Analysis of the main factors behind the decline in Bitcoin prices: Will the market enter a consolidation phase?

Bitcoin markets recently experienced a brief wave of relief, with prices trading above the realized price for 23 consecutive days. However, weakness in underlying network activity as covered by the WoC 31 report manifested itself in a sell-off last week, with prices once again falling below this key cost basis level.

The realized price is currently at $21.7k, while the spot price is slightly below the realized price at $21.3k. During the 2018-2019 bear market, the price fluctuated below the realized price for 140 days, making the current 36-day bear market relatively short, so this suggests that more accumulation time may be needed.

In this edition, we look at the underlying weaknesses that led to last week’s sell-off, as well as indicators to watch to support a broader recovery.

Diving back underwater

With realized price now standing at a high, two other on-chain price models are located below the market as potential support levels. Delta Price and Balanced Price are well-known on-chain models.

• Delta Price ($13,760) is a hybrid pricing model based on technology and on-chain foundations. It is calculated as the difference between the realized price and the historical average price. Delta Price has previously bottomed out in bear markets.

• The Balanced Price ($17,180) represents the difference between the realized price and the transfer price (the time-weighted price). It can be thought of as a form of “fair value” model, reflecting the difference between payment (base cost) and expense (transfer).

The chart below highlights the similarities between the current market structure and the bottoming phase of 2018-2019.

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Distribution Opportunities

Initially, we will examine the trend accumulation scores by cohort to provide a detailed look at the accumulation/allocation behavior of all market participants by wallet size. Zooming in on the recent rally from the mid-June local bottom, we can observe two distinct phases:

• Phase A : After falling below $20,000, Shrimps (<1 BTC) and whales (>10,000 BTC, excluding exchanges and miners) became net accumulators, while other investment categories were in balance.

• Phase B : After the initial recovery in realized prices, all groups took the opportunity to distribute their tokens. Interestingly, Xiami’s continued strong accumulation momentum (<1 BTC) also weakened during this phase.

Therefore, the recent price rally has triggered a comprehensive distribution phase, increasing selling pressure in the market.

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Tracking demand through network activity

Following the principles of supply and demand, the sustainability of bear market rallies may be frustrated when new demand and rising network activity fail to balance the supply side.

The number of unique new addresses appearing for the first time is an effective tool to measure network activity. Due to the intraday volatility of trading activity, the absolute number of new addresses on any given day can be inconclusive. However, the trend of new addresses entering the market can provide a strong signal of network activity. Therefore, we will compare the monthly average of new addresses to the yearly average to highlight the relative changes in dominant sentiment and help identify trends in network activity.

• Bear Market Confirmed : The 30-day moving average (DMA) of new addresses has crossed sharply below the 365-day moving average (DMA) as the price plunged from the ATH in April 2021. This view through network activity confirms that a bear phase may be in effect.

• New Demand Confirmed : After a lengthy market consolidation phase, the 30-day moving average of new addresses has suddenly surged above the 365-day moving average, which historically indicates a good sign of new demand entering the market.

Examining the recent spot price rally above realized prices shows that the monthly average of new addresses is still below the yearly average ��. This pattern can be considered a validation of the low demand in the market.

TIP: New Addresses (30 SMA) breaking above 924k (365 SMA) would indicate increased on-chain activity, signaling underlying market strength and demand recovery.

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Exploring the demand side further, miner fee revenue allows for an assessment of the competitiveness of block space. This can be thought of as a measure of network congestion and demand for inclusion in the next block.

• Low Demand : The early stages of bear market realizations often coincide with fee evaporation of miner revenues. Here, the typical range of 2.5% to 5% has become the historical threshold between high and low market demand.

• High Demand ?: In contrast, sustained levels above the aforementioned 2.5%-5.0% range can be seen as a constructive signal for assessing a new wave of demand.

The current structure of the metric shows a low level of demand for block space, but clearly rising. Despite its simplicity, measuring payment momentum in total settlement value is an insightful macro indicator for assessing the complex dynamics of increasing demand on the network.

Tip: A breakout above 2.5% in Miner Fee Revenue Percentage (30 SMA) would indicate increased on-chain activity, signaling underlying market strength and demand recovery.

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By analyzing the long-term trend of small transactions, it is possible to measure the presence of retail investors in the network. The chart below shows the 90-day moving average of the total number of transactions with a USD value of less than $10,000.

