In whose hands is the wealth concentrated in this bull market?

summary

• The market has effectively been moving sideways since reaching an all-time high of $73,000 in March, and by our estimates, demand momentum has turned negative since early May.

• We analyze the cost basis of short-term investors as a way to examine the flow of capital in the market.

• In our supply-side analysis, we focus on long-term holders and find that the concentration of unrealized profits held by this group is well below historical peaks.

• The consumption behavior of long-term holders shows that although these players only spend 4%-8% of the total transaction volume, the profits realized from this expenditure usually account for 30%-40% of the total transaction volume. The cumulative profits realized during the bull market. This finding highlights the concentration of wealth in older cryptocurrencies, which gradually pay off the diamond hands during the bull market.

Tracking requirements

In WoC 18, we explored a method to determine the direction and intensity of capital flows into or out of the market. We consider a framework that utilizes the average cost basis of different age groups within the short-term holder group:

• When the cost basis of these groups is on an uptrend, this indicates capital is flowing into the market as new buyers acquire tokens at higher prices (and vice versa for a downtrend).

• When the spot price deviates above or below the cost basis, we can estimate the extent of unrealized profits held by each group using the MVRV ratio.

• We can think of the MVRV value as a measure of investors' motivation to take profits (high values), or an indicator of seller exhaustion (low values).

We first compare the spot price to the cost basis of both groups:

• Holders of old cryptocurrency between 1 week and 1 month old. (Orange)

• Holders of 1 to 3 month old cryptocurrency. (Red)

From this, we can identify when the macro tides of capital flows change in the early stages of bull and bear markets. The chart below shows how these two price patterns could provide market support during the 2023-24 bull market.

Since mid-June, spot prices have fallen below their cost basis for 10k-1m holders (orange) ($68,500) and 1m-3m holders (red) ($66,400). If this structure persists, it has historically led to a deterioration in investor confidence and has the potential to cause this correction to be deeper and take longer to recover.

We can also describe the market dynamics by comparing the cost basis of these groups. The following chart highlights:

• When the cost basis of 1w-1m holders trades above the cost basis of 1m-3m holders, capital flows in (blue). This highlights positive momentum in demand and attracts new capital into the market.

• When the cost basis of 1w-1m holders falls below the cost basis of 1m-3m holders, capital flows out (purple). This structure signals a weakening of demand-side momentum and a net outflow of capital from this asset.

In all the bull markets, the negative capital flow structure has appeared as many as five times. We can also see that this structure has been in effect from May to early June.

Leading the supply side

To fully understand the current market, we can use indicators that describe the behavior of long-term holders (LTH). The LTH group is the main player on the supply side during bull markets because they distribute tokens and profit. When LTH increases the intensity of selling until it overwhelms and exhausts demand, the market cycle top has formed.

The chart below compares the spot price to a significant multiple applied to the average cost basis of the LTH cohort (LTH realized price).

• 1.0 * LTH Realized Price (green) Historically coincides with the bottoming phase of bear market cycles and market recoveries.

• 1.5 * LTH Realized Price (orange) Depicts the recovery phase of the long-term equilibrium phase of the bull market. Prices tend to experience a slower growth rate, and on average, LTH's unrealized profit is about +50%.

• 3.5 * LTH Realized Price (red) provides the boundary between the equilibrium and euphoria phases of a bull market. At this point, prices tend to appreciate rapidly and LTH tends to experience increased distribution pressure as unrealized profits reach 250% or more.

If we apply this framework to the recent cycle, we can see that, from a macro perspective, the current bull run is very similar to the 2017 cycle . In particular, the recent consolidation phase around the previous ATH is consistent with the euphoria boundary equilibrium described by 3.5x applied to the LTH realized price (red).

The size of the unrealized profits held by LTH can be viewed as a measure of the motivation of this group to spend their cryptocurrencies and take their chips. We can visualize this psychological incentive using the LTH-NUPL indicator.

At the time of writing, LTH-NUPL is 0.66, which is between the levels associated with the pre-euphoria phase (green). This situation has lasted for 96 days, which is very similar to the duration of the 2016-17 cycle.

Using the long-term holder spending binary indicator, we can identify periods of strong spending by this group. During these events, the total balance of LTH holdings continues to decline significantly.

From this, we can determine the following LTH spending system:

• Spending is weak (green), with LTH supply falling on at least 3 of the past 15 days.

• Moderate spending (orange), where LTH supply has decreased on at least 8 of the past 15 days.

• Spending is strong (red), with LTH supply falling in over 12 of the past 15 days.

The next chart aims to combine the two previous models to assess LTH sentiment and behavior. This combines the motivation of this group to make a profit with their actual consumption behavior.

We consider four regimes to amplify LTH divestment and behavioral changes:

• Capitulation (red), spot price is below LTH cost basis, so any strong spending is likely related to fear and capitulation.

• Transition (orange), the price trades slightly above the LTH cost basis and there are occasional small payouts. This is considered to be related to typical day-to-day activity.

• Equilibrium after recovery from a prolonged bear market (yellow), the market seeks a new balance between a small inflow of new demand, reduced liquidity, and a gradual withdrawal of funds by underwater holders from the previous cycle. Strong LTH spending during this phase is usually associated with a sudden rebound or correction.

• LTH-MVRV is trading above 3.5 and has historically coincided with the market reaching the ATH of the previous cycle, hence the euphoria (green). The LTH cohort is holding over 250% unrealized profits on average. The market enters a euphoric uptrend, which drives these investors to spend at a very high rate.

Using this template, we can see that LTH's spending profile rises in Q4 2023 and Q1 2024. This puts the market in equilibrium during this period.

Analyzing the spending of strong players

The previous metric took into account periods when total supply declined for long-term holders. Similarly, for the short-term holder group, we can also examine which sub-age groups are responsible for the seller pressure.

To assess the contribution of each subgroup of LTH spending, we highlight the days on which its spending volume is at least one standard deviation above the annual average.

While each group has occasional bursts of spending activity, the frequency of high spending days increases dramatically during the euphoria phase of a bull market. This highlights a relatively consistent pattern of behavior among long-term investors who take profits during periods of rapid price increases.

Given that only 4%-8% of daily on-chain volume corresponds to LTH, we can use another core on-chain metric to explain the relative weight of these investors on the supply side.

Although LTH tokens make up a small share of consumption, their price is often much higher (or lower) than when they were initially purchased. Therefore, the size of the profit or loss realized through the tokens spent provides a valuable perspective on their behavioral patterns.

The chart below records the cumulative realized profits locked by long-term holders during the bull market. We found that over time, LTH typically accounts for 20% to 40% of the total locked profits.

Although LTH’s trading volume only accounts for 4% to 8% of the total daily volume, the LTH group accounts for 40% of investors’ profit-taking.

in conclusion

As sideways price action has dominated since early March, we use the cost basis of long-term and short-term investors to assess the current supply and demand levels in the market.

Using the changes in the cost basis of a subgroup of short-term investors, we constructed a toolbox to estimate the momentum of capital flows into the network. The results confirm that a period of capital outflows (negative momentum) was followed by the ATH in March.

Next, we divided the spending of long-term holders into subgroups of different ages. The results show that the frequency of high-spending days increases sharply during the excitement phase of the bull market. Surprisingly, long-term holders only account for 4% to 8% of the daily total, but this group accounts for 40% of investors' profits.