In-depth analysis of Bitcoin market sentiment

• We compare two on-chain pricing models to the current state of the market, both of which are associated with past market bottoms and the March 2020 crash.

• Accumulation and distribution patterns tend to coincide with local highs and lows, which we show happening in our on-chain data.

• Currently, most short-term holders are losing money, and new data shows that negative sentiment is prevalent among this group.

Finding the market bottom

The Bitcoin market continues to oscillate around $26,000 after failing to sustain above the mid-cycle level of around $31,400. Both attempts in April and July of this year effectively set up a double top pattern for the price. Among the other indicators related to short-term holders that we reported last week, it may mean that the market mentality and confidence are undergoing an early shift.

The following diagram illustrates the two pricing models:

• The investor price ($17,600) reflects the average acquisition price of all coins, excluding coins acquired by miners (i.e., only coins acquired on the secondary market are counted).

• Delta price ($11,100) This is a model that combines on-chain pricing and technical pricing, and is often used to predict market bottoms.

Prices spent similar periods of time trading within the bottom ranges predicted by these models in both the 2018-19 and 2022-23 cycles. Notably, the market retested investor price levels during the chaos of the March 2020 sell-off.

In addition to the duration between these models, we also measure the contraction and expansion between these pricing models as a criterion for market recovery. As a large amount of capital flows into the market, the distance between these models will narrow at market peaks. Conversely, the divergence indicates that the capital inflow is slowing down and price declines are the driving factor.

This model helps monitor the market's transition to recovery from the depths of a bear market. Therefore, the current state of the market seems similar to the market correction phases of 2016 and 2019.

Capital rotation cycle

The "Rate of Realized HODL" (RHODL) is a market indicator that tracks the balance of wealth between coins that have moved recently (< 1 week) and longer-term HODL (1-2 years). In the next chart, we use the 2-year (half-cycle) median as the threshold for periods when the capital flow regime switches between bull and bear structures.

Judging from this indicator, new investors entering the market in 2023 are not active, but the RHODL rate is almost the same as the two-year median. Although the influx of new investors is a positive sign, its momentum is relatively weak.

We can get a more intuitive view of this modest capital inflow using the Cumulative Trend Score. This tool reflects the relative balance change among active investors over the past 30 days.

From this, we observe that the market recovery in 2023 was driven by a large accumulation of funds at highs above $30,000. This indicates that investors exhibited a "panic buying" posture. This is in contrast to the "market capitulation" event in the second half of 2022, when new investors took the opportunity to accumulate at the market low.

We can use the realized profit and loss metric to assess sudden changes in investor profitability. This metric calculates the change in value of all coins sold, comparing their value when they were sold to when they were acquired. The following chart shows the sum of realized profits and losses on a weekly basis, normalized to market value for comparison across periods.

Here we can see that there is a crossover between these periods of intense accumulation and profit taking. Both of these peaks occur at the 2023 market highs, while there are similar crossovers at the January and December 2021 market highs.

Holders at a loss

In last week’s analysis, we reviewed a range of indicators to explore the current losses faced by many short-term holders.

In a bear market, when more than 97.5% of new investors are losing money, selling will decrease significantly. Conversely, when more than 97.5% of short-term holders are making a profit, they tend to sell when they are at a break-even or profit.

During the rally above $30,000, the metric reached full profitability for the first time since November 2021. However, after falling below $26,000 in recent weeks, more than 97.5% of short-term holders are now losing money, the lowest point since the FTX crash.

Since so many short-term holders are currently losing money, we can use two powerful indicators to analyze their positions:

• STH-MVRV: This metric describes the size of unrealized profits/losses of coin holders and is a key metric for assessing selling motivation.

• STH-SOPR describes the size of the realized profit/loss locked in and is a measure of actual selling pressure.

First, using STH-MVRV, we can assess the extreme volatility of the indicator compared to its 155-day average, including upper bounds (mean plus standard deviation) and lower bounds (mean minus standard deviation).

It can be observed that the market's recent highs and lows have appeared outside these limits many times, which means that investors' gains and losses are statistically huge.

STH-SOPR analysis shows a similar trend, highlighting that investors have begun to take action, choosing to profit at market highs and sell at large losses at market lows.

Now that we have identified the changing relationship between implied profitability (unrealized) and the expenditures of STHs (realized profitability), we will explore how to assess the trend of this relationship.

We attempt to gauge changes in new investor sentiment by comparing the difference between holder and seller cost benchmarks.

• When sellers have a lower cost basis than holders, it means sentiment is negative.

• On the other hand, if the seller's cost basis is high, it shows that the sentiment is optimistic.

From this perspective, when the market fell from $29,000 to $26,000 in mid-August, the cost basis of STH currently sold was lower than the basis of the holders, which indicates panic and negative sentiment in the market in the short term.

In order to represent this indicator more intuitively, we normalized it using the spot price.

It is noteworthy that this indicator usually fluctuates between -0.25 and 0.25, but there are outliers at key market moments. Here, we ignore the neutral range of -0.05 to 0.05 (which is set arbitrarily).

The first important revelation is that the negative sentiment during a bear market recovery period usually lasts 1.5 to 3.5 months. Recently, the market has entered a negative range that began at the end of 2022.

Analysts can use this tool when watching for a shift in STH sentiment. When the trend returns to the transition zone and enters the positive zone (>-0.05), it suggests that funds are flowing back into the market and holders are back in a favorable position.

Summary and Conclusion

The sentiment of the Bitcoin market is undergoing a profound change, with most short-term holders now facing tight supply. This has triggered a negative shift in sentiment, with investors selling at prices now below the cost of the rest of the group. This suggests that a period of panic is affecting this group, for the first time since the FTX crash.

Some indicators show that although there will be new capital and new investors entering the market in 2023, the momentum is not strong enough. This seems to indicate that the current macroeconomic conditions, regulatory pressure and tight market liquidity have increased uncertainty.