7 indicators to predict BTC trend: Most indicators have not broken through previous highs, and the market price is less overvalued

Analyst | Carol Editor | Tong Producer | PANews

This month, BTC started to fall after going sideways, from the opening price of $58,926.56 on April 1 to the closing price of $55,033.12 on April 27, a drop of about 6.61%. In particular, on April 18, BTC's single-day drop reached 7.98%, setting the third highest single-day drop this year. From April 23 to 26, BTC repeatedly fell below the $50,000 mark, with an average daily fluctuation of 8.07%.

In just two weeks, BTC has repeatedly adjusted from high levels, which has caused investors to worry about its future trend. Is this round of bull market over? If not, what stage has the market reached?

PAData conducted a comprehensive analysis of seven market indicators in three dimensions: fair value and fundamental value, investment income and market confidence, and fund activity[1], attempting to find the answer by comparing the performance of the indicators in the 2017/2018 bull market with the current performance of the indicators. According to the analysis, the performance of the indicators in the two time periods is as follows:

Overall, PAData believes that:

1) Currently, various market indicators do not show any signs of a market reversal. Many indicators are at recent highs (above the 75th percentile), but have not broken through previous highs.

2) From a value perspective, although the current market price is significantly higher than the fair price of actual transactions, on the one hand, the degree of deviation is lower than the peak of the bull market in 2017/2018, which means that current market participants can still tolerate a higher price consensus and there is still room for the coin price to rise; on the other hand, supply scarcity is one of the intrinsic values ​​of BTC, but since the third production cut, the BTC price has been negatively deviating from the intrinsic value for a long time, which means that the current intrinsic value is well supported and there is room for further strengthening of support.

3) From the perspective of investment returns and market confidence, the current market has a large profit margin, but it has not yet exceeded the peak of the 2017/2018 bull market, and the current reserve risk of long-term investors has risen moderately, which is different from the trajectory of rapid rise and immediate decline after reaching the peak, which marks the end of the bull market. This shows that the investment return is still attractive and long-term investors are still confident in the upward trend of currency prices.

4) From the perspective of fund activity, the current market fund activity is slowly increasing, but there is no tendency to accelerate, and the trading activities of long-term holders continue to maintain a high level. Moreover, from a short-term perspective, in early January this year, long-term holders put more tokens into the circulation market, releasing a certain amount of selling pressure. Recently, this tendency has declined, and the market pressure has eased, which provides momentum for the rebound of the currency price.

5) From the perspective of specific indicators, the peaks of MVRV Z Score and profit and loss ratio appeared earlier than the peak of the currency price, which can provide investors with a forward-looking reference. When the index continues to accelerate, investors need to be alert to risks.

Fair Value and Intrinsic Value:

Market price is higher than fair value, but still lower than intrinsic value

Value is the basis of price, and price fluctuates around value. If the scarcity of BTC supply is taken as its intrinsic value, then according to the S/F model, during the peak of the 2017/2018 bull market, the BTC market price was significantly higher than the S/F estimated price, and the degree of deviation quickly climbed to an abnormally high value of 223.96% in a short period of time, and then fell rapidly.

However, in this round of bull market, the relative trend of BTC market price and S/F estimated price has not yet shown the same trajectory. Currently, BTC market price is lower than S/F estimated price, with a negative deviation of about 38.19%, and the degree of negative deviation is at a high level since 2017. In fact, since the third Bitcoin production reduction in late May 2020, BTC market price has been in a state of negative deviation from S/F estimated price for a long time. On the one hand, this means that the current BTC intrinsic value has good support for the market price and the degree of bubble is low. On the other hand, this also means that the intrinsic value can provide further support for the upward movement of BTC market price. It should be noted that the peak of the S/F deviation indicator appears later than the peak of the market price. This indicator cannot predict the price peak, but it can help investors confirm the top.

From the perspective of price performance, there is also a difference between the real-time market price and the fair price of actual transactions (on-chain movement), which leads to a difference between market value and realized market value. MVRV is the main indicator for observing the relationship between market price and the fair price of actual transactions. It is generally believed that when the MVRV index is greater than 1, the market price is higher than the fair price of actual transactions, that is, the market price is overestimated. Conversely, when the MVRV index is less than 1, the market price is lower than the fair price of actual transactions, that is, the market price is underestimated.

At the peak of the bull market in 2017/2018, the MVRV index peaked at 4.16. The peak time of the indicator was synchronized with the peak of the currency price, and in the six months before the peak, the index was always above 2.45 and ran at a high level. Currently, the MVRV index is about 2.77. In the past five months or so, the index has always been above 2.45, which shows that the current market price continues to be higher than the fair price of actual transactions.

However, since this month, the MVRV indicator has shown a significant decline, and the indicator has never exceeded the peak of 2017/2018, which shows that investors still have room for tolerance for the overvalued market price of BTC.

The ratio of the difference between market value and realized market value to the standard deviation of market value, i.e., MVRV Z Score, can be used to measure the degree to which market prices are overvalued. At the peak of the bull market in 2017/2018, MVRV Z Score reached an extremely high value of 9.474. In the previous six months or so, the index continued to operate in the high range of 3-5.5, breaking through the 95th percentile (5.614) many times, and the extreme high value reached 9.47. In this round of bull market, MVRV Z Score also showed a trend of continuous high operation, breaking through the 95th percentile many times, but the highest value of 7.17 has not yet broken through the previous high, and has begun to fall since March. At present, the index is about 4.12, which is still at a relatively high level, indicating that the current market price is still overvalued to a high degree.

