%

-60%

-70%

And what about Bitcoin? Bitcoin was not insulated from the global turmoil. Having experienced a solid bull run in January and February, Bitcoin

dropped by -26% in March, bringing the performance down to -11% for the year, before rebounding in early April. The 2-day drop Bitcoin

recorded on March 12-13 was the largest such drop for seven years, back when Bitcoin markets were nothing like as mature as they are today.

Bitcoin has since rebounded from its mid-March low and for the year crypto remains the third-best performing major asset class of 2020,

behind only Gold and US Treasuries.

Rolling 1-Month Volatility of BTC & SPY

BTC-USD S PY

2.5%

1%

2%

0.8%

Rolling 1-Month Volatility

Rolling 1-Month Volatility

1.5%

0.6%

1%

0.4%

0.5%

0.2%

0%

0%
3.18

7.18

3.19

7.19

3.20
01.01.18

01.02.18

01.04.18

01.05.18

01.06.18

01.08.18

01.09.18

01.10.18

01.11.18

01.12.18

01.01.19

01.02.19

01.04.19

01.05.19

01.06.19

01.08.19

01.09.19

01.10.19

01.11.19

01.12.19

01.01.20

01.02.20
01.0

01.0

01.0

01.0

01.0

© 2020 Glassnode. All Rights Reserved

2
 DAVID VS. GOLIATH
The long-term case for Bitcoin was powerful prior to COVID-19 and if anything the current pandemic has bolstered it further. Take the actions of
the US central bank, the Federal Reserve. In March alone, to avoid the total rupture of the financial markets’ basic plumbing, it slashed its target
interest rate to 0 and embarked upon a bond buying scheme of truly staggering proportions. De facto, the Fed now acts as the ultimate buyer of
last resort not only for US Treasuries and mortgage backed securities but also for wider corporate credit, a market of over 40tn USD in size
(that’s 12 zeroes if you’re counting...). Its unlimited quantitative easing and emergency liquidity provision could see the Fed’s balance sheet
double in 2020 alone, from 5tn to 10tn USD.

The Relative Bitcoin Market Size

Bitcoin (BTC)
BTC x120

BTC x100
Expected
2020 QE

Expected
BTC x42 2020 QE

USA

Gold US Federal Reserve Balance Sheet Global Currency Supply

Politicians have got in on the action too. The US congress ratified a 2tn USD stimulus deal to boost economic activity and we record similar
programs across the globe.

And the upshot of all of this? On the one side we are faced with the largest supply shock for over a century (US Q2 GDP growth is predicted to
drop by upwards of -20%). On the other side we’re seeing an unprecedented expansion of the monetary base. Well, hello, Inflation anyone?
Fortunately, for the strategic Bitcoin investor few scenarios are more preferable to a world characterized by increased inflationary pressure. The
Bitcoin markets seem to tentatively agree with our interpretation: save for the aforementioned days in mid-March Bitcoin has behaved a lot
more like gold than like a risk-on asset in the current downturn; Bitcoin-Gold correlation is now actually close to an all-time high.

Rolling 1 Year Correlation of Bitcoin & Gold

0.3

0.2

Rolling Correlation Bitcoin/Gold

0.1

0.0

-0.1

-0.2

Jul Jan 2019 Jul Jan 2020

© 2020 Glassnode. All Rights Reserved

3
THE POWER OF ON-CHAIN DATA
In the long-term the case for Bitcoin is crystal clear. Nevertheless, Bitcoin remains a risky investment in the medium term: its annualized
1-month volatility exploded to 191% in March. And for over a year now the Bitcoin markets have been choppy. For the moment at least, gone are
the days of the great bull run of 2017/18. In sideways-trending, volatile markets vigilantly monitoring your investments becomes increasingly
important. Investors in traditional asset classes are restricted to analyzing price and economic data (with the occasional alternative dataset
thrown into the mix). We as Bitcoin investors, in contrast, have a significant advantage: we can study events and investor behaviour on the
blockchain directly, thereby enriching our information set and providing an important valuation tool for our tactical decision making.

