Original title: The Week Onchain - Bulls Under Pressure
Original author: CryptoVizArt, UkuriaOC
Original source: insights.glassnode.com
Compiled by: Mars Finance, Eason
After months of sideways price action, Bitcoin experienced its deepest correction since late 2022, trading below the 200DMA and leaving a large number of short-term holders stuck with unrealized losses.
Summary
Bitcoin has recorded its biggest drop of the current cycle, trading more than 26% below its all-time high. Still, the drop is historically low compared to past cycles.
This price contraction has caused a large amount of short-term holder supply to fall into unrealized losses, with more than 2.8 million BTC currently in a loss based on their on-chain acquisition price.
While financial pressure on short-term holders has increased, the magnitude of locked-in losses is still relatively small compared to the size of the market.
Price performance
The 2023-24 Bitcoin cycle is both similar and different from previous cycles. After the FTX crash, the market experienced about 18 months of steady price increases, followed by three months of range-bound prices after the $73,000 ETF high. The market experienced its deepest cycle correction between May and July, falling more than -26% from ATH.
While this is significant, this decline is significantly shallower than previous cycles, highlighting the relatively strong underlying market structure and compressed volatility as Bitcoin matures as an asset class.
If we evaluate price performance relative to each cycle low, the market performance in 2023-24 is strikingly similar to the previous two cycles (2018-21 and 2015-17). The reason why Bitcoin has followed such a similar path is a topic of frequent debate, but it continues to provide a valuable framework for analysts to think about cycle structure and duration.
However, if we benchmark performance against the Bitcoin halving date, the current cycle is one of the worst performing, despite the market breaking out to new cyclical highs ahead of the April halving event, the first time this has happened.
🔴Stage 2: +117%
🔵 Stage 3: -7%
🟢 Stage 4: +30%
⚫ Age 5: -13%
We can evaluate on a daily basis the number of times a daily decline during an uptrend exceeded the 1 standard deviation threshold. This helps us assess the number of significant selling events that investors experienced throughout the bull market uptrend.
2011-13: 19 events
2015-18: 27 events
2018-21: 26 events
Current cycle 2023-24: 6 events (so far)
The current cycle has recorded 6 daily losses that are more than 1 standard deviation below the long-term average. This suggests that the current cycle is either significantly shorter and less volatile than previous cycles, or that investors have more fuel.
New investors in trouble
Evaluating the supply of short-term holders, we can see that supply will grow significantly from January 2024. This is accompanied by an explosive increase in price after the spot ETF is listed and reflects a strong inflow of new demand.
However, this demand growth has plateaued in recent months, suggesting supply and demand will reach equilibrium in the second quarter of 2024. Since then, an oversupply situation has taken over as fewer long-term holders take profits and fewer new buyers emerge.
In a sustained bull run, a local bottom is usually formed when the amount of lost supply held by short-term holders reaches around 1-2 million BTC. In more severe cases, the amount of lost supply could peak between 2-3 million BTC.
We can see an example of this in the recent sell-off, with prices dropping to the 53k level, which has left the number of tokens held below their cost basis at over 2.8 million BTC. This is the second time this has happened in the last 12 months, with August 2023 being another example where over 2 million BTC held by new investors were at unrealized losses.
We can assess the intensity of these periods by counting the number of days that more than 2 million short-term holders’ tokens were underwater for at least 90 days. According to this metric, the indicator has marked 20 days of activity so far.
If we compare this to market conditions in Q2-Q3 2021, short-term holders experienced a longer period of severe financial stress, 70 consecutive days. That period was long enough to destroy investor sentiment and lead to the devastating outbreak of the bear market in 2022. In comparison, this cycle is currently relatively underway.
Profitability Stagnation
As spot prices continue to fall, the ratio of investors' actual profits to actual losses has also fallen. The indicator has now fallen to the range of 0.50 to 0.75, which is a more neutral level during a bull market correction.
We can also see that throughout the 2019-2022 cycle, the indicator exhibited a similar pattern of wild swings, which can be seen as a reflection of inherent instability and investor uncertainty.
Looking specifically at the losses of short-term holders, we can see that this group of people locked in a total actual loss of approximately $595 million this week. This is the largest loss event since the 2022 cycle low.
Furthermore, only 52 trading days out of 5,655 (< 1%) recorded significant daily loss values, highlighting the severity of this USD correction.
However, when we look at the losses of these short-term holders as a percentage of total invested wealth (divided by STH realized market cap), we see a very different picture. Relatively speaking, the losses locked up by this group are still fairly typical compared to previous bull market corrections.
In the chart below, we have highlighted in blue certain time periods where both the percentage of short supply lost and the magnitude of locked losses deviated from the mean by more than 1 standard deviation.
Looking at losses by both long-term and short-term holders, we note that this week’s loss events account for less than 36% of the total capital flows on the Bitcoin network.
Major capitulation events, such as the sell-offs in September 2019, March 2020, and May 2021, saw losses account for more than 60% of capital flows in a few weeks, with both groups of investors making significant contributions.
Therefore, it can be argued that the current market contraction bears more similarities to the topping formation in the first quarter of 2021 than a severe capitulation event. Nonetheless, the onus remains on the demand side to curb negative price momentum, or else profitability for investors will continue to deteriorate.
Summarize
After the FTX crash, the market experienced the deepest correction of this cycle after an 18-month rally and 3 months of flat sideways trading. Nevertheless, the decline of the current cycle still compares favorably to historical cycles, indicating that the underlying market structure is relatively robust.
The sharp contraction put a large number of short-term holders in a position of severe unrealized losses, which put a lot of pressure on this group. However, the size of the locked-in losses is still relatively small compared to the market size. In addition, long-term holders rarely participated in the losses, indicating that mature investors remained profitable despite the subsequent market panic.
