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Based on the on-chain data analysis, what is the limit of BTC price retracement in this bull market?

Murphy

24-06-24 13:20

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Original author: Murphy, crypto KOL

Editor's note: This morning, Bitcoin fell below $63,000 again, and was quoted at $62,709.47 as of press time; Ethereum fell below $3,400, and was quoted at $3,388.36 as of press time. The entire crypto market seems to have fallen into darkness and confusion again, and the community is full of FUD voices. Will it fall further? Where is the bottom? Crypto KOL Murphy combined on-chain behavior analysis and historical data to analyze the extreme value of BTC price retracement in this round of bull market. BlockBeats reproduced the full text as follows:

From the on-chain behavior analysis, how far may BTC in the bull market fall in extreme cases?

The overall logic is to evaluate from two aspects based on on-chain behavior analysis and historical data.

Method 1: From the perspective of STH-MVRV (short-term holders)

Short-term holders are important participants in the bull-bear transition, so the performance of STH-MVRV has extremely important reference value in the bull market cycle. I have used 2 tweets to explain its principles and functions in detail. New friends can refer to the following link, and I will not repeat it here.

For a detailed explanation of the role of STH-MVRV in the bull market, please refer to the following link: https://x.com/Murphychen888/status/1780825849962590374

For the important performance of STH-MVRV in history, please refer to the following link: https://x.com/Murphychen888/status/1781342103639130544

As we all know, there were two daunting black swan events in the last cycle, which also triggered a sharp drop in BTC prices. From the figure below, we can see that when the March 12 incident occurred, STH-MVRV was as low as 0.59; when the May 19 incident occurred, STH-MVRV was as low as 0.67. This means that the average floating loss of STH (short-term holders) was 41% on March 12, and 33% on May 19. This shows how tragic the market was at that time.

In this cycle, there have also been 3 impressive market capitulation events:

1. On March 10, 2023, Silicon Valley Bank collapsed, and the price of BTC fell from US$25,000 to US$20,000. During this period, STH-MVRV dropped to a low of 1.02;

2. On June 5, 2023, Binance was sued by the SEC, and the price of BTC fell from US$30,000 to US$25,000. During this period, STH-MVRV dropped to a low of 0.95.

3. On August 17, 2023, it was reported that SpaceX sold $373 million worth of BTC, triggering long leverage liquidation, during which STH-MVRV dropped to as low as 0.91;

The STH-MVRV values under these special events correspond to the current BTC prices as follows:

STH-MVRV 0.59 = $37,979
STH-MVRV 0.67 = $43,129
STH-MVRV 1.02 = $65,659
STH-MVRV 0.95 = $61,153
STH-MVRV 0.91 = $58,579

I wonder if you have noticed that when the market moves out of the bottom range of the bear market, we can use the performance of STH-MVRV to evaluate the volatility of market sentiment. The depth of the STH-MVRV retracement also reflects the magnitude of the impact of the event that caused the BTC price to fall.

For example, the COVID-19 pandemic swept the world in 2020. This was a severe test for human life and health. In the face of the survival crisis, no one could think about anything other than life, including investment. The impact of the 3.12 incident on the risk market was equivalent to a magnitude 9 earthquake.I think that in this round of bull market cycle, based on the current situation that can be predicted, the probability of a black swan event of the same level (affecting human survival) occurring again is almost zero. Therefore, it can be inferred that STH-MVRV will not reach 0.59, that is, the price of BTC will not reach $37,979 (negligible);

The cause of the 5.19 incident was the panic caused by the Chinese government's withdrawal of mining companies. Although it was also a black swan, it was not to the extent of "life-threatening". Therefore, STH-MVRV reached a minimum of 0.67, which is obviously better than the situation at 3.12. Therefore, I think that if the risk market is shaken by the US economic recession, its maximum level will be similar to the level of 5.19. If this is used as a metric, then the limit of the BTC price retracement in this bull market cycle is around $43,129.

The current market's expectation of the Fed's postponement of interest rate cuts and the possibility of only one rate cut this year should have a similar impact on the crypto market as the "Silicon Valley Bank crash" and "Binance FUD". Therefore, I still maintain the view in the previous long tweet that BTC is more likely to make a wide range of adjustments in the C1 and C2 ranges (i.e., $60,000-64,000 and $66,000-70,000).

