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Glassnode: Multiple indicators have fallen to historical lows, and greater volatility may occur in the short term

Lila

24-07-04 16:10

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Summary

· Despite the sideways or falling price of Bitcoin, a large part of the market is still in profit, and short-term holders have borne most of the losses.

· By combining on-chain pricing models and technical indicators, we explore the future development of the market.

· Volatility continues to compress historically, which indicates that investor sentiment is apathetic, but also suggests that greater volatility may be in the future.

Market profitability remains strong

When the price of Bitcoin fell to the $60,000 range, a certain degree of fear and bearishness emerged among many digital asset investors. It is not uncommon when market volatility stagnates and goes dormant as apathy creeps in.

Despite this, overall investor profitability remains very strong from a MVRV ratio perspective, with the average coin still making 2x profit. This is often the indicator or rule that distinguishes between "enthusiastic" and "fanatical" bull market phases.

By breaking all holdings into unrealized profits or losses, we can assess the average cost basis of each group and the average magnitude of unrealized profits and losses per coin.

· The average profitable coin holding has an unrealized gain of $41.3k and costs of approximately $19.4k. It is important to note that this data is distorted by coins that were moved from earlier cycles, including Patoshi entities, early miners, and those lost coins.

· The average losing coin holds an unrealized loss of $5.3k, and costs about $66.1k. These coins are mainly held by short-term holders, as few "top buyers" from the 2021 cycle are still holding.

These two indicators help identify potential points of selling pressure as investors look to hold their gains, or avoid larger unrealized losses.

By looking at the unrealized profit/loss ratio for each coin, we can see that paper gains on holdings outweigh paper losses by a factor of 8.2. Only 18% of trading days record a greater relative value, all of which suggests that we are in a frenetic bull market phase.

It can be argued that the March all-time high (ATH) was in line with several characteristics that followed the ETF approval and are consistent with historical bull market peaks.

Determining Position in Cycle

Bitcoin price has consolidated in the $60k-$70k range since the March all-time high, with investor apathy and boredom spreading. This has led to indecision among most investors and the market has failed to establish a robust trend.

To determine where we are in the cycle, we will refer to a simplified framework to think about historical Bitcoin market cycles:

· Deep Bear Market: Price is below realized price

· Early Bull Market: Price is between realized price and true market mean

· Enthusiasm Bull Market: Price is between all-time high and true market mean

· Mania Bull Market: Price is above the all-time high of the previous cycle

Currently, prices are still in the Enthusiasm Bull Market phase, with only a few very brief forays into the mania zone. The true market mean is at $50k, representing the average cost basis of each active investor.

This level is a key pricing level for whether the market can continue its macro bull run.

Next we look at the short term holder group and overlay their cost basis with their level plus or minus 1 standard deviation. This provides an area where these price sensitive holders may begin to react:

· Significant unrealized profits signal a potentially overheated market, current value is $92k.

· The short term holder group has a breakeven level of $64k, spot price is currently below this level but is attempting to recapture.

· Significant unrealized losses signal a potential oversold market, currently at $50k. This is consistent with the true market mean as a bullish demarcation point.

It is noteworthy that only 7% of trading days have recorded spot prices below the -1 standard deviation band, a relatively uncommon occurrence.

With prices below the short-term holders cost basis, it is important to examine the degree of financial stress for different subsets of this group. By segmenting by age metric, we can dissect and examine the cost basis of different age components of the short-term holder group.

Currently, coins in the 1-day-1-week, 1-week-1-month, and 1-month-3-month range are on average in unrealized losses. This suggests that this consolidation range is mostly unproductive for traders and investors.

The 3-6 month cohort is the only subgroup still in unrealized profit, with an average cost basis of $58k. This coincides with the price low of this correction, again marking it as a key area of interest.

Turning to technical indicators, we can use the Mayer Multiple indicator, assessing the ratio of price to the 200DMA (200-day moving average). The 200DMA is often used as a simple indicator to assess bullish or bearish momentum, making any breakouts above or below key market pivot points.

The 200DMA is currently valued at $58k, again providing convergence with the on-chain price model.

We can further assess supply concentration around specific cost basis clusters using the URPD metric. Currently, spot price is near the lower bound of a large supply node between $60k and all-time highs. This is consistent with a cost basis model for short-term holders.

With 2.63 million BTC (13.4% of circulating supply) currently sitting in the $60k to $70k range, small price movements can significantly impact the profitability of a coin and an investor's portfolio.

Overall, this suggests that many investors may be sensitive to any price decline below $60k.

Volatility Expectations

After several months of range-bound price action, we noticed a significant decline in volatility across many rolling window timeframes. To visualize this phenomenon, we introduced a simple tool to detect periods of contraction in realized volatility, which generally provides an indication of higher volatility to come.

The model evaluates the 30-day change in realized volatility over the 1-week, 2-week, 1-month, 3-month, 6-month, and 1-year timeframes. A signal is triggered when all windows exhibit a negative 30-day change, inferring that volatility is compressing and investors are expecting less volatility in the future.

We can also assess market volatility by measuring the percentage range of the highest and lowest price fluctuations over the past 60 days. By this metric, volatility continues to compress to levels that are rare, but usually after long periods of consolidation and before large market moves.

Finally, we can enhance volatility assessments using the sell-side risk ratio. This tool assesses the absolute sum of realized profits and losses locked in by investors, relative to the size of the asset (realized market cap). We can think of this metric according to the following framework:

· High values indicate that investors are spending coins at large profits or losses relative to their cost basis. This situation indicates that the market may need to re-find equilibrium, usually after a high volatility price move.

· Low values indicate that most coins are spent relative to their breakeven cost basis, indicating that some degree of balance has been reached. This situation generally indicates that "profits and losses" are exhausted within the current price range, and generally describes a low volatility environment.

Notably, the short-term holder-seller risk ratio contracted to an all-time low, with only 274 of 5,083 trading days recording a lower value (5%). This suggests that a degree of balance has been established during this period of price consolidation, and suggests that high volatility expectations are expected in the near term.

Summary

The Bitcoin market is in an interesting phase, with apathy and boredom reigning despite prices being 20% below all-time highs. The average coin is still holding 2x unrealized profits, but new buyers are losing money on their positions.

We also explored key factors for a possible shift in investor behavior patterns. We looked for a degree of convergence in on-chain and technical indicators and came up with three key areas of focus.

· A break below $58k to $60k would put a large number of short-term holders in the red and below the 200DMA price level.

· Price fluctuations between $60k and $64k continue the current sideways trend of market hesitation.

· A breakout above $64k would return coins to profitability for a large number of short-term holders, and investor sentiment could rise as a result.

Volatility continues to compress across multiple timeframes, both from a pricing and on-chain data perspective. Metrics such as the sell-side risk ratio and 60-day price range have fallen to all-time lows. This suggests that the current trading range is in the late stages of an extension to the next range.