The Bitcoin market has been testing both the high/low bands within the $27k to $30k range since mid-March, having recovered from $27.1k to $29.9k this week. During this rally, inaccurate rumours circulated of movements within the Mt. Gox, and USD Government controlled wallets. We also saw some activity by ancient supply holders (>7yrs), which led an infamous daily Doji candle being printed in a light liquidity environment, with $1.5k shadows.
This report aims first to address the events mentioned above which caused the volatility, and then scrutinize the demand side by emphasizing the weight of short-term investors over price action within the prevailing uptrend.
🪟 View all charts covered in this report in The Week On-chain Dashboard.
Ancient Coins Revive
By examining the volume of spent supply from 7y-10y and +10y age bands, we observe that approximately 3.2k BTC were revived this week, with 1.1k BTC originally acquired in the pre-2013 era.
After filtering out internal transfers via entity-adjustment 🟥, we can confirm that these transfers were not internal. However, the magnitude of these incidents were not relatively significant compared to previous isolated events during cycle pivot points.
Taking a birdseye view of Ancient Supply spending, we can see that since the inception of Bitcoin, only 4.25M coins have reached the status of Ancient Supply (7+ Years). Remarkably, only 356K of these ancient coins have ever been spent, equivalent to 8.3% of the all-time total. The remaining 3.9M (20% of circulating supply) remains dormant, often assumed to be lost.
If we look at the rumours about Mt Gox coins being on the move, we can see that their balance has remained stable at 137,890 BTC since the first tranche of distributions in 2018, and no coins were released from this wallet. Whilst no spending was observed lately, it is expected that distributions will commence in 2023, making this balance, currently worth $3.93B, one to keep track of.
🔔 Alert Idea: tracking the Mt Gox Balance falling below the current level of 137,890 BTC would give an immediate alert as soon as a spend takes place, likely signalling the start of distributions.
Similarly, the Bitcoin held by US Government authorities has been stable at 205,514 BTC. These coins are those obtained from seizures such as the 2016 Bitfinex Hack, and the 2012 Silk Road Hack. The most recent decline saw 9,861 BTC sent into our Coinbase cluster.
🔔 Alert Idea: tracking the USG balance for declines below 205,514 BTC would indicate an increased likelihood of distribution from this entity.
Probing The Demand
The charts below show the proportion of both BTC, and USD-denominated wealth held by these recent buyers. The rising share of younger supply during a rally is an indication of capital flowing into the market. This also signals that Old Supply (> 6-months) is spending, often taking advantage of this demand liquidity, leading to a net transfer of cheap/old coins to new buyers at higher prices.
The monthly Net Position Change of young supply shows that this net sell pressure has reached and stabilized at a rate of +250k BTC per month. This wave of demand increased the total young supply by 366K BTC.
Compared to significant rallies in the prior cycle, this pattern appears similar to the 2019 uptrend, which was followed by a period of equilibrium prior to the 2020-21 bull.
A similar pattern can be observed in the transfer of USD-denominated wealth into the Young Supply region. The share of wealth held by new investors has increased from 20%, to 40% of the total, a similar uplift to that seen in early-2019.
This puts 28.2% of the total invested wealth in the hands of recent buyers, which remains remarkably low, and is still not over the threshold level of +40% seen in prior bull markets. This suggests that new demand inflows remain relatively soft, but the supply remains predominantly held by longer-term, higher conviction holders.
Riding The Wave
After illustrating the intrinsic relation between inflows of demand, and wealth held by Young Supply, we can derive indicators which study the behavior of these new investors, who are a key driving force of an up-trending market.
The chart below displays the average cost basis of these Young/Old Supply cohorts alongside the market average.
- Old Supply Cost Basis (> 6m) 🔵
- Market Supply Cost Basis (average) 🟠
- Young Supply Cost Basis (< 6m) 🔴
The first note is that the market has firmly recovered from the historical bottom discovery phase of the 2022 bear 🟪. More recently, the rapid spot price appreciation has driven the cost basis of new investors ($25.1k) 🔴 above all other cohorts, as in-flowing demand chases the rally.
This is the first time since Nov 2022 that the cost basis of old supply ($24.1k) is back in a superior position to new buyers (many of whom were active immediately after FTX failed).
