Author: UkuriaOC, CryptoVizArt, Glassnode; Translated by: Baishui, Golden Finance
Summary
Despite Bitcoin trading sideways and down, a large portion of the market remains profitable, while short-term holders are shouldering the bulk of the losses.
By combining on-chain pricing models and technical indicators, we define and explore a range of potential scenarios for the future development of the market.
Volatility continues to remain historically compressed, which suggests a degree of investor apathy but also under-indexes for higher volatility ahead.
Market profitability remains strong
As BTC prices dropped towards the $60,000 region, many digital asset investors could sense a degree of fear and bearishness setting in. This is not uncommon when market volatility stagnates and goes dormant, and apathy creeps in.
Nevertheless, overall profitability for investors remains very strong from a MVRV ratio perspective, with the average token still maintaining a 2x profit multiple. This level typically depicts a “passion” and “excitement” bull market phase.
Going one level deeper, we can separate out all the tokens holding unrealized profits or losses. This allows us to assess the average cost basis of each group, as well as the average magnitude of unrealized gains or losses held by each token.
The average profitable token has an unrealized gain of +$41,300 and a cost basis of approximately $19,400. It is worth noting that this number will be partially affected by the last tokens moved in earlier cycles, including the Patoshi entity, early miners, and lost tokens. (red)
The average losing token has an unrealized loss of -$5,300 and a cost basis of approximately $661,000. These tokens are primarily held by short-term holders, as the “top buyers” of the 2021 cycle still hold very few to date. (blue)
Both indicators can help identify potential points of selling pressure as investors seek to preserve gains and avoid holding onto their worst unrealized losses.
If we look at the ratio between unrealized profits/losses per coin, we can see that the size of paper gains held is 8.2 times greater than paper losses. Only 18% of trading days recorded a large relative value, all of which fell into the excited bull market range.
Arguably, the March ATH set after the ETF approval had several characteristics consistent with historical bull market peaks.
Focus on short-term holders
Since the ATH in March, Bitcoin price has been consolidating in a clear range between $60,000 and $70,000, with the market failing to establish a strong trend in either direction.
To ground our position in the cycle, we will refer to a simplified framework for thinking about historical Bitcoin market cycles:
Deep Bear Market: Prices are trading below their actual value. (Red)
Early bull market: Prices trade between realized prices and true market mean. (Blue)
Enthusiastic bull market: price is trading between ATH and the real market average. (orange)
Excited Bull Market: Price is trading above the ATH of the previous cycle. (Green)
Currently, prices remain in enthusiastic bull market territory after a few very brief forays into the euphoria zone. The real market average is $50,000, representing the average cost basis of each active investor.
This level remains a critical pricing level for the market to remain above if the macro bull run is expected to continue.
Next, we will focus on the short-term holder group and overlay their cost basis with the level representing +-1 standard deviation. This provides insight into areas where these price sensitive holders may begin to react:
Large amounts of unrealized profits indicate a potentially overheated market, currently valued at $92,000. (red)
The breakeven level for the STH queue is $64,000, and the spot price is currently below this level but is trying to reclaim it. (Orange)
Significant unrealized losses signal a potential oversold market, currently valued at $50,000. This is consistent with the true market mean as a bull market breakpoint. (Blue)
Notably, only 7% of trading days saw the spot price trade below the -1SD range, making this a relatively rare occurrence.
Since prices trade below the cost basis of something, it is wise to examine the degree of financial stress various subsets of this group are in. Using our segmentation by vintage metric, we can dissect and examine the cost basis of different coin-age investors within the short-term holder group.
Currently, the average unrealized losses for coins aged 1d-1w, 1w-1m, and 1m-3m all exist, which indicates that this consolidation range is basically unproductive for traders and investors.
The 3m to 6m cohort remains the only subgroup to maintain unrealized profits, with an average cost base of $58k. This is consistent with the low price of this correction, again marking this as a key area of focus.
Turning to technical indicators. We can use the widely used Mayer Multiple indicator, which evaluates the ratio between price and its 200DMA. The 200DMA is often used as a simple indicator to evaluate bullish or bearish momentum, making any breakout or breakout a key market pivot point.
The 200DMA is currently valued at $58,000, again providing convergence with the on-chain price model.
We can use the URPD metric to further assess the concentration of supply around specific cost basis clusters. Currently, the spot price is near the lower bound of a large supply node between $60,000 and the ATH. This is consistent with a cost basis model for short-term holders.
With 2.63 million BTC (13.4% of the circulating supply) sitting in the $60,000-$70,000 range, small price fluctuations can significantly impact the profitability of the token and investor portfolios.
Overall, this suggests that many investors may be sensitive to prices falling below $60,000.
Volatility expectations
After several months of range-bound price action, we noticed a significant decrease in volatility on many rolling window timeframes. To visualize this phenomenon, we introduce a simple tool to detect periods of realized volatility contraction, which can often provide an indicator of the potential for heightened volatility in the future.
The model evaluates the 30-day change in realized volatility over 1-week, 2-week, 1-month, 3-month, 6-month, and 1-year time horizons. When all windows show a negative 30-day change, a signal is triggered, inferring that volatility is compressing and investors’ expectations of lower volatility in the future are also compressing.
We can also assess market volatility by measuring the percentage range between the highest and lowest price changes over the past 60 days. By this metric, volatility continues to compress to levels that are rarely seen, but typically precede large market moves after long periods of consolidation.
Finally, we can use the sell-side risk ratio to strengthen our volatility assessment. This tool assesses the absolute sum of realized profits and losses locked in by investors relative to the size of the asset (realized cap). We can think of this metric under the following framework:
High values indicate that investors are spending tokens at large profits or losses relative to their cost basis. This situation indicates that the market may need to re-balance and often results in wild price swings.
Low values indicate that most coins are spending relatively close to their breakeven cost basis, indicating that a certain level of equilibrium has been reached. This situation usually means that the "breakeven" within the current price range has been exhausted, and generally describes a low volatility environment.
Notably, STH sell-side risk has fallen to historic lows, with only 274 trading days (5%) out of 5,083 trading days recording lower values. This suggests that a certain degree of equilibrium has been established during the price consolidation period and hints at heightened volatility expectations in the near term.
Summarize
The Bitcoin market is in an interesting place, where apathy and boredom reign supreme despite prices being 20% below ATH. The average coin is still holding 2x unrealized profits. Yet, new buyers are woefully lacking.
We also explore key pricing levels where investor behavior patterns may change. We seek a degree of convergence between on-chain and technical indicators and come up with three key areas of interest.
A break below $58,000 to $60,000 would see a large number of STHs suffer losses and trade below the 200-day moving average price level.
Price action between $60,000 and $64,000 continues the sideways trajectory of the current market decision.
If the decision breaks through $64,000, a large number of STH tokens will return to profitability and investor sentiment may rise.
From a pricing and on-chain perspective, volatility continues to compress across multiple timeframes. Indicators such as the sell-side risk ratio and 60-day price range have fallen to all-time lows. This suggests that the current trading range is in the late stages of development towards the next range expansion.
