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Wednesday

12 May 2021

After A Needed Break, The Bitcoin Price Still Has Gas In The Tank

After A Needed Break, The Bitcoin Price Still Has Gas In The Tank


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By combining this on-chain data with other price and market data, bitcoin holders are more equipped to understand why its markets behave the way that they do, giving them tools to make more informed decisions or the confidence needed to keep sailing.

After the bitcoin price had rapidly risen in late 2020, an increasing number of options traders were expecting continued price growth.

The amount of pain of those futures traders that massively went long on leverage during this parabolic rise is visualized in the long liquidations chart in figure 5.

This means that, on average, the bitcoins that were last sold and moved on-chain were neither in profit nor at a loss — an indication that market participants are no longer actively taking profits, which is a good sign during a consolidating price dip.

Around that same time, the bitcoin price was touching the Network Value to Transaction (NVT) ratio price model that had worked as a support during the previous bull runs (figure 8).

That week not just the bitcoin price dipped, so did its hash rate, likely thanks to a government-instituted power outage in China.

As soon as the hash rate starts to recover, the indicator then gives a “buy” signal (blue dots in figure 9) that can soon be expected to occur on the bitcoin price.

Perhaps an even more comforting thought is that this latest price rise was not accompanied by a rise in funding rates (figure 11), which is a sign that it was primarily spot-markets driven and more likely to be sustainable.

This means that the traders that irresponsibly leveraged long during the run up and were rekt are now either on the sidelines or learned their lesson and bought spot bitcoin without leverage.

Although the sample size was modest, the results were quite clear (figure 12): Respondents were indifferent short-term but very much bullish on bitcoin mid- to long-term.

The previous 10 charts showed a clear picture that, during the last few months, bitcoin markets were (over)leveraged after a rapid price rise and simply needed a bit of time to cool off, causing this consolidation with several dips.

That trend becomes even clearer when you see that the liquid market supply has decreased on a daily basis all year so far (top chart in figure 15) and thus the illiquid supply — the coins in the hands of holders with no history of selling — keeps growing (bottom chart in figure 15).

It is hard to predict future demand for any asset, but the fact that bitcoin has moved in a very expressive four-year cycle (which I described in detail in this recent Bitcoin Magazine article) means that there is clear cyclical historic data to compare the current cycle with.

Where the Reserve Risk assesses long-term holder market behavior by looking at the age of the coins that were moved on-chain, the Realized HODL (RHODL) ratio does so by looking at the age of the long-term holders’ coins that didn’t move on-chain (figure 24).

To close off this analysis, we’ll have a look at my Halving Cycle Roadmap chart (figure 25), that combines the BPT (Bands) metric that was introduced earlier with several popular predictive price models.

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