With the market currently trading at yearly highs, 83.6% of the Bitcoin supply on the market is in profit. This is the highest level since November 2021 and close to the all-time high. However, the scale of unrealized profits, measured by the difference between the market spot price and the Bitcoin base cost, is still small. So far, the unrealized profits held by investors are still not enough to incentivize long-term investors to sell their Bitcoin, so the Bitcoin supply on the market remains relatively tight overall.
Currently, Bitcoin is still maintaining a strong price trend, and the current trading price is close to the highest point so far this year. This week, the price has exceeded $37,900. There are currently 16.366 million Bitcoins in profit on the market, equivalent to 83.6% of the circulating supply. This brings the total profit of these Bitcoins to a level similar to the high point of the 2021 bull market.
In this article, we’ll explore what this situation means for investors’ asset profitability and how it compares to past bull market conditions.
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Full line accumulation
We start with the accumulation behavior of investors, discussing the change in on-chain wallet balances. Using the cumulative trend score, we can explain why the recent price rally shows a larger accumulation pattern than other previous rallies this year.
Unlike the initial two rallies in 2023, the indicator shows that a strong accumulation range has emerged during the recent rise (dark bands in the figure below), while the support price has surged 39% in the past 30 days.
In the following figure, we use a 7-day simple moving average to smooth out the differences between the data points in order to improve the visualization of the data:
Considering that wallets vary in size, we can perform a more detailed assessment by breaking down wallets into different groups. Since the end of October, there has been a clear shift in the trend, and we can see that wallets of all sizes have experienced a significant increase in holdings (blue squares in the figure below).
But we also need to see that in 2023, there was still a net outflow in multiple wallet groups (red squares in the figure below), which shows that the behavior of different investor groups is not consistent. But in any case, this broad rise in accumulation means that strong market performance and an increasingly optimistic tendency towards Bitcoin spot ETFs are boosting investor confidence in the upward trend.
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Profitable rebound
As prices revisit yearly highs, 83% of the total market supply is now in profit. This is statistically significant, as it is already well above the all-time average of 74% and will continue to rise to +1 standard deviation (90% of the total market supply) in the future.
History tells us that when the indicator moves above this upper limit, it is consistent with entering the early stages of the "euphoria phase" of a bull market.
In the figure below, we have used the cummean(m1) and cumstd(m1) functions to calculate the mean and standard deviation range for all time periods.
To give a full picture of current supply profitability, the following chart highlights three typical cycle phases over the past 5 years:
Bottom finding (red): less than 58% (-1 scale) of circulating Bitcoins are profitable.
Bullish/Bearish Transition (yellow): The market is recovering from the bottom-finding phase or retreating from the euphoria phase, and the amount of Bitcoin generating profits is between 58% and 90% of the market supply.
Euphoria phase (green): When the price reaches the previous all-time high, more than 90% of the coins in supply are profitable (+1 standard).
The market has been in a bull/bear transition phase for the past 10 months, meaning it is recovering from the bear market of 2022. Bitcoin has been trading below its historical average for most of 2023, with the October rally bringing prices above the historical average for the first time.
Market Capacity vs Market Size
It is worth noting that the above chart measures the number of holdings that are generating profits - these are undoubtedly the supply that is generating profits with a spot price below its underlying cost. But this concept is not the same as the size of the unrealized profits held, which assesses the delta between the underlying cost and the current interest rate.
Unrealized profits are often a more critical variable in analyses of investor behavior because they correlate with the dollar-denominated profits on investors’ positions.
In our next chart, we apply the same mean and ±1 standard bands to the unrealized profits metric. This gives us a direct measure of how much profit investors are holding. This metric shows how much profit is stored in the market for every dollar of Bitcoin.
Unlike previous Bitcoin volume indicators, the size of unrealized profits has not yet reached high levels consistent with the big bull market phase. It is currently trading at 49% of its historical average, still far below the extreme levels of more than 60% during the "euphoria phase" caused by previous big bull markets.
This suggests that while most Bitcoin is profitable in the current supply market, the underlying cost of most Bitcoin is only slightly below the current spot price.
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The Great Divide
Another notable phenomenon is the growing gap between the supply held by long-term and short-term investors.