As of June 21, STH-MVRV was 0.99. In the bull market, when STH-MVRV is less than 1, opportunities usually outweigh risks (only for BTC, not including ALT).

Method 2: From the perspective of the market fair price algorithm

We first need to introduce a new concept, namely "Real Market Fair Price (TMMP)", its algorithm and principle are as follows:

TMMP = (Realized Cap - Thermocap) / (Liveliness x Circulating Supply)

There are 3 basic concepts to understand in this formula:

1. Realized Cap:
Each UTXO is valued at the corresponding price at the time of the last move, and the value of all unspent UTXOs in the network is accumulated and summed to obtain the Realized Cap. Because it takes into account the last move time and price of each Bitcoin, it more accurately reflects the total capital investment that actually flows into the BTC market.

2. Thermocap:
Also called total security expenditure, it is the sum of the dollar value of all block rewards (including block rewards and transaction fees) obtained by miners.

3. Liveliness:
It is the ratio of Coin Days Destroyed to all generated Coin Days.

Coin Days (CD): It is calculated by multiplying the number of days each Bitcoin is held by its quantity. One Bitcoin held for one day is equal to one Coin Day.

Coin Days Destroyed (CDD): When a Bitcoin is spent, the Coin Days it holds are destroyed. That is, Coin Days Destroyed is the sum of the Coin Days of all Bitcoins spent.

The numerator of the TMMP algorithm is Realized Cap minus Thermocap, which means that the portion of the total capital flowing into the BTC market that is paid to miners is deducted from the general cost basis of the market. The denominator is Liveliness multiplied by the circulating supply, which means the number of all active BTC (spent) currently.

It covers all active chips on the chain, including ETFs, whales, transfers in and out of exchanges, etc., and excludes the miners, and does not include long-term dormant or lost chips. Therefore, using TMMP as the on-chain cost basis for evaluating active investors to buy BTC in the secondary market is one of the most accurate mean reversion models for analysts seeking investors' on-chain holdings.

As shown in the figure above, the blue line is TMMP and the gray line is the BTC price; whenever the BTC price stands on the blue line, it means that the market has moved out of the bear market and entered a bull market cycle. Although there will be false breakthroughs before this, after the effective breakthrough is finally formed, BTC's price will hardly be lower than TMMP, even when the 5.19 black swan event occurs. But 3.12 is the only exception, which makes the price of BTC lower than TMMP again after entering the bull market cycle.

At the end of the bull market, once the BTC price falls below TMMP, it means the end of the bull market. In other words, as long as it is still in the bull market cycle, the price of BTC will not be lower than TMMP, unless a super black swan event occurs (the level that affects human survival).

As of June 21, the "real market fair price" evaluated by the TMMP model is $44,940. That is to say, even if a black swan event similar to the 5.19 level occurs, the limit of BTC price retracement will be around $44,900. This price is close to the limit value of $43,129 evaluated by STH-MVRV in the previous article, so I think this is a number worth referring to.

To sum up, we can draw some conclusions:

1. Under the premise that there is no super black swan, even if BTC is affected by other macro factors, the limit value of the retracement will not be lower than 43,000-44,000;
2. The so-called super black swan must have an influence that challenges human life (such as a nuclear war between Russia and Ukraine); obviously, "US economic recession" is not enough.
3. Since it is a limit value, it means "it is highly unlikely to reach" rather than "it may reach".
4. The time period analyzed above is in the bull market cycle. If we enter a bear market, the extreme standards of STH-MVRV and TMMP will become invalid;

In addition, I can make a more long-term prediction without shame: even at the bottom of the next bear market cycle, the price of #BTC will not be lower than $22,500. Although it does not mean much at present, it can tell us that the lower limit of BTC will get higher and higher over time. If the cost of the #BTC you hold is below this, please cherish it.

It is based on the CVDD algorithm:

CVDD (USD) = ∑(CDD × price) / (days × 6,000,000)

As shown in the figure above, CVDD depicts the historical bottom of BTC prices in each cycle with amazing accuracy. When BTC is transferred from one investor to another, the transaction not only has a dollar value, but also destroys the time value associated with the time the original investor holds the token.

Its unique algorithm makes the value trend of CVDD continue to rise, that is, today's CVDD will definitely be higher than yesterday's and will never retreat.This is very effective for building a lower limit of the market bottom that continues to rise in a bear market with falling prices!