Data analysis: Bitcoin bottoming out is about to be completed

Bitcoin prices have been unusually stable in recent weeks, in stark contrast to the stock, credit and foreign exchange markets , where rising interest rates, inflation and a strong dollar continue to wreak havoc. Against this backdrop, Bitcoin has been remarkably stable. Relative to many other assets, Bitcoin has made some progress.

The Bitcoin market has moved slightly higher this week, rebounding from a low of $19,037 to a high of $20,406. Since the major deleveraging event in mid-June, the price of Bitcoin has been range-bound for more than 120 days.

As investors attempt to establish a bear market bottom, we can compare market structure to past cycle lows. In this article, we conduct a series of studies on the behavior of large investors and adjust many bottom formation indicators to better account for the impact of lost and long-held Bitcoin.

Bitcoin: Price in Week 41

Whales drive selling

Generally speaking, sustained price action is often associated with on-chain net accumulation or de-accumulation trends. This correlation is often driven primarily by the behavior of larger entities (i.e. high net worth individuals, whales, and institutional capital).

The importance of large entities can be measured by their share of the total circulating supply. As shown in the relative address supply distribution chart , the share of larger entities (holding >100 BTC) in total supply has gradually decreased from 70% to 60% since the beginning of 2011 (even though the value of Bitcoin has changed significantly during this time).

Bitcoin: Supply Distribution by Relevant Addresses

The accumulation trend reflects the strength of change in the total balance of active investors over the past 30 days, with larger entities having higher weights. A weight close to 1 indicates that, in general, larger entities are increasing their on-chain balances (and vice versa).

Looking back at the late 2018-2019 bear market, a series of distinct ranges can be identified:

• Equilibrium state before the sell-off: Supply and demand remain in equilibrium as the spot price converges toward the long-term cycle baseline (dashed line).

• Sell-off: As price action breaks below the cycle baseline, the market enters a sell-off phase. Interestingly, larger entities tend to accumulate further (green), and these strong accumulation periods are usually followed by equilibrium.

• Forming a bottom: Throughout the bottom formation phase, there are one or more short-term Bitcoin rallies that coincide with large-scale sell-offs (red) due to lack of demand (known as bear market rallies).

It is worth noting that after breaking the cycle baseline at $30,000, a series of events similar to the 2018-2019 bear market occurred in succession. Throughout the sell-off in early 2022, the cumulative trend score indicated that large entities accumulated a lot and sold during the recent bear market rally to $24,500. Currently, the indicator indicates that the market has a similar equilibrium (neutral) structure as in early 2019.

Bitcoin: Accumulation Trend (7 days)

For a more detailed analysis, we can refer to the accumulation trends of wallets of different sizes. Here, we compare the market structure with the post-sell-off phase of the 2018-2019 bear market.

We can see that large entities, specifically wallets holding 1,000-10,000 BTC, drove the sell-off (red) during the rally off the lows in March 2019. Retail investors (holding < 1 BTC) accumulated heavily in 2018 and 2019 (blue).

Accumulation trends of wallets of different sizes

In our current market structure (roughly 10x higher than 2019 Bitcoin price), we can see very similar behavior happening among large entities, but in the August rally, the driving influence was much greater from 100-1000 BTC entities.

The relative neutrality of the small and medium wallet groups, while the accumulation trend of whales holding 1,000-10,000 BTC highlights the strong accumulation since late September. The accumulation trend of whales holding more than 10,000 BTC has weakened in recent months.

Accumulation trends of different wallet sizes

We can see that whale net withdrawals have increased in recent weeks, with net outflows from the exchange reaching 15,700 BTC, the largest outflow since June 2022.

Bitcoin: Whale deposits and withdrawals on exchanges

We can calculate the basis cost of all whales that actively speculated in a specific time period, thus deriving a threshold level that affects the psychology of these investors. By exploring the deposit and withdrawal volume of the whale cohort (holding 1000+ BTC) to and from the exchange platform, we estimated the average price of whale deposits/withdrawals since January 2017. This whale basis cost is currently around $15,800.

Bitcoin: Whales and prices relative to exchanges

Losses worsen

The reduction in profitable supply will cause increased financial pressure as sellers have already shipped all of their inventory in the previous cycle.

Exploring the profitable supply share during previous bear market bottom formation phases, we found that cyclical lows often coincide with 40%-42% profitable supply share. Currently, 50% of the circulating supply is in unrealized profit, indicating that supply profitability is still high relative to the same bear market. This may suggest that our significant decline in profitability has not yet occurred.

Bitcoin: Profitable Supply Percentage

Additionally, the cyclical lows in the profitable supply percentage chart have been trending upward since the 2014-2015 bear market. A key driver of this macro trend is the “lost” bitcoins and inactive supply, including the impact of the Patoshi pattern (a former miner who mined approximately 1.1 million bitcoins between 2009 and 2010). To examine the impact of these bitcoins, the chart below shows the total supply in profit and the supply that was last active 7 years ago, which can be assumed to be lost or inactive.