On-chain data can reflect investor sentiment well before the market does. At Glassnode we have made it our mission to provide you with the
most wide-ranging suite of on-chain data available. Applying our proprietary clustering algorithms with advanced data science techniques we
strive to fully unlock the potential of fundamental on-chain metrics. As of April 2020, our api gives you access to more than 150 separate
on-chain metrics (and growing), covering everything from simple UTXO counts to statistically sophisticated coin age analyses for BTC, ETH, LTC
and more. See below for a selection of on-chain metrics available via Glassnode Studio.

Glassnode Studio

© 2020 Glassnode. All Rights Reserved

4
 THE NEED FOR A GLOBAL VIEW
The more granular and varied the data we are able to offer, the better. But as the richness of the data increases rapidly, so do the accompanying
evaluation challenges. Individual metrics can only ever deliver a fragmented view of individual aspects of on-chain activity. What has been
missing up until now is a measure of the global state of blockchain. Alas, no longer: we’ve been hard at work in our R&D labs and are now able
to launch the Glassnode On-Chain BTC Index (GNI), our brand-new measure of the state of the Bitcoin universe. By analyzing and synthesizing
diverse strands of on-chain data and measuring medium-term trends across different categories the GNI yields insights not only into the
current state of the blockchain but also acts as a useful signpost as to where Bitcoin may evolve, neatly summarized into a single,
comprehensive number.

Glassnode On-Chain BTC Index (GNI) BTC-USD GNI

100

90

10000

80

70

60

Price (USD)

Index Value
50

Bitcoin

40

30

20

10

1000

Jan 2015 Jul Jan 2016 Jul Jan 2017 Jul Jan 2018 Jul Jan 2019 Jul Jan 2020

To accompany the index, we will launch a regular performance report, in which we will highlight recent on-chain developments through the
prism of the GNI, discuss their relevance to our wider Bitcoin market outlook and show how you can incorporate the index into your own
investment process. In this inaugural issue we will focus on giving a brief sketch of the GNI methodology.

Glassnode Fundamental Index Values

This Week Current Month Previous Month

90

80

70

60

50

Index Value

40

30

20

10

GNI Network Health Liquidity Sentiment Network Growth Network Activity Trading Transactions Investor Sentiment Saving Behavior

GNI Sub-Indices Network Health Liquidity Sentiment

© 2020 Glassnode. All Rights Reserved

5
PART 2:

ON-CHAIN INDEX: A METHODOLOGY PRIMER

Strong Bitcoin performance can only be decoupled from solid network fundamentals for so long. A sustained positive bull run must be reflected
in strong on-chain fundamentals. On the flip side, as on-chain-fundamentals worsen, so too does the outlook for Bitcoin in the nearer term. GNI
attempts to capture this dynamic by measuring, synthesizing and aggregating a plethora of blockchain fundamentals using scientifically
rigorous quantitative techniques.

The index construction incorporates 3 MAIN STEPS:

(For readers not interested in the nitty-gritty of index construction, skip directly to the Bottomline.)

STEP 1 Metric Selection

The heart and soul of any index lies in the information it processes. The primary goal of the GNI is to get an accurate
impression of the state of the Bitcoin network as a whole. This information in turn is a critical factor in assessing Bitcoin’s
attractiveness as a tactical investment opportunity. We carefully select 19 metrics that capture the breadth of available
on-chain data. They range from simple measures such as the transaction rate to more complex ones such as short-term holder
MVRV.

