In-depth analysis: Bitcoin prices will continue to consolidate before the 2021 bull run begins

The Bitcoin price (BTC) has breached the $19,400 mark in the past 24 hours, a key resistance level since early December. However, on-chain indicators suggest that the dominant cryptocurrency could stagnate or consolidate into early 2021. Despite the all-time high near $20,000, there are compelling reasons to expect more consolidation in Bitcoin.

On-chain analysts mainly look at two indicators to measure the continued upward sentiment: the expenditure output profit ratio (SOPR) and the long-term holder MVRV. The SOPR indicator shows whether short-term holders are selling at a profit or loss. If the SOPR rises, it means that investors are taking profits and selling, which usually means there is room for a small correction. But if the SOPR falls, it means that retail investors may exit the market and the trend may reverse to the upside.

Long-term holder MVRV is a measure of whether Bitcoin is overvalued or undervalued. MVRV refers to the ratio of market value to realized capital value. This indicator can measure whether investors are hoarding Bitcoin at abnormally high prices, causing Bitcoin's rally to overheat. 1 is an important dividing point for MVRV. MVRV above 1 indicates that the average market value of speculators is higher than that of holders; MVRV below 1 indicates that the market value of holders is higher than (or had been) the market value of current speculators. When MVRV is below 1, holders will be psychologically tested.

SOPR and MVRV come into play

Bitcoin is currently in an ideal position, with the SOPR indicator signaling the possibility of further profit-taking, while the MVRV is signaling a long-term uptrend. This trend is positive for Bitcoin as it suggests that even if there is a short-term correction or consolidation phase, the overall uptrend is likely to remain intact.

Willy Woo, the founder of Woobull.com and an online analyst, said that there is room for the SOPR to reset. Woo noted that based on historical cycles, this may not happen until January. Therefore, at least in the short term, the probability of Bitcoin consolidating or stagnating for a longer period of time remains high. While this does not mean that Bitcoin will see a sharp correction, it may lead to lower volatility and a more cautious short-term price trend. Woo explained:

“Once SOPR starts to fall, profit taking begins. We wait until all the profitable investors who were going to sell have finished selling, at which point the Bitcoin being moved is no longer profitable, SOPR rises to 1.0, and we can move forward. Perhaps expected in January.”

One positive factor that could offset SOPR-induced sell-offs in the short to medium term is long-term holder MVRV. Glassnode analysts explained that MVRV is far from the danger zone, which previously marked local tops. For example, when Bitcoin hit its all-time high in December 2017, long-term holder MVRV was over 20. In comparison, this indicator is currently around 3.

Both SOPR and MVRV suggest that Bitcoin is still in the early stages of a bull run. Similar to MVRV, SOPR is significantly lower than the 2017 peak. In the halving cycle, Bitcoin tends to peak 12 to 15 months after the block reward halving occurs. If a similar cycle to the mid-2016 halving is repeated, Bitcoin could peak in mid-2021.

Glassnode analysts explained that the MVRV ratio is currently extremely bullish, adding: “When LTH-MVRV reaches the red zone (above 20), it usually means a global top. But as we can see in the chart below, Bitcoin’s LTH-MVRV is still far from the red zone.”

If Bitcoin breaks through $20,000, it may start to surge

However, in the short term, Bitcoin could break through $20,000. After Bitcoin has completely broken through its all-time high, opinions vary as to what will happen next. Some believe that Bitcoin prices could top out in the $20,000-$21,000 range as optimism reaches its peak. Others say that retail investors may begin to take an interest in Bitcoin.

There are two main reasons why mainstream interest in Bitcoin will rise after Bitcoin reaches its all-time high. First, many retail investors bought Bitcoin at nearly $20,000 in 2017 and lost a lot of capital. Therefore, the all-time high is still a barrier for many investors. Second, Bitcoin has no historical ceiling above $20,000, so the price discovery period may begin.

An anonymous technical analyst named “Crypto Monk” said that the breakout above $20,000 marked the “maximum pain scenario”: “People who could have bought Bitcoin below $10,000 but ultimately decided to look for a lower price are now hoping for a sharp pullback to get a second chance to buy.”

Eric Thies, a cryptocurrency trader, told Cointelegraph that he expects Bitcoin to break through $20,000. Thies said that Bitcoin could see a new uptick in January 2021 and continue the current uptrend after some consolidation:

“I expect that with the recent interest from banks and continued growth from retail investors, Bitcoin will soon reach $20,000 or even higher. We are undoubtedly seeing a continuation of this upward trend and the birth of a new bull market. The best option for entry is probably now at $19,000, or if we happen to crash at this price, the best entry point will be at $15,000. January 2021 will see new highs in Bitcoin prices.”

In addition to the historical significance of Bitcoin exceeding $20,000, on-chain data shows that the number of Bitcoin holders is increasing overall. According to researchers at IntoTheBlock, the number of Bitcoin addresses with balances reached 33.22 million on December 10. This is a record high, indicating that retail investors' interest in Bitcoin is increasing.

In addition to strong on-chain fundamentals supporting continued gains, institutional demand for Bitcoin continues to grow. On December 15, Grayscale CEO Barry Silbert said that Grayscale's assets under management reached $13 billion. This shows that qualified investors in the United States are increasingly interested in alternatives to exchange-traded funds (Grayscale funds).

Continued institutional demand for Bitcoin has been critical to Bitcoin's recent upward move, as it has made traders cautious about being net short Bitcoin. Bitcoin prices have faced the risk of a sharp correction several times over the past week, most notably when the price fell below $18,000, which could have led to a deeper correction to the $16,000 macro support area.

However, traders seem reluctant to short Bitcoin due to the unpredictability of institutional accumulation. An anonymous trader named "Bitcoin Jack" said he did not want to bet against these billionaires, adding: "Holding a cash position is a moderate way between mitigating downside risk and up/down. The reality is, I don't know what will happen from here. A lot of cash is flowing into the Bitcoin market."

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