Glassnode: How severe is this sell-off? Is it a normal correction in the bull market?

summary

• Bitcoin investors suffered huge losses during the downturn, with the price of BTC falling to as low as $93,000.

• However, when we normalize these losses to BTC denominations, the severity of the losses appears consistent with other local adjustments.

• Most of the locked-in losses come from the short-term holder group as profitability for top local buyers declines rapidly.

• The altcoin sector suffered the worst relative losses during the downturn, with the global altcoin market capitalization experiencing one of the largest depreciations ever.

Significant depreciation

Last week, Bitcoin investors experienced wild price swings. BTC prices initially fell to as low as $93,000 before briefly recovering to $102,000 and currently trading near $98,000. This indecisive price action was primarily in response to President Trump’s threats to impose tariffs on Canada, Mexico, and China, which provided an uncertain macro backdrop for investors. In addition to this, the continued strength of the U.S. dollar also led to a slightly tight liquidity environment.

While Bitcoin’s price has been volatile in recent weeks, it has not strayed too far from its starting position during this period as daily volatility and sideways movements continue.

How has the composition of Bitcoin investors evolved over this cycle? Bitcoin's liquidity has increased substantially, and greater capital flows are balancing the inertia of an increasingly large asset. In addition, a growing number of gritty, patient holders are helping to stabilize Bitcoin prices even against a relatively volatile macro backdrop.

On the other hand, the altcoin sector has experienced significant sell-side pressure, with many assets struggling to achieve widespread adoption or product-market fit, making the market environment even more challenging. This ultimately led to a significant drop in coin prices, with all altcoin sub-sectors underperforming Bitcoin in recent weeks.

To explore downside price action in the altcoin space, we can project the correlation of token returns into a two-dimensional space using principal component analysis (PCA). This visualization helps identify tokens that behave similarly (clustered together) or differently (far apart) based on their return behavior.

We can observe that most ERC-20 tokens are densely clustered together, highlighting that a large number of altcoins experienced the same broad sell-off, with a clear lack of idiosyncratic behavior between different sectors.

In other words, few coins were able to escape this week’s downside volatility, and they all essentially moved lower together.

We can assess the magnitude of the decline by evaluating the 14-day change in global altcoin market capitalization. In the past two weeks, altcoin market capitalization has fallen by $234 billion, with a few days seeing even greater absolute declines.

The severity of this drop highlights the scale of the sell-off event, which can reasonably be considered an event in the bear market of the altcoin space.

This is very interesting because Bitcoin does not appear to be showing the same relative weakness, suggesting a divergence is emerging between BTC and the rest of the digital asset space.

If we look at this metric in percentage terms, the decline in altcoins is still significant, with only 41/1662 trading days seeing larger declines. However, on this relative scale, it does fall more in line with the previous decline event experienced throughout 2024.

The current decline is also much smaller than the sell-off in May 2021 (large miner migration) and the sell-off during the LUNA/UST and 3AC crashes in late 2022.

Check Bitcoin Losses

While Bitcoin prices were relatively flat over the week, the actual losses locked in by Bitcoin investors during the price swings were among the largest in the current bull cycle. As the market fell to $93,000, investors locked in losses of approximately $520 million, one of the largest sell-offs to date.

Therefore, we can view this as a meaningful sell-off event in the context of a macro bull uptrend. Only the losses locked in during the unwinding of the JPY carry trade on August 5, 2023 were a larger single-day loss (actual loss of -$1.3 billion).

As Bitcoin grows in size, we must also consider that absolute measures of actual losses can be misleading when compared to previous price ranges. When these losses are assessed in BTC denominations, which effectively normalizes the size of the market, the severity of the losses begins to look more “typical.”

The magnitude of this surge in losses is similar to previous localized sell-off events throughout 2024, suggesting this could still be viewed as a normal event in a bull market correction/consolidation period.

Analyzing the losses

During bull markets, long-term investors are typically highly profitable. Therefore, the primary source of realized losses is the short-term holder group, which accounts for the most recent investor group and has the highest average cost basis.

Typically, there are no losses for long-term holders during bull markets. Losses for the LTH cohort typically begin as the cycle transitions from a bull market to a bear market, and accelerate as the market decline intensifies. It ends with a final exodus, typically peaking near the macro cycle low.

Alternatively, relatively price-sensitive short-term holders tend to suffer large losses during the declines in both bull and bear markets. Adjusted realized losses for short-term holder entities totaled $520 million this week, similar in magnitude to the entire 2024-25 cycle’s correction so far.

If we further analyze the losses of short-term holders, we will find that most of the losses are related to investors who purchased tokens within the past month. The breakdown by coin age is as follows:

• Actual loss in 24 hours: $68.5 million

• Actual losses from 1 day to 1 week: $286.3 million

• Actual losses from 1 week to 1 month: $479.1 million

• Actual losses from 1 month to 3 months: $14.5 million

• Actual losses from 3 months to 6 months: $112 million

This reinforces the idea that the majority of on-chain volume and realized losses tend to be associated with investors who have recently entered the market and are therefore most sensitive to volatility and price swings.

Looking ahead

As prices fluctuate, we can employ a set of on-chain derived pricing levels to explore some potential paths and thresholds for future prices.

To assess key areas of support, we can use the MVRV Z-score on a 1-year rolling window. This particular transformation gives a clearer representation of recent market dynamics, as the model only captures recent market behavior.

• +1σ: $118,000 (red)

• Average: $96,300 (yellow)

• -1σ: $80,100 (blue)

Currently, the price is finding strong support near the moving average. If the price breaks below the -1σ level, it could become a critical threshold for the bulls to move towards the next major defensive support line. Conversely, the +1σ level could act as a resistance level as investors have received a lot of unrealized paper profits and may seek to cash them out as market forces.

Since we have identified that the majority of losses have come from the short-term holder group, it would be wise to emphasize their investment positioning while the market trades around the intermediate MVRV support range.

The average cost basis of short-term holders has also historically acted as a strong support level during bull market uptrends. Currently trading around $922,000, this pricing model is a critical area for the market to avoid further declines.

We can similarly employ ±1σ intervals based on a full-lookback Z-score transformation to assess typical upper and lower bounds on price action.

• Short-term holding cost basis + 1σ: $131,000

• Short-term holding cost basis - 1σ: $71,000

Currently, the spot price is trading between the upper and lower bands and hovering above the STH cost basis. This suggests that bulls are still in control but the price is approaching their first line of defense and almost tested the STH cost basis during the recent selling event.

When overlaying the price trajectory onto the URPD volume profile, the importance of defending the STH cost basis and MVRV 1Yr Z-Score pricing areas becomes increasingly apparent. Significant volume voids can be seen below these levels, with few tokens changing hands in this price range.

Additionally, the -1σ band of the STH cost basis is located at the upper limit of this volume gap, suggesting that this could be a relatively sensitive area if prices fall to this extent.

Summarize

The past few weeks have seen both wild swings and stabilization in the price of Bitcoin, which rose to a high of $105,000 and fell to a low of $93,000, but ended the week at around $98,000.

This erratic price action resulted in heavy losses totaling $520 million, one of the largest in this cycle in terms of USD. However, when the severity of the decline is assessed through standardized metrics, the sell-off remains roughly in line with other local corrections.

In contrast, the altcoin sector experienced a broad sell-off and failed to gain footing. Most tokens experienced a highly correlated downside sell-off, with few sectors immune.

This resulted in one of the largest altcoin drops ever, highlighting a clear disconnect between Bitcoin and the typical rotation of capital into the altcoin landscape in previous market cycles.