STEP 2 Metric Clustering

In line with the GNI’s main purpose as a tool for analysis rather than a mere predictor, we assign each metric to individual
categories and then cluster the categories into a set of sub-indices, each of which captures different conceptual parts of the
blockchain ecosystem. By combining fundamental economic principles with our on-chain expertise, we identify the following
set of sub-indices:

Network Health

Network Health is the subindex that acts as a straight-forward measure for the health and size of the current Bitcoin
ecosystem. Is it growing or shrinking? How active are its users? Are they trading cautiously or without fear? The answers are
captured by the metric clusters Network Activity and Network Growth.

Liquidity

Liquidity is one of the fundamental price driving properties of any commodity. How easy it is to exchange your Bitcoin into the
object of your choice, be it USD, Ethereum, Stablecoins, or your preferred altcoin. To arrive at a broad-based measure of
Bitcoin’s liquidity, we propose two different categories. Firstly, Transaction Liquidity, a proxy for the overall supply and demand
mechanics of Bitcoin, which contains metrics such as Entity Adjusted Transaction Volume and Transaction Count. Secondly, we
capture how easy it is to exchange bitcoin for other currencies in the category Trading Liquidity, which measures among others
the supply of stablecoins and the transaction flows to and from exchanges.

Sentiment

Sentiment is another, if not the, key factor driving the price of any good. Ultimately, Bitcoin’s value is what people are willing to
pay, either directly, via actual transactions or indirectly via the opportunity cost of not transacting. We therefore apply valuation
measures for potential and actual profits, such as the MVRV and SOPR, and combine them under Investor Sentiment. We also
make use of one of the blockchain’s fundamental features -- the ability to track the age of each traded coin -- to understand
Saving Behaviour within the network. Are long-term holders selling their old coins or accumulating for the next bull-run?

© 2020 Glassnode. All Rights Reserved

6
 STEP 3 Index Calculation

Each metric undergoes a rigorous, custom preprocessing step, reducing noise and extracting the information we are actually

interested in. We subsequently apply different filtering methods to assess the metric’s current level and medium-term trend and

map the result into a range of 0 to 100; the stronger the fundamental, the higher the value. After carefully weighing the individual

signals, we then combine them into the categories and sub-indices discussed above, and finally merge them into the GNI.

Bottom Line

z :
GNI hierarchically combines and synthesi es a multitude of different on-chain metrics first into conceptual categories, then sub-indices and

ultimately the final index.This methodology guarantees a balanced evaluation of different aspects of the available on-chain data and yields a
single number between 0 and 100 which describes the overall state of the bloc kchain networ k . Each construction step incorporates rigorous

statistical processing to ensure the maximum information content is maintained.

GNI & Sub-Indices Weekly Values

GLOBAL GNI NETWORK HEALTH LIQUIDITY SENTIMENT

Network Network Investor Saving

Trading Transactions
Growth Activity Sentiment Behavior

100

100

90

80
78

70
69

60
58 58

50
55 52
47
47 45

40

30

20

10

WoW Change +1 +3 -1 -4

Weekly Ranking

(Out of 173) #60 #67 #67 #66

index as per 20/04/2020

© 2020 Glassnode. All Rights Reserved

7
 THE THREE REGIONS
High GNI implies solid Bitcoin fundamentals. But when is GNI high? And vice-versa, when should we consider it to be low? By construction the
GNI is a continuous measure, but it is more straightforwardly assessed by identifying 3 distinct regions. The chart below depicts the historical
evolution of the GNI and maps these 3 regions.

On average, GNI hovers around 50. In this region (highlighted in yellow), on chain fundamentals are, from a tactical perspective, neither
particularly attractive nor particularly unattractive. Trends aren’t particularly strong and metric readings are in line with their medium term
averages: in other words, the blockchain is not sending off strong signals either way. GNI reaches higher levels only once the fundamentals
become extraordinarily strong across categories and sub-indices (green area). When GNI is in this region, the on-chain fundamentals are
strongly bullish. In contrast, if GNI drops to around 40 and below, from an on-chain perspective, it means that the Bitcoin ecosystem is
experiencing substantial turmoil and blockchain data is sending out bearish signals.

