summary
A "first-level correlation" event has led to a sharp drop in major assets and stocks in recent days. Bitcoin has not escaped the bad luck - it has recorded the largest drop in this cycle.
The price drop caused the BTC spot price to hit the $51,400 investor active price line, which is an important threshold for investor psychology shifts.
At the same time, leveraged trading has also decreased significantly, with open interest in the futures market falling by 11% in one day. This may lead to further abnormal movements in on-chain indicators.
Massive market sell-off
A general decline that affects global markets is not common, and it usually only occurs when the global economy is overwhelmed, large-scale deleveraging and geopolitical risks are intensified. On Monday, August 5, the unwinding of the yen carry trade led to large-scale deleveraging in the market, and investors began to sell stocks and digital assets on a large scale.
Bitcoin is down 32% from its all-time high, its steepest drop in this cycle.
Figure 1: Bull market retracement
Here, we will use the Mayer Ratio to assess the severity of the price decline. It refers to the ratio between the current price and the 200-day moving average. Traders and investors generally consider it a key indicator that reflects investors' bullishness or bearishness.
Currently, the Mayer multiple is 0.88, which is the lowest value since the FTX crash in late 2022.
Figure 2: Mayer multiples for the Bitcoin market
Key On-Chain Price Levels
Among the various relevant on-chain metrics, we can use the cost basis of short-term holders and how it moves within a -1 standard deviation range to assess the severity of the sell-off. This helps us predict the profitability of new investors and how it changes during price fluctuations.
Short-term holders' cost basis: $64,300
Short-term holder cost basis -1 standard deviation: $49,600
When the spot price fell into the -1 standard deviation range, only 364 (7.1%) of the 5,139 trading days had deviations below the pricing level, highlighting how severe the market decline was.
Figure 3: Analysis of short-term holder behavior
We can also evaluate the market through the short-term holder MVRV, which measures the size of unrealized profits or losses for new groups of investors.
Currently, short-term holders are suffering from the biggest unrealized losses since the FTX crash. The recent decline has caused them to face severe financial crisis.
Figure 4: Short-term holder MVRV
If we look at the percentage of profitable supply held by short-term holders, we can see that only 7% of the supply is in profit, which is similar to what was seen during the August 2023 sell-off.
This indicator is also more than -1 standard deviation below its long-term average, which also suggests that new investors are struggling recently.
Figure 5: Short-term holder supply profit percentage range
The real market average ($45,900) and active investor price ($51,200) are both important indicators of the average cost basis of active investors in the current cycle. It is worth noting that these indicators do not take into account those bitcoins that have been lost or have been dormant for a long time.
The height of the spot price relative to these two key pricing levels is crucial and has been seen as the watershed that distinguishes macro bull and bear markets.
Active Investor Price: $51,200
True Market Average: $45,900
Currently, the market has found support near the active investor price, which indicates that some investors have bought a bottom near their long-term cost basis. However, if the market continues to fall below these two pricing areas, most of the Bitcoin assets in the market will turn from profit to loss. If so, we may need to re-evaluate the current bull market structure.
Figure 6: Market real average and investor active price
Realized losses surge
In the previous section, we assessed at what point in price the investor would experience significant financial stress, and in the following section, we will analyze the scale of the recent locked-in losses and provide a glimpse into the investor’s reaction.
The sell-off triggered panic among investors, with market participants locking in actual losses of about $1.38 billion, the 13th largest event in history in terms of dollar losses.
Figure 7: Realized losses of adjusted entities
We analyze the losses suffered by long-term and short-term holders separately to see who suffered the most in this crash. Shockingly, as much as 97% of the losses came from short-term holders.
Therefore, we will focus on the short-term holder group as the core target group for future loss analysis.
Figure 8: Realized losses of long-term and short-term holders
We note that the Z-score variation of realized losses for short-term holders was as high as 6.85 standard deviations at one point – a level that has only been exceeded on 32 trading days in history. This highlights the unprecedented severity of this sell-off.
Figure 9: Profit and loss trading decisions of short-term holders
This sentiment is clearly reflected in the realized profit and loss ratio of short-term holders, which has fallen to an all-time low - historically, only 6% of trading days have seen this indicator at a lower level than the current level.
This suggests that short-term holders have panicked as the spot price of Bitcoin is currently well below its purchase cost.
Figure 10: Realized profit and loss ratio of short-term holders
The SOPR for short-term holders also fell to an alarming low, as new investors lost an average of 10% - there have only been 70 trading days in history with a lower SOPR than the current one.
Figure 11: Short-term holders SOPR
Derivatives trading swept out
In the derivatives market, a large number of long positions were forced to close, with a total of $275 million worth of long contracts being liquidated. In addition, short positions were liquidated as high as $90 million, with a total liquidation amount of $365 million. This shows that a large number of speculators with high leverage were swept out of the market.
Figure 12: Total number of contracts forced to close in the futures market
This wave of forced liquidation caused the total open interest in the futures market to drop by -3 standard deviations, equivalent to -11% of the market evaporating in one day. This may mean that the entire futures market will undergo a complete reshuffle, and the current spot and on-chain data trends will be crucial in the market recovery process in the coming weeks.
Figure 13: One-day percentage change in futures market open interest
Summarize
August has become an eventful month for the stock and digital asset markets after the “first-order correlation” event triggered a massive market sell-off. Bitcoin fell 32% from its cycle high, a record high, and triggered a massive collapse and panic among short-term holders.
To make matters worse, in the futures market, more than $365 million of contracts were forced to close, and the open interest fell by 3 standard deviations. This led to a significant reduction in leveraged trading and paved the way for the recovery of on-chain and spot markets. Their movements will be crucial in the coming weeks.
Proofreading: Akechi, Anna
Layout: Anna
Review: Amber