Currently, 3.7 million Bitcoins have been sitting idle for the past 7 years, which is equivalent to 34% of the current supply that is profitable.

Bitcoin: Profitable Supply & 7 Years+ Inactive Supply

By adjusting the profitable supply (yellow) and the inactive supply, we can calculate the adjusted percentage of supply in profit (blue). The resulting chart shows that at the lowest point of the bear market cycle, the profitable supply percentage fell to around 39%, and in previous cycles, the profitable supply percentage fell more. However, it is consistent with the conclusions drawn above.

Bitcoin: Adjusted Profitable Supply Percentage (7 days)

The potential financial stress on remaining investors can be tracked through the unrealized profit metric, which measures the normalized total profit of all bitcoins in supply and adjusts for the increase in bitcoin assets each cycle.

A survey of historical data shows that when the cumulative unrealized profits are compressed to about 30% of the market value, a large part of the selling pressure is relieved (Bitcoin is sold out). Since November 2021, the continued decline in Bitcoin prices has caused this ratio to fall to 0.37, slightly milder than the previous low.

Bitcoin: Correlated Unrealized Profits

Net Unrealized Profit and Loss (NUPL) is a metric that measures the difference between the network’s unrealized gains and losses as a percentage of market capitalization, taking into account losses and gains in supply at various stages of the market cycle.

Since the beginning of June, NUPL has fallen into a compressed negative range of 0% to -15% on two different occasions, lasting 88 days to date. By comparison, NUPL has fallen below -25% in previous cycles and has been negative for as long as 134 days (2018-19) and 301 days (2014-15).

Note that NUPL cycle lows are also gradually climbing due to lost and long-held Bitcoin.

Bitcoin: Net Unrealized Profit and Loss (NUPL) (7 days)

Next, we can use the same method to adjust the NUPL metric for the percentage of profitable supply. This produces the metric adjusted for inactive supply (aNUPL) .

The key observation from this adjustment is that by removing the impact of Bitcoin held for more than 7 years (inactive supply), aNUPL has been negative for the past 119 days, which is comparable to the length of time during previous bear market bottom formation phases.

Furthermore, the lowest recorded value of aNUPL during the current bear market (-39%) has fallen below the -25% threshold, suggesting that the extent of losses in the market structure continues to be severely underestimated.

Bitcoin: Adjusted Net Unrealized Gains and Losses (7 Days)

STH has lower base cost

After assessing the financial stress of the entire network, we can examine its distribution among long-term (LTH) and short-term holders (STH). This analysis aims to determine the market structure during bear markets.

Looking at the profitable/lossy STH supply, the price will pause to correct when all (more than 99%) of STH's supply (blue) is in a loss. Currently, STH supply accounts for 18.1% of the total supply, of which 15.1% is in an unrealized loss state. This leaves STH holding only 3% of the profitable supply, which may be close to the point where Bitcoin is sold out after such a long period of downward trend.

Bitcoin: STH supply in profit/loss

Studying the long-term lost supply metric shows that the probability of these investors selling peaks when the lost LTH supply exceeds 20% of the total supply (red).

LTH currently holds over 31% of the supply in a loss (red), and the market has most likely reached a sell-off phase, similar to the previous bottom formation phase. The market has been in this phase for 1.5 months, and the duration of this phase in previous cycles ranged from 6 to 10 months.

Bitcoin: Long-term loss of supply

Finally, we can compare the average acquisition price per Bitcoin for STH (red) to the average acquisition price for LTH (blue) to explore relative stress levels. In a prolonged bear market, a sustained downward movement in price causes STH’s realized price to fall below LTH’s realized price (purple).

This market structure means that the average acquisition cost over the past 155 days is currently lower than the average LTH basis cost. In other words, STH has a lower basis cost than LTH.

This is a direct result of the LTH sell-off, where they bought Bitcoin near the top of the cycle and sold it at a much lower price and changed hands.

Two weeks ago, the market entered this phase and compared to the previous bear market, we guessed it would take 145 days to 339 days to recover. The LTH base cost is $23,300 and STH is $22,100, which sets a critical price zone.

Bitcoin: Basis Cost

Bear market bottom formation

Bitcoin prices have recently shown significant relative strength compared to highly volatile traditional markets. Several macro indicators suggest that Bitcoin investors may be establishing a bear market bottom that shares many similarities with previous cycle lows.

Network profitability has not quite reached the same level of losses as in past cycles, but adjustments to the parameters for losing and long-term holding Bitcoin can reasonably explain the difference.

In many ways, many on-chain indicators, market structure, and investor behavior patterns are centered around a textbook bear market bottom. The data can’t tell us how long it will take for a bottom to form, but history suggests it could be months away.

Source: https://insights.glassnode.com

Original author: CryptoVizArt, Glassnode

Original link: https://insights.glassnode.com/the-week-onchain-week-41-2022/