Glassnode On-Chain BTC Index (GNI)

100

10000

80

Bitcoin Price (USD)

Index Value
60

40

20

1000

J an 2017 J ul J an 2018 J ul J an 2019 J ul J an 2020

All things, good and bad, come to an end and we want to invest proactively rather than reactively. The yellow area allows us to detect the all
important trend changes. GNI dropping from strong to neutral indicates a worsening of on-chain fundamentals and should raise warning flags,
whereas a turn from weak fundamentals indicates an on-chain recovery and that the general environment has improved materially.
GNI Region Breakdown

Current Value ast Week

L Last Month ear to Date
Y Current Region
GNI Index 55

51

50

35

Neutral
9.70%

11.63%

58.68%

Network Health 58

50

50

25

Neutral
13.59%

12.63%

131.28%

Network Growth 69

62

53

26

Strong
13.29%

34.29%

176.28%

Network Activity 47

38

48

24

Weak
14.09%

-11.01%

82.04%

Liquidity 52

52

61

40

Neutral
2.26%

-11.44%

35.58%

Trading 78

79

75

45

Strong
-2.38%

2.71%

71.53%

Transactions 45

44

56

38

Weak
5.05%

-17.78%

21.36%

Sentiment 58

48

26

48

Neutral
17.89%

113.55%

16.48%

Investor Sentiment 47

42

22

36

Neutral
17.04%

122.64%

39.01%

Saving Behavior 100

70

43

100

Strong
42.85% 132.55% 0%

© 2020 Glassnode. All Rights Reserved

8
GNI AND BITCOIN PRICE
GNI describes the overall state of the blockchain and does not explicitly predict Bitcoin price performance. But on-chain health and Bitcoin
returns are intrinsically linked concepts and cannot diverge indefinitely. Do we see this link is in the data?

The chart below plots the price evolution of Bitcoin (logarithmic price) over the different GNI regions. We can easily identify that high GNI tends
to coincide with periods of strong, sustained bull runs and low GNI with bear markets. Likewise, periods of strong GNI and weak Bitcoin
performance and vice-versa are unstable and unsustainable. The end-of- 2018 Bitcoin sell-off for example registered only weakly on GNI: the
on-chain fundamentals throughout this period remained relatively strong. Alas, Bitcoin performance picked up again soon thereafter. This
sell-off was not driven by weakening fundamentals but proved to be a short-term market over-correction.

BTC Price per GNI Region

100

10000

80

Bitcoin Price (USD)

60

Index Value
40

20

1000

0
Jan 2017 Jul Jan 2018 Jul Jan 2019 Jul Jan 2020

Historically strong on-chain fundamentals coincide with good Bitcoin performance and vice-versa. But do the GNI regions also predict average
Bitcoin returns? In the chart below, on the left-hand side, we cluster all dates into their specific GNI region, calculate the subsequent 3-month
Bitcoin returns for every date, then average over dates. On the right we adjust these average returns for their within cluster volatility. Each bar
thus shows the Bitcoin Sharpe Ratio (the return per unit of risk) for a specific GNI region.

We see clearly that a weak GNI predicts poor average quarterly Bitcoin returns, while strong GNI readings imply high average returns. Once we
adjust for risk, the contrast becomes even more pronounced. Returns in region 2 are quite high but also significantly more volatile, reducing
their Sharpe Ratio accordingly.

GNI Region Returns (Quarterly) GNI Region Sharpe (Quarterly)

51%
50%

1.0

0.8
Bitcoin Quarterly Sharpe Ratio

40%

35% 0.8

Bitcoin Quarterly % Returns

30%

0.6

0.4
17% 0.4

20%

0.2
10%

0.2

0.0 0.0

16.205,43.446 43.446,55.677
55.677,82.371 16.205,43.446 43.446,55.677
55.677,82.371
Weak Neutral
quantiles Strong Weak Neutral Strong
quantiles

© 2020 Glassnode. All Rights Reserved

9
PART 3:

THE GN COMPASS
GNI captures on-chain fundamentals, and these in turn anchor Bitcoin price expectations. But we also know that Bitcoin is a trending asset: for
prolonged periods the price trend can deviate and overshadow fundamentals. Analysing on-chain fundamentals can thus only get us so far. By
combining both price momentum and GNI we gain a more complete insight into Bitcoin’s current trading regime.

