Market trend - short-term bearish on BTC

The NVTS indicator uses the on-chain transaction amount of BTC as a proxy indicator of its intrinsic value. The on-chain transaction amount mainly measures the on-chain "user" activity of the BTC network, but the on-chain "user" activity does not directly affect the demand and supply of BTC in the secondary market, but affects the price by changing investors' views on BTC fundamentals. Therefore, from this perspective, NVTS values ​​​​BTC more as a means of value circulation rather than its value storage function. When reflecting the "fundamentals" of BTC's value circulation function, the current NVTS still has the following limitations:

Current statistics do not include Lightning Network transaction data;

Consensus algorithms such as PoP (Proof of Proof) may significantly change the meaning of this indicator. For example, in April 2019, VBK, which adopted the PoP algorithm, caused a sharp increase in on-chain transfers and congestion in the BTC network, which resulted in on-chain transaction volume failing to reflect the use value of BTC.

Regular wallet consolidation at large exchanges will also lead to an increase in on-chain transfer volume, which may distort this indicator. For example, on June 17, 2019, due to Binance’s regular wallet consolidation, approximately 440,000 BTC were transferred on the chain.

Therefore, when using the NVTS indicator, you also need to frequently observe the current market dynamics and track the abnormal reasons for changes in the NVTS indicator.

On June 17, the MVRV was 1.63. Overall, the MVRV value is not high, but in the short term, the MVRV is already at a relatively high point. For the sake of prudence, MVRV is not used as a price judgment indicator here.

MVRV (Market Value to Realised Value Ratio) is the ratio of BTC market value to BTC realized value. Realised value is the sum of the creation costs of all BTC UTXO (BTC data structure). MVRV is an indicator that directly starts from the perspective of secondary market supply and demand. It is a proxy indicator for the market's average profit multiple. It assumes that most investors have a psychological expectation range for profit multiples. When the profit multiple is high enough, investors will cash out and leave the market, creating selling pressure on prices. The logic behind this is widely applicable to all financial products (including traditional financial products), but investors of different financial products have different expectations.

According to historical data (as shown in Figure 2), MVRV has a good indicative significance for the bull-bear cycle of BTC: MVRV below 0.8 corresponds to the bottom of all bear markets, and MVRV above 4 corresponds to the top of all bull markets.

Realized Value (RV) has similar limitations to NVTS in measuring the cost of opening a position, and is affected by the Lightning Network and regular wallet consolidation on large exchanges, but it also has the following advantages:

Excluding the impact of early BTC loss on valuation, because the early BTC price was extremely low and had almost no impact on Realized Cap;

It reflects the recognition of BTC value by market participants at different stages, and this indicator can roughly represent the purchase cost of investors;

The transfer process is the process of generating new UTXO to replace the original UTXO, which can better reflect the update cycle of BTC circulation value. For example, the newly initiated transfer of UTXO generated in 2012 will increase the realized value, and the newly initiated transfer of UTXO generated at the peak of the bull market will reduce the realized value.

Another major limitation of MVRV is that it is a simple divisor of market price and position building cost, and does not take into account the length of the holding period. Investors' psychological expectations of profit multiples should be affected by their holding time, and the opportunity cost of holding a position will increase with the term.

An interesting phenomenon is that the high point of MVRV is gradually decreasing, which may mean lower profit requirements (it may be that the "zero" risk is lower, resulting in a decrease in the risk premium required by investors), or it may be that the average holding period in the market is shortening.

On June 17, the Mayer Multiple was 1.15. The indicator has remained near 1 for a long time and has not shown a clear trend.

Mayer Multiple is the ratio of BTC market price to BTC 200-day moving average. In technical analysis, when the price is above the long-term moving average (MA), it is generally considered a bullish (or positive) indicator, and when the price is below the moving average, it is considered a bearish (or negative) indicator. Mayer Multiple is derived through similar logic.

As shown in Figure 3, if the Mayer Multiple is higher than 1, it means that the BTC price has crossed above the 200-day moving average, and the bull market has started. If it is lower than 1, the bear market has started. According to statistics, if the Mayer Multiple is higher than 2.4 (only 8%), it generally means that a speculative bubble has begun.

On June 17, the Bitcoin Difficulty Ribbon is narrowing, but considering the impact of halving and flood season, this indicator is not considered this time;

The Bitcoin Difficulty Ribbon is composed of a simple moving average of mining difficulty. When the difficulty band narrows or flips (the short-term moving average approaches or crosses the long-term moving average downward), it is time to buy BTC.

The logic behind Bitcoin Difficulty Ribbon is that when BTC is mined, miners will sell part of the mined BTC to pay for production costs, which will create downward pressure on prices. Among the miners, miners can be divided into weaker miners and stronger miners. In order to keep the mining machines running, weaker miners need to sell more newly mined BTC than stronger miners. When selling all BTC is still not enough to pay for mining costs, weaker miners will stop mining, resulting in a decrease in the computing power and network difficulty of the entire network (the difficulty band narrows or flips), leaving only stronger miners. Stronger miners sell less newly mined BTC, and some miners have sufficient funds and even keep all newly mined BTC, waiting for the BTC price to rise before selling. Therefore, when the difficulty band narrows or flips, it means that the effective supply of BTC in the secondary market decreases, which is conducive to the rise of BTC prices.

The implicit assumption of the Bitcoin Difficulty Ribbon indicator is that the selling behavior of miners will cause sufficiently large selling pressure, which means that the proportion of BTC held by miners in the effective supply of BTC in the secondary market is relatively high.

This indicator was more effective in the early days of BTC, but as BTC halved and the market depth deepened, the indicator's judgment ability will become weaker and weaker, because the proportion of newly mined BTC in existing BTC is getting smaller and smaller, and the impact on BTC prices will also become smaller and smaller.

Funding rate refers to the rate set by the exchange in the perpetual contract market in order to anchor the perpetual contract market price to the spot price (also known as the index price). When the perpetual contract market price is greater than the index price, the funding rate is positive, and the long side needs to pay the funding fee (position * funding rate) to the short side; conversely, the short side needs to pay the funding fee to the long side.

The history of funding rates is not long (since October 2018), and there have been only 6 times when the funding rate was at an abnormal level, but these 6 times all provided relatively accurate short-term buy/sell opportunities. According to historical data (as shown below), when the absolute value of the funding rate is higher than 0.25% (abnormal level), it is a good buy/sell opportunity. At this time, if the funding rate is negative, it indicates a good buy opportunity, and a positive number indicates a sell opportunity.

There has been no abnormality in funding rates recently.

The impact of funding rate on BTC price can be explained from the following two perspectives:

Funding rate represents market sentiment. When the funding rate is high, it means the market is crazy and the market is about to turn from rising to falling. When the funding rate is low, it means the market is panic and the market is about to turn from falling to rising.

When the funding rate is a high positive number, it will have two major impacts on transactions: first, the number of people willing to buy perpetual contracts is decreasing, because holding perpetual contracts requires high funding fees; second, the number of people willing to short perpetual contracts is increasing, because holding perpetual contracts can earn high funding fees every day. Even if the entire market continues to rise, the high interest can make up for part of the loss. For miners, when the funding rate is relatively high, shorting in the market can not only hedge, but also earn funding fees.