Bitcoin is in the late bear and early bull stages

In this data analysis, we explore this from the perspective of consumer activity in response to recent price increases, with the goal of identifying emerging behavioral patterns that measure changing macro trends.

Bitcoin price is recovering above the on-chain cost basis of several groups after a volatile month. Despite BTC’s 6.2% correction to a weekly low of $22,600, holders’ accounts are currently in profit on average, and several macro on-chain indicators suggest that the market trend may be shifting.

In this data analysis, we will explore this from the perspective of spending activity in response to the recent price increase, with the goal of identifying emerging behavioral patterns that measure changing macro trends. We will also investigate whether the incentive to sell begins to outweigh the opportunity cost of HODLing as capital begins to change hands (how we can identify this shift), and the relationship between established and new players.

Return to profitability

We will start our investigation by analyzing the realized profits locked in the market during the most recent cycle. We can see that after October 2020, there was a surge in profit taking due to the monetary policy anomaly. It can be seen that since the peak in January 2021, this has decreased sharply, returning to the 2020 level in the next two years.

Recent price action reflects a recovery in realized profits, but it remains bleak for the boom experienced throughout the 2021-22 cycle.

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The losses realized by the market during the same time frame began to expand after January 2021 and reached an initial peak in the May 2021 sell-off.

However, we can see that realized loss levels have now fallen to a periodic baseline of ~$200M/day, with the loss profile contracting overall unless there is a clear capitulation event (e.g. LUNA/FTX).

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By calculating the ratio between realized profits and losses, we can identify a structural change in the dominance between the two. After the market reached an ATH in November 2021 and then the price action collapsed, a regime dominated by losses ensued, pushing the realized profit-loss ratio below 1, and the severity has increased with each subsequent price action capitulation.

Nonetheless, we can observe the first sustained profitable period since the exit liquidity event in April 2022, indicating initial signs of a change in the profit mechanism.

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The Bitcoin Sell-Side Risk Ratio is a metric we can use to compare total realized profits and losses as a percentage of realized market capitalization (a measure of network valuation).

From this perspective, the total amount of realized profits and losses remains relatively small compared to the size of the asset. This suggests that the size of the payout events remains small, especially relative to the excitement experienced during the bull run and the FTX capitulation event.

Overall, this suggests that most coins that are moving are being acquired relatively close to the current spot price, and therefore are not locking up a large amount of “realized” payload.

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Re-emergence

The Net Unrealized Profit and Loss (NUPL) ratio shows that the recent rally has taken Bitcoin’s spot price above the average purchase price of the broader market. This has put the market back into a state of unrealized profits, where the average holder is back in profit.

Comparing the duration of negative NUPL in all past bear markets, we observe historical similarities between the current cycle (166 days) and the 2011-12 (157 days) and 2018-19 (134 days) bear markets. The 2015-16 bear market still stands out in terms of duration, with the period of unrealized losses being almost twice as long as the runner-up (the 2022-23 cycle).

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The ratio between the total amount of unrealized profits held by the market and its annual average can provide a macro indicator of a recovering market.

The recent surge in price action has surpassed several aggregated on-chain cost basis models, leading to a significant improvement in the market’s financial health. This momentum indicator is now approaching an equilibrium turning point, similar to the recoveries from the 2015 and 2018 bear markets.

Historically, confirmed breakouts above this equilibrium point have coincided with shifts in macro market structure. We have also noticed that the length of time spent below this equilibrium point has been similar during major bear markets.

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A variation of the SOPR (Spent Output Profit Ratio) indicator that can be used to examine the total profit multiples locked in by various market groups on any given day.

For the short-term holder group, it can be seen that STH-SOPR is now consistently trading at values ​​above 1.0, showing the first profit-taking since March 2022, reflecting the large amount of BTC purchased at lower prices in recent months.

The broader market also returned to earnings spending after a long period of deep losses.

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Assessing the long-term holder group, we can observe a continued state of losses since the LUNA crash. Although this group has continued to suffer losses over the past 9 months, there are initial signs of recovery and a potential uptrend in LTH-SOPR is starting to form.

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Changing roles

The Adjusted Reserve Risk metric can be used to assess changes in HODLer behavior. This cyclical oscillator quantifies the balance between the overall incentive to sell and the actual spending of long-dormant BTC.

Higher values ​​indicate that both price and HODLer spending are increasing. Lower values ​​indicate that both price and HODLer spending are decreasing.

A structural change in trend appears to be underway as the indicator continues to move closer to its equilibrium position. This suggests that the opportunity cost of HODLing is decreasing while the incentive to sell is increasing.

Historically, previous breakouts of this equilibrium position have marked a transition from a HODLing regime to one of increased profit realization, and a movement of capital from older bear market accumulators to newer investors and speculators.

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We can add weight to the capital rotation argument by examining the “Realized Market Cap HODL Waves.” Here, we isolate BTC held for 3 months or less and note two key observations:

The percentage of wealth held by new holders is increasing, albeit slightly. Since this is a binary system, this suggests that wealth must be transferred from the hands of old holders to the hands of new holders. The depth of this inflection point is very consistent with historical precedent.

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We can then use the Realized HODL ratio to further complement the above observations.

Higher values ​​indicate a disproportionate amount of wealth held by new buyers and speculators. Lower values ​​indicate a disproportionate amount of wealth held by long-term, higher-conviction HODLers.

When evaluating the Realized HODL ratio, the rate of change and the direction of the trend are usually more important than the absolute value. Currently, we are witnessing the formation of a cycle bottom structure, which indicates that a net transfer of wealth is occurring and the trend is beginning to turn upward.

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With this as background, we can introduce a new variant of the RHODL ratio, which compares the wealth held by single-cycle long-term holders (6 months-2 years) to the wealth held by the youngest short-term holders (1 day-3 months). This aims to assess capital rotation turning points during cycle transitions.

Currently, we can see a large, sharp inflection point in this RHODL ratio variant, which indicates a shift in capital from long-term holders from the previous cycle to a new group of buyers.

This market phenomenon has been strikingly consistent in previous bear markets, with large shifts in capital flows indicating significant changes in market characteristics and structure.

Summary and Conclusion

After an ongoing deleveraging episode and a long, brutal bear market, there are signs that a cyclical shift may be underway.

However, it is still early days for this trend, both from a duration perspective and in terms of the size of realized profits and losses relative to the size of the market. As previously discussed in WoC#45, the rotation of capital from long-term to short-term holders has been an ongoing trend over the past 12 months. This is well reflected in the increasing wealth held by the short-term holder group, who absorb BTC from the hands of long-term holders, while long-term holders continue to distribute these BTC to the market (usually at a loss).

The market appears to be in a transition phase, evolving from the late stages of a bear market to the beginning of a new cycle. The road ahead remains arduous, using past cycles as a guide, with reference to 2015 and 2019. Historically, these transition periods have been characterized by an extended macro sideways market with localized sharp moves in both directions.