Author: UkuriaOC, CryptoVizArt, Glassnode; Translated by: Tao Zhu, Golden Finance
Summary
The “Correlation 1” event caused major assets and stocks to fall sharply, and Bitcoin was no exception, recording its largest drop in this cycle.
The price contraction caused the BTC spot price to reach the active investor price of $51,400, a key level for investor psychology.
Leverage has also decreased significantly, with futures open interest falling 11% in a single day. This may increase the importance of on-chain data.
Selling off
Periods of widespread declines in global markets are not usually common and usually occur at times of great global stress, deleveraging and heightened geopolitical risk. On Monday, August 5, stocks and digital assets sold off sharply as the unwinding of the yen carry trade led to market deleveraging, while U.S. Treasuries rallied on recession fears.
Bitcoin is down 32% from its all-time high, its biggest drop of the cycle.
To assess the severity of the price contraction, we can use the well-known Mayer Multiple, which is the ratio between price and the 200-day moving average. The 200DMA is widely considered by traders and investors to be the dividing point between bullish and bearish market conditions.
Currently, the Mayer Multiple is trading at 0.88, its lowest value since the FTX crash in late 2022.
Key on-chain pricing levels
Moving on-chain, we can assess the severity of the sell-off using the short-term holder cost basis and the range representing a -1 standard deviation move. This helps us assess how profitability for new investors changes during price fluctuations.
Short-Term Holder Cost Basis: $64,300 (Orange)
Short Holder Cost Basis -1SD: $49,600 (blue)
The spot price fell within reach of the -1SD pricing range, with only 364 / 5139 (7.1%) trading days experiencing deviations below the pricing level. This highlights the drastic speed of the market’s decline.
We can also assess these market dynamics through the lens of short-term holder MVRV, which measures the size of unrealized profits or losses for new investor cohorts.
Short-term holders are currently holding the largest unrealized losses since the FTX crash, once again highlighting how current market conditions are severely stressing investors.
If we evaluate the percentage of profitable supply held by short-term holders, we can see that only 7% of the supply is in profit, similar to the August 2023 sell-off.
This is also more than -1 standard deviation below the indicator's long-term average, suggesting considerable financial stress among recent buyers.
Both the True Market Mean ($45,900) and the Active Investor Price ($51,200) provide estimates of the average cost basis of active investors during the current cycle. These models attempt to ignore lost and long-dormant tokens.
The position of spot prices relative to these two key pricing levels can be considered areas of interest that differentiate macro bull and bear markets.
Active Investor Price: $51,200 (Orange)
True market average: $45,900 (blue)
The market did find support near the active investor price, which suggests a group of investors are providing buy-side support close to their long-term cost basis. If the market decisively breaks below these two pricing areas, a major reassessment of the bull market structure would be warranted.
Actual losses increased significantly
In the previous section, we assessed the market's position relative to the level at which investors might experience severe financial stress. The next step is to assess investor reaction by analyzing the size of the losses locked in during the event.
The sell-off triggered panic among investors, with market participants locking in actual losses of around $1.38 billion. In absolute terms, this was the 13th largest event in history in terms of U.S. dollars.
We can break down these losses by long-term or short-term holder groups to determine which groups were most affected. Notably, 97% of the losses can be attributed to short-term holders, while the long-term holder group was relatively quiet.
Therefore, we will focus on the short-term holder group as the core of future loss analysis.
For short-term holders, we note that their realized losses recorded a Z-score of 6.85 standard deviations, with only 32 trading days reaching a larger value. This highlights the severity of the sell-off events in a historical context.
This sentiment is reflected in the STH realized profit-loss ratio, which fell to its lowest value in history, with only 6% of trading days recording lower values.
This suggests that the main reaction from investors is panic and fear, as tokens are selling for far less than their original acquisition price.
The SOPR for short-term holders also fell to alarming lows, as new investors lost an average of 10%. This illustrates a form of capitulation, with only 70 trading days with SOPR values below this figure.
Derivatives are liquidated
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 by another $90 million, bringing the total liquidation to $365 million. This shows how many leveraged speculators were cleared out of the market.
The forced liquidation caused futures open interest to drop by 3 standard deviations, equivalent to an 11% reduction in one day. This could mean a complete reset across the futures market, and suggests that spot and on-chain data will provide key insights into the recovery process in the coming weeks.
Summarize
August has turned out to be an unusually eventful month for the stock and digital asset markets after the Correlation 1 incident triggered a major market sell-off. Bitcoin is down 32% from its cycle high, hitting a new all-time high and triggering a statistically significant sell-off among short-term holders.
Futures liquidations added fuel to the fire, with over $365 million in contracts forced to close and open interest falling by 3 standard deviations. This led to a significant reduction in leverage and paved the way for on-chain and spot market data that will be critical for analysts assessing the recovery in the coming weeks.