It is worth noting that among the price-related indices, only the MVRV Z Score peaked earlier than the coin price peak, which can provide investors with a forward-looking reference. When the index continues to accelerate, investors need to be alert to risks.

Profit and confidence:

Large profit margin and low reserve risk show confidence

One of the main signs of a bull market is that most people can make money. Based on the profit and loss status of BTC when it moves on the chain compared to the current price, we can get the realized profit/realized loss ratio. If the ratio is greater than 1, there are more profitable chips than loss-making chips. The higher the ratio, the more profitable chips; conversely, there are fewer profitable chips than loss-making chips. When profitable chips accumulate to a certain extent, there will be a demand for profit, which will in turn generate selling pressure and affect the price of the currency.

Judging from the profit and loss status during the bull market in 2017/2018, the peak profit and loss ratio was 44.94, which occurred nearly 4 months earlier than the peak of the currency price. Before the peak of the currency price, the profit and loss ratio was higher than the 75th percentile (9.24) for a long time, and was higher than 30 many times, accompanied by violent fluctuations. At present, the profit and loss ratio has fallen sharply to 1.66, but since the second half of last year, this indicator has been higher than the 75th percentile for a long time, reaching a maximum of 35.40, but it has not broken through the previous high, nor has it continuously set abnormally high values. This shows that although the current profit chips are more, they are still less than during the previous bull market, and the profit-taking pressure is also smaller, especially the recent decline has further reduced the market's pressure level.

On the other hand, the reserve risk indicator also shows that long-term holders are still confident in the future upward movement of BTC. Reserve risk simulates the ratio between the current price (motivation to sell) and the confidence of long-term investors (opportunity cost of not selling). The lower the ratio, the more attractive the risk/return of the investment, and vice versa. Low reserve risk may last for a long time, because the accumulation of opportunity costs is a long process, which usually corresponds to the late bear market to the early bull market; while high reserve risk is often a short and rapid event, and the indicator rebound often covers the middle and late stages of the bull market and quickly reverses after reaching the peak.

During the bull market in 2017/2018, the peak value of reserve risk was about 2.61%. The peak value of the indicator occurred slightly later than the peak value of the currency price. In the six months before and after the peak value of the indicator, the indicator first showed a short-term rapid rise, and then showed a short-term rapid decline, and was always above the 75th percentile (0.56%).

On the other hand, after the second half of 2020, reserve risk began to rebound. After mid-January this year, reserve risk has been above the 75th percentile for a long time. However, on the one hand, the indicator has not accelerated upward significantly, and has recently fallen back. On the other hand, the peak is only 0.79%, far lower than the previous high. This means that long-term investors are still accumulating opportunity costs, and the risk/return is attractive.

Fund activity:

Trading activity continues to remain at a high level, and long-term holders have released liquidity once

Activity is an indicator that provides insight into changes in macro holding behavior and helps identify the accumulation or consumption trends of long-term holders. When a large proportion of tokens are held, the accumulation (holding) speed exceeds the on-chain consumption (transaction) speed, and the activity will decrease, that is, the activity index tends to 0; when long-term holders begin to consume a large number of accumulated tokens, and the on-chain consumption (transaction) speed exceeds the accumulation (holding) speed, the activity will increase, that is, the activity index tends to 1.

Judging from the fund activity during the bull market in 2017/2018, the peak activity was 0.61, which occurred significantly later than the peak of the currency price. Before reaching the peak, the activity showed a continuous rapid upward trend, and then declined gently after reaching the peak.

It was not until the second half of 2020 that activity resumed its upward trend. After the end of January this year, activity has always been above the 75th percentile (0.61). The increase in activity indicates that the current consumption (transaction) speed of tokens in the entire network exceeds the accumulation (holding) speed. However, the indicator is rising slowly, and there is no significant acceleration like the previous bull market. This means that the current consumption and accumulation behaviors are still in a relatively balanced process, and the selling pressure faced by the market is still within the tolerance range, which provides the possibility for the future rise of BTC.

On the other hand, judging from the dormancy index, the tendency of long-term holders to reallocate tokens is increasing. The dormancy index describes the ratio of the total amount destroyed (referring to the process from holding to circulation) per unit time to the total amount of transactions. A high dormancy value means that the tokens spent on that day are in an illiquid state for a longer time, which indicates that long-term holders have released liquidity; a low dormancy value means that the tokens traded on that day are relatively young, which indicates that the tokens of long-term holders are still in a holding state. Generally speaking, high dormancy means a bear market, while low dormancy means a bull market.

During the bull market in 2017/2018, the dormant index was below the 50th percentile (10.99) for a long time, and fell below the 25th percentile (8.29) several times, reaching a low of 4.09. When the coin price reached its peak, the dormant index was only 10.25, and before that, the dormant index had two small peaks.

But the current bull market is different. After the second half of 2020, the dormant index has risen significantly, reaching a high of 51.94 in early January. This shows that long-term holders have put more tokens into the circulation market and have released a certain amount of selling pressure. Recently, this trend has declined, the dormant index has begun to decline, and the market pressure has eased, which has provided impetus for the rebound in currency prices.

It needs to be emphasized that with the in-depth development of the industry, the market is also constantly changing. The current bull market is different from the previous bull market in many ways. Therefore, the interpretation of market indicators needs to be understood more from the perspective of trends, that is, from the perspective of the relatively fixed behavioral patterns of investors during the bull market, rather than being obsessed with the absolute numerical changes of indicators. Indicators can only provide certain support for analyzing trends.

Data description:

[1] In order to avoid the impact of an abnormal increase or decrease in an indicator on a certain day on the overall trend analysis, this article uniformly analyzes the average of the most recent 7 days (including the current day) of each indicator.