Bitcoin's $72k Break: On-Chain Metrics Signal a Defensive Reset

Bitcoin's plunge on February 5 was a historic selloff, its largest single-day drop since the FTX collapse. The price started near $73,000 and fell to a low around $62,000, a decline of more than 14%. That move wiped out nearly half of its recent gains from the October peak.

The immediate catalyst was a broad rotation out of risk assets. Geopolitical tensions, specifically over the U.S. and Europe, combined with the recent, delayed impact of a partial government shutdown, triggered a flight to safety. This forced a sharp de-risking across markets, with Bitcoin as a primary target.

Sentiment turned extreme in the aftermath. The Fear and Greed Index dropped into single digits, a level seen only a handful of times in Bitcoin's 17-year history. This collapse in sentiment, coupled with the price action, signals a defensive reset where holders are being tested.

On-Chain Metrics: Confirming the Defensive Shift

The breakdown of the True Market Mean confirms a structural deterioration that began in late November. This key metric, which reflects the average cost basis of actively circulating Bitcoin, has failed, signaling a shift from a consolidating market into a more fragile, defensive regime.

On-chain activity is at a standstill. Active addresses and transfer volume are both at range lows, indicating weak demand for block space and a market in de-risking mode. This lack of flow is a direct signal of reduced participation and heightened caution.

The most telling metric is the circulating supply in loss. It surged to almost 10 million BTC, the fourth-highest level ever recorded. This massive pool of coins held at a loss, nearly equal to the supply in profit, is a classic setup for a market bottom. It shows widespread paper losses and a market where selling pressure is being met by a dense cluster of cost basis, setting the stage for a potential reversal.

Derivatives and Liquidity: A Mixed but Defensive Picture

Spot market conditions have deteriorated sharply. The Spot CVD (Cash-Value Differential) has flipped negative, confirming a clear shift toward sell-side dominance. This move is backed by netflows reversing into a sizeable outflow, signaling weaker institutional support and adding near-term overhead pressure.

Derivatives positioning presents a mixed picture. While futures open interest has eased, suggesting a modest reduction in leverage, long-side funding has surged. This indicates renewed demand for bullish exposure, even as the overall market posture remains defensive. The collapse of perpetual CVD into the lower band reinforces this cautious leverage environment.

Options markets remain firmly cautious. Open interest has drifted lower, and while the volatility spread has compressed, it remains elevated relative to realised levels. More telling is the sharp rise in 25-delta skew, which signals increased demand for downside protection. This hedging activity underscores persistent risk aversion despite some bullish positioning in the futures market.