Glassnode: Has BTC entered a correction phase? What is the near-term outlook?

summary

• Bitcoin has entered a correction phase, trading 11% below its all-time high of $108,000, but remains above key support levels, maintaining a constructive market structure.

• Z-Score analysis shows that cyclical highs often coincide with various indicators ranging from 1.5 to 2.0σ above the mean, providing a framework to help navigate bullish market phases.

• Bitcoin’s current price is about 10% above short-term holders’ cost basis of $884,000, highlighting downside risk if momentum stalls and prices fall below this level.

• Unrealized losses are concentrated among short-term holders, with 2.0-3.5 million BTC being held, reflecting moderate market pressure.

• Relative unrealized losses peaked at 4.3% in the third quarter of 2024, significantly lower than previous cycles driven by external shocks, highlighting that the market is more spot-oriented and patient.

Peak value of change

The realized price reflects the average price at which all Bitcoins last traded on-chain, and therefore represents the total cost basis of the market. The MVRV ratio is the ratio between the spot price and the realized price, and it measures the size of the average unrealized profit. Values ​​above 1 represent average unrealized profits, and values ​​below 1 represent unrealized losses.

The MVRV ratio is currently trading at 1.32, indicating that the average unit of BTC is holding 32% in unrealized profit. This structure is similar to the one following the ATH in mid-April 2024, indicating that despite the market correction, overall sentiment remains positive.

Over the years, the Bitcoin market has matured, with MVRV peaks and periodic decays near cyclical tops. This reflects an overall reduction in speculative extremes as the asset grows in size.

The MVRV highs are gradually decreasing with each market cycle, which indicates that the average unrealized profit multiple is decreasing:

• 2011: 8.07 times

• 2014: 6.00 times

• 2018: 4.81 times

• 2021: 3.98 times

• 2024: 2.78x (to date)

This decline indicates that as market size and liquidity grow, volatility and speculative intensity gradually decrease. It also shows that although Bitcoin is still cyclical, each peak has become relatively less exaggerated, consistent with a more mature and efficient market structure.

In order to explain the decrease in the peak value of MVRV in consecutive cycles, we can use statistical methods to normalize its oscillation range. A widely accepted method in financial time series analysis is the Z-score, which is calculated as follows:

Z-Score = (X - μ) / σ

• X is the observed value,

• μ is the mean value,

• σ is the standard deviation.

When calculating the Z-score, we can use the entire historical data set for a cumulative view, or we can adopt a shorter rolling window to better capture the dynamic nature of financial cycles and the gradually decreasing peaks in MVRV.

Using the entire history for the MVRV Z-score transformation can lead to somewhat distorted results, as earlier periods with higher peaks will distort the mean and standard deviation, making them less reflective of current market conditions.

Therefore, to account for these effects, we optimize the rolling window by shortening its length and using more recent market history as a benchmark.

The chart below compares the cumulative Z-score to a version calculated using a 4-year rolling window. Although we have tried to accommodate the dynamic nature of market cycles, the results remain virtually identical and the MVRV peak decay issue remains unsolved.

Moving to the 2-year rolling window for the Z-score calculation (blue), the peak observed in the most recent cycle ATH in March 2024 is very close to the range of peaks in the previous two cycles.

In this case, we have now adjusted for the decline in MVRV peaks. However, the 2-year rolling window Z-scores do not mark significant market highs in Q4 2015, Q3 2019, and Q2 2023, suggesting that there may be potential for further optimization.

Finally, we applied a 1-year rolling window to the Z-score calculation, which resulted in a more precise and promising transformation. This approach can identify mid- and late-stage peaks on a similar scale, providing a clearer representation of recent market dynamics.

This 1-year MVRV Z-score shows that cyclical bull markets consistently reach local and global peaks within 2σ, with investor profitability increasing significantly over a relatively short period of time. During bear market phases, local and global lows are captured when MVRV trades -1.5σ away from the mean.

This improved MVRV Z-Score can provide a more responsive framework for identifying key market turning points throughout the cycle and help adjust for overall peak declines near extremes.

Now that we have optimized our rolling window to 1 year, we can extend this framework to back-calculate the threshold price levels that define these recent peaks and troughs.

Bull markets are characterized by prices trading around the 1-year average, with peaks above around 2σ. Conversely, bear market prices remain below the average, with significant lows occurring around -1.5σ. This structured approach allows for a clearer demarcation of market phases.

Currently, Bitcoin is trading at $94,398, above the 1-year average of $909K but below the +2σ threshold of $1.126K. This suggests that the market is still in a bullish phase, although it has retreated slightly from its recent highs, when it was above the upper limit.

Assessment Revision

The 1-year MVRV Z-score model shows that the market has cooled off from its strong rally, and we can now assess investors’ profitability by measuring the unrealized losses held. This helps gauge the incentives of market participants and identify key risk areas that require attention.

First, by analyzing the physical-adjusted cost basis distribution of the circulating supply, it is clear that all unrealized losses are concentrated among short-term holders - investors who purchased tokens within the past 155 days (close to the market peak).

By keeping an eye on short-term holders as potential sellers, we can look for areas where unrealized losses could become severe if the current market decline deepens.

The average cost basis for short-term holders is currently $884,000. Based on similar statistical methods as above, we also show the high ($1,255,000) and low ($685,000) ranges that represent the typical extremes of price action during bull and bear markets.

The spot price is currently 9.2% above the cost basis of short-term holders, indicating that the market is still in the norm of a typical bull market. However, if the market fails to resume upward momentum, a break below the STH cost basis becomes more likely, which could lead to short-term pressure and additional selling if investors begin to panic.

To better gauge the degree of stress being experienced, we can assess the amount of BTC supply that is currently in a state of unrealized loss. From a historical perspective, over the past 10 years we can observe:

• During bull runs, the number of losing BTC typically remains below 4 million.

• In the early stages of the bear market, the number of lost BTCs reached 4 to 8 million.

This week, market volatility resulted in the loss of between 2 million and 3.5 million BTC. While significant losses, this range is still lower than the 4 million BTC lost during the local market lows between July and September 2024. This suggests that the current market may be in a more depressed state than the previous correction phase.

Another dimension of measuring market pain is the relative unrealized loss indicator, which measures the ratio of unrealized losses (in US dollars) to market value. Looking back at recent cycles, we can see similarities between the current market and the 2016-17 bull run.

Unlike the 2019-22 cycle, where external shocks such as the COVID-19 pandemic pushed relative unrealized losses to levels above 10%, the consolidation phase in the third quarter of 2024 only pushes this indicator to about 4.3%.

Arguably, the current market cycle has experienced less stress, likely due to smaller drawdowns, lower volatility, and new spot demand through ETFs and institutional investors.

in conclusion

Bitcoin has entered a correction phase, trading 11.1% below its all-time high of $108,000. However, the spot price is still trading above several key support levels, suggesting that the current bullish market structure remains intact. This is exacerbated by the relatively mild market distress, as measured by the historically small unrealized losses held by market participants.

We also show how the MVRV z-score optimized using a 1-year rolling window can provide a framework to navigate recent bullish and bearish market phases. According to this model, we remain in bullish territory, although the cost basis for short-term holders remains at $884K, a critical level to maintain constructive sentiment.