Assuming that small-volume transactions are mainly attributed to retail investors, the quarterly smoothed average of this indicator can be used to track the dominant sentiment in the market. Long bullish phases are attractive to retail investors, while bearish periods are less so, so the trend of small-volume transactions can be used to measure market sentiment.

Interestingly, the recent positive move toward $24,400 was not accompanied by any retail-sized transfer volume or change in demand. This pattern further confirms the underlying weakness of this market rally.

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Looking at the total inflows and outflows (in USD value) across all exchanges , we can also extract cyclical behavior of Bitcoin price, with similar correlations between inflows and outflows to exchanges denominated in USD. Exchange flows have now fallen to multi-year lows, returning to levels seen in late 2020. Similar to volumes from retail investors, this suggests a general lack of speculative interest in the asset.

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To establish a clear indicator based on the connection between exchange traffic and broader market sentiment, we defined a new metric, the exchange traffic multiple , which is equal to the ratio between an exchange’s average monthly traffic and its annual average.

Exchange flows are defined as the average of USD-denominated inflows and outflows associated with all exchanges (i.e., inflows + outflows divided by 2).

The exchange flow multiple can be used as a threshold level that can be used to chart the early and late stages of a bear market. Consistent with previously discussed charts, the recent price rebound from the June 2022 bottom has not been accompanied by a large influx of speculators into the market.

Therefore, from the above observations, it appears that there is little substance behind the recent price rally from an on-chain perspective, thus confirming the weaknesses we initially highlighted in WoC 31 .

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Short-term holder confidence

Monitoring network demand and activity with a focus on retail investors and speculators can provide insight into the twilight phase of a bear market. However, to complete the puzzle, this article will end with an assessment of short-term holder confidence .

The current market structure does resemble past bottom formation patterns, as described in the Week On-Chain 29 report. Generally speaking, after a long accumulation phase, any positive price action tends to boost the confidence of short-term investors at a cost basis close to market value.

In line with this, sustainable bullish uptrends are usually accompanied by two macro shifts:

• Since all remaining sellers have withdrawn from the market, realized losses have declined.

• Profits are realized by short-term holders as new demand absorbs seller pressure

Realized losses continue to decline

An examination of the 2018-2019 bear market shows that during the final stages of bottom formation, the net realized profit/loss (90DMA) has gradually returned to neutral as the last sellers have been exhausted from the market.

Using Net Realized Profit/Loss (90DMA), we look for a structural decline in Realizing Net Losses. If this continues for longer, the pattern will shift towards Realizing Net Losses that the market can easily absorb. The current tilt towards Realizing Net Losses indicates price vulnerability to any negative forces in the market.

Tip: A breakout above zero in the Miner Fee Revenue Percentage (30 SMA) would indicate increased on-chain activity, signaling underlying market strength and demand recovery.

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Profit Absorption

Looking at the Short Term Holders SOPR (90DMA) , we can see the quarterly smoothed ratio of investor sell prices relative to buy prices. The important threshold level in this indicator is the crossover of 1.0, a breakout of which indicates a resumption of earnings spending.

Following the capitulation to the November ATH, short term holders (top buyers) were hit hard, causing the short term holder SOPR (90DMA) to drop sharply below 1 ?.

This phase is usually followed by a low conviction period, when the breakeven value of 1 acts as overhead resistance. This occurs because investors are very willing to sell at or close to their cost basis to simply recover their money?.

Finally, after sufficient bottoming accumulation has occurred, a sustained breakout above 1.0 usually confirms that new money is flowing into the market and is absorbing profits from short-term holders?.

Tip: A breakout of 1.0 for STH-SOPR (90 SMA) would indicate rising on-chain profitability, signaling underlying market strength and demand recovery.

Real-time charts

Summary and Conclusion

In this report, we discuss the major factors that led to the weakness and subsequent rejection of Bitcoin price from $24,400 to below realized price. Investors from all wallet sizes decided to allocate in the recent rally above the market average cost basis level.

The recent upward price trend has also failed to attract a large wave of new active users, especially among retail investors and speculators. The monthly momentum of exchange traffic also does not indicate a new wave of investors entering the market, which means that the influx of capital is relatively weak.

The current market structure is certainly comparable to the late 2018 bear market, but the macro trend reversal required for profitability and demand inflows for a sustainable uptrend has yet to occur. Therefore, an ongoing cycle bottom consolidation phase is most likely as Bitcoin investors attempt to establish a more solid foundation, subject of course to continued uncertainty and adverse events in the macroeconomic backdrop.