The next step is to seek indicators for whether the market is approaching any overheated conditions. The next chart shows the weekly Rate of Change for the aforementioned cost basis, which we can use this metric to gauge the intensity of wealth acquisition by each cohort.
Overheated conditions in the past often aligned with both young supply 🔴, and the overall market 🟠 surpassing a weekly change of 4%-8%, with past instances seeing an extended correction afterwards.
The recent market surge has not yet breached the 4%/wk threshold, however, the young supply has come close at 3.4%. This observation means that the market has not yet experienced the same magnitude of rapid appreciation as was seen in Dec 2017, Jun 2019, and Jan 2021.
Has Bitcoin Overheated?
So far, we have highlighted the significance of Short-Term Investor behavior during the rally out of the cycle lows. Next, we will focus on metrics which enable us to evaluate whether the rally reached a degree of ‘overheated’ thus far.
First, we zoom into the average unrealized profit held by Short-Term Holders via the MVRV metric, which is the ratio between the spot price, and their on-chain cost-basis. The weekly average of this indicator, helps to identify the possibility of short-term corrections, typically seen when STH-MVRV is above 1.2, signalling a 20% unrealized profit. Macro tops tend to see even higher values, often above 1.4.
Recent resistance was found at the $30k level, corresponding with STH-MVRV hitting 1.33, and putting new investors at an average 33% profit. Should a deeper market correction develop, a price of $24.4K level would bring a STH-MVRV back to a break-even value of 1.0, which has shown to be a point of support in up-trending markets.
A more sensitive-to-price indicator, tracking similar behavior, is the ratio of Short-Term Holder Unrealized Profit vs Loss. Studying prior uptrends, we can identify three distinct areas of interest for this ratio:
- STH-Supply Profit > 95% (P/L Ratio > 20): Underlines an extremely profitable position of new investors.
- STH-Supply Profit > 80% (P/L Ratio > 4): Frequently revisited during corrections within macro uptrends, and can signal point of near-term seller exhaustion.
- STH-Supply Profit > 50% (P/L Ratio > 1): Representing a balanced profit vs loss position for new investors. Falling below this level tends to precede a more extensive price contraction, however, there are examples of the market finding support at this level during strong bull runs.
Within the 2023 rally, we can already find several instances reaching, and reacting to all three zones, with the sell-off in early March being a perfect showcase of a reaction at zone 3.
Again, if we consider the potential of a deeper correction in near future, zone 3 would be reached at the cost basis of new investors, located at approximately $24.4K.
Realized Profit to Exchanges
Exchanges are a common destination for speculator funds and the primary venue for price discovery. We can assess the capital flowing into/out of exchanges as a measure of the investor response.
The recent rally was no exception, with exchanges seeing non-trivial inflows of late, pushing the Net Position Change above +30k BTC/Month in recent weeks. This metric has fallen slightly to 22.3k BTC/Month, which translates to a smaller, but persistent sell pressure in the market.
Among both Long-Term 🟦 and Short-Term 🟥 Holder cohorts sending coins to exchanges, the dominance of the Short-Term Holders remains a consistent 90%-95% of total inflows. Of note is the increase of profit taking by STHs in 2023, denoted by the deeper dark red zone, which accounts for 58% of exchange inflows at present.
Isolating the share of Short-Term Holders Profit from the total exchange inflows, we see that since early Jan, there have been two waves of profit taking by this cohort, peaking at 60% of the total. Within the current market, the second wave of short-term holders profit realization aligns with the recent correction.
In this edition, we addressed the rumors concerning the movement of Ancient Supply, Mt. Gox Trustee funds, and supply controlled by the US Government. Given the significant size of these balances, setting Alerts is an excellent tool for providing automatic notification should their balance decline.
We also revisited the concept of Old/Young wealth redistribution through up-cycles, and utilized it to gauge demand in the market. Via an assessment of the various cohort cost basis, we illustrated how new investors influence the market, largely driven by their unrealized and realized profit performance.
From this, we observed that sell pressure by new investors was a key driving force that established resistance at $30k. Should this present correction resume, the cost basis of the young supply holders at $24.4k may well be a psychological level to monitor in the weeks ahead.
Disclaimer: This report does not provide any investment advice. All data is provided for information and educational purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.
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