As we have mentioned in previous research reports, the supply from long-term investors (blue) continues to reach new all-time highs, reaching 14.5 million Bitcoins at the time of writing. In contrast, the supply from short-term investors (red) has fallen to 2.3 million Bitcoins, which is actually at a new all-time low.
This dynamic indicates that existing holders are increasingly reluctant to give up their holdings as they historically wait for market prices to break out to new all-time highs. This can be interpreted as investors needing higher profit margins to increase their distribution pressure.
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Market prospects
We have now established that market profitability is slightly above the statistical midpoint. Next, we will explore how these tools can provide a macro blueprint of the road ahead based on previous cycles.
The first thing we focus on is the supply of Bitcoin from the gains and losses of long-term investors. We noticed that the supply of long-term investors tends to have a clear cyclicality. In the figure below, we provide a model that measures the strong tendency of spending (red) vs. holding (green).
Before prices return to all-time highs, the supply of Bitcoin from long-term investors will go through a long period of re-accumulation, with total supply showing an overall flat or modest growth trend.
As the market breaks through the all-time highs of the previous cycle, the incentive to increase spending increases significantly. This causes a sharp drop in supply from long-term investors, who are inclined to sell their Bitcoin holdings to new buyers at increasingly higher prices.
Throughout the 2022 bear market, the market's performance in the first phase of the bear market was very consistent with past cycles, with a strong climb in the supply of Bitcoin from long-term investors, which showed the extraordinary resilience of Bitcoin holders. Despite their increasing losses last year, however, unlike the 2015-16 and 2018-20 cycles, there were fewer price declines and fluctuations due to spending, and the supply from long-term investors tended to get higher and higher. This illustrates what we have discussed in previous articles on the tightness of supply.
Using these observations, we revisited the “Compass” indicator introduced in a previous article, which measures the spending behavior of long-term investors. It helps to split the long and bumpy road between the bear market low and the new all-time high into three sub-ranges:
Bottom Finding (Red): Bitcoin’s market price is trading below its underlying cost.
Equilibrium (yellow): The market price is lower than the previous all-time high, but higher than the all-time low.
Price Discovery (Green): The market price is above the previous cycle’s all-time high, during which Bitcoin spending from long-term investors begins to accelerate.
The Spending Binary Indicator (SBI) tracks whether long-term investors’ Bitcoin support is strong enough to reduce the total supply from them over a sustained period of 7 days. The current situation shows that spending from them is very small, which further proves the fact that the market supply is tight.
In summary, we can combine the SBI indicator with the relative position of spot prices and the basis cost of long-term investors to construct a new tool to track market sentiment. We consider four subcategories to detect changes in the withdrawal behavior of these long-term investors:
Capitulation: The spot price of Bitcoin is below the base cost of long-term investors, so any large expenditures may be due to investors being forced by financial pressure or forced to capitulate to the falling market (condition: long-term investors' MVRV score (hereinafter referred to as LTH-MVRV) <1 and SBI>0.55).
Transition: The transaction price is slightly higher than the basic cost of long-term investors, and there will be relatively small daily expenses (conditions: 1.0<LTH-MVRV<1.5 and SBI>0.55).
Equilibrium: After recovering from a prolonged bear market, the market seeks a new balance between reduced inflow demand, reduced liquidity, and declining holdings from the previous cycle. Large outlays from long-term investors in this phase are usually associated with sudden price rebounds or corrections (conditions: 1.5<LTH-MVRV<3.5 and SBI=>0.55).
Euphoria: When LTH-MVRV reaches 3.5 (coinciding with the market reaching its previous high historically), long-term investors hold an average profit of more than 250%. In this case, the market enters the euphoria phase, which incentivizes these long-term investors to spend their Bitcoin holdings at a very high and accelerating rate (conditions: LTH-MVRV>3.5 and SBI>0.55).
Summarize
With the recent price increase, the number of profitable Bitcoins in the market supply has reached the same level as 2 years ago when the market left the all-time high reached in November 2021. However, the size of unrealized profits in these Bitcoins is still small, so it is far from enough to incentivize long-term investors to take profits and spend them.
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