50%

TRANSITION BULLISH
45%

Regime 2 Regime 1
Week 8
40%

35%

30%

25%

Week 9

Week 7
20%

15%

Week 10 Week 6
Bitcoin Quarterly % Returns

10%

Week 5 Week 3
5%

0%

BEARISH Week 4 Week 2 TRANSITION

-5%

Regime 4 Week 1
Regime 3
Week 14
-10%

Week 13
Week 15
Week 12
-15%

Week 16
-20%

Week 11

-25%

-30%

-35%

-40%

-45%

0 10 20 30 40 50 60 70 80 90 100
-50%
GNI Weekly Value
The GN Compass identifies 4 distinct Bitcoin environments. Along the x-axis we measure the state of the blockchain fundamentals, as
calculated by GNI. On the y-axis we measure current Bitcoin momentum (defined as the lagged 3-Month Bitcoin performance). Regime 4
describes an environment where both price and fundamentals are trending downwards, and marks a state of medium-term bearishness.
Regime 1 is characterized by strong positive price trends and is backed by strong fundamentals i.e. it is the quintessential bull market.
Regimes 2 and 3 meanwhile are unstable: on-chain fundamentals and price trends are divergent, a state that cannot go on for long.

We can show the power of the GN Compass empirically. The chart below repeats the analysis from the previous section but now applied to the
4 regimes, where for simplicity we report the data for the unstable regimes 2 and 3 jointly. The results are even more pronounced than before:
average Bitcoin quarterly returns in regime 4 are negative as they should and regime 1 returns on average more than 50%! Meanwhile the
unstable regimes 2 and 3 are characterized by a significant return dispersion. The same story holds true when looking at risk adjusted returns,
but with an even clearer distinction between the unstable regimes 2 and 3 and regime 1.

GNI Regime Returns (Quarterly) GNI Regime Sharpe (Quarterly)

55%
43% 1.0

0.9
50%

0.8

Bitcoin Quarterly Sharpe Ratio

40%

0 .4
Bitcoin Quarterly % Returns

0.6

30%

0.4

20%

0.2

-0.4
10%

-8% 0.0

0.0

-0.2

-10%

-0.4

-20%
-0.6

Bearish Transition Bullish Bearish Transition Bullish

© 2020 Glassnode. All Rights Reserved

10
THE MARKET COMPASS CONCEPT
At Glassnode we are undertaking a significant research effort to further explore the interaction between price momentum and GNI. A richer
understanding of their co-dependence leads to superior investment decisions. GNI can help us distinguish short-term price corrections from
long-term bear markets, while its subindices enable us to delve deeper into specific questions such as ‘how does liquidity, a critically important
measure in financial theory, impact Bitcoin price development?’. The GN Compass with its distinct regimes, on the other hand, can prove
invaluable to predict market stability and indicate looming market shifts.

It is evident that approaching on-chain data analysis in a systematic and coherent framework can significantly boost investment decisions,
particularly in today’s choppy markets. We look forward to picking up on these themes in our next edition of The Market Compass.

The Market Compass is the result of a collaboration between Glassnode and Swissblock Technologies. Please direct questions and
suggestions to [email protected].

© 2020 Glassnode. All Rights Reserved

11
Disclaimer: This report does not provide any investment advice. All data
is provided for information purposes only. No investment decision shall be
based on the information provided here and you are solely responsible for
your own investment decisions.

© 2020 Glassnode. All Rights Reserved