The Week On-chain Newsletter

Is This Time Different?

Almost all macro indicators for Bitcoin are at all-time lows, signalling potential floor formation. Many are even trading at levels with single digit percentage points of prior history at similar levels. With numerous floor formation signals flashing, the question is, will this time be different?

Checkmate, Glassnode

Jun 27, 2022 • 11 min read

After a volatile and challenging month in June, Bitcoin prices have started to consolidate around the last cycle $20k ATH level, giving investors a moment to pause and reflect. Prices did trade higher this week, coming off a low of $18,067, and rallying to a high of $21,783.

The digital assets market has recently experienced a widespread deleveraging event, which has driven many valuations to lows considered extreme, in both a historical and statistical context. We recently released two research pieces that provide detailed analysis into this de-leveraging event, covering both the Bitcoin and Ethereum markets. These will provide additional context supporting this weeks newsletter:

The Great DeFi Deleveraging covering the expulsion of over 60% of leverage accumulated in the Ethereum DeFi sector.
A Bear of Historic Proportions where we explore the statistical deviation of Bitcoin and Ethereum from numerous long term means.

In this piece, we will provide an assessment of whether a Bitcoin bear market floor is likely to form within the current price range. We will draw on both on-chain, technical, and cyclical metrics. We will also gauge whether there is an observable loss of investor conviction, especially related to Long-Term Holders.

Note: This newsletter edition puts an extra focus on the application of Glassnode Advanced metrics, and has a more fully featured dashboard experience to help our members navigate these challenging market conditions.

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Charting The Depths

Over the past decade, several models have been developed, from both technical and on-chain foundations, in an attempt to find the lows of Bitcoin bear markets. Here we will use the 2015, 2018 and March 2020 lows for comparison, and try to identify confluence between models.

There are five models shown on the chart below, listed in order of highest to lowest:

🔴 Mayer Multiple of 0.6 ($23,380) price trading at a 40% discount to the 200-day moving average, with just 3.4% of trading days closing at or below this level.
🟠 Realized Price ($22,500) being the aggregate cost basis of the coin supply, typically provides resistance during bottom formation. 14% of all trading days have closed below.
🔵 200 Week Moving Average ($22,390) which has historically provided support during final bear market capitulation phase, and only 1% of days have closed below it.
🟢 Balance Price ($17,980) which accounts for the destruction of coin-days, and reflects a market price that matches the value paid for coins, minus the value ultimately realized. Just 3% of trading days have closed below this model.
🟣 Delta Price ($15,750) which is the difference between the Realized Price, and the all-time-average price. This level never been breached on a closing basis, and has provided ultimate final support in bears.

In the current market, spot prices ($21,300) are trading below the Realized Price, the 0.6 Mayer Multiple band, and the 200 Week MA, and recently broke below Balanced Price during the 18-June flush out to $17,600.

Only 13 out of 4,360 trading days (0.2%) have ever seen similar circumstances, occurring in just two prior events, Jan 2015 and March 2020. These points are marked in green on the chart below.

The Accumulation Trend Score metric continues to return high values in excess of 0.9 throughout the month of June. This is being primarily driven Whale (>10k BTC) and Shrimp (< 1BTC) entities adding meaningfully to their on-chain balance.

In the last five years, there are six periods with similar stretches, which fall into three categories:

Bull Market Rallies such as mid-2019 and the Q1-2021 Bull where influx of new demand pushes prices higher, often with early investors as the sell-side.
The Post Nov 2021 ATH which can be best described as dip buyers who were unfortunately much too early.
Bear Market Bottoms such as Nov 2018 and March 2020. These are periods where buy side demand finally overwhelms supply, and established a meaningful macro low.

Cyclical Lows

The Reserve Risk metric has also plunged to all-time-lows. This metric is heavily weighed down when there is an excess of HODLing behaviour, and coinday accumulation within the supply. This indicates that despite serious the downside price action of 2022, Bitcoin investors in aggregate remain generally steadfast in holding onto their coins (for better or worse).

Such deep lows on this metric are coincident only with the late 2015 bear, and the March 2020 flash crash events.

Similarly, Dormancy Flow has hit what is effectively an all-time-low (we are discounting pre-2011 early data). Where Reserve Risk captures the accumulation of coindays (HODLing behaviour), Dormancy Flow weighs the Market Cap against coinday destruction (HODLers spending).

What this metric is signalling that the Bitcoin Market cap is now very low relative to the value of coinday destruction. In other words, the asset is trading below implied fair value given the value that HODLers are liquidating. This is generally the case when the oldest coins that are being spent, are from the current cycle (i.e. old, but not ancient). We will revisit this idea later in this article.

A bearish interpretation here could be that we are seeing a period of historically low demand, that is simply incapable of absorbing the distributed supply by investors. The more constructive interpretation is that the market has over-extended to the downside, and is mis-priced relative to the conviction in the holder base.

The investor experience of HODLing Bitcoin for over 1yr is one of high volatility, and thus requires a sound thesis and strong conviction to avoid being shaken out.

With this in mind, the last cyclical oscillator in this sequence is the RHODL Ratio, which captures the relative wealth balance between 1y-2y old coins, and 1-week old coins.

With the RHODL Ratio approaching the macro range lows, this indicates that the coin supply is firmly and heavily dominated by these longer-term, more experienced investors. Conversely, there is a distinct lack of younger more inexperienced investors, which is synonymous with late stage bear markets, where the investor base is no longer saturated by new and inexperienced demand.

Thus we can see strong confluence between Reserve Risk, Dormancy Flow, and the RHODL ratio, which all suggest that the market remains dominated by strong thesis, high conviction investors.

The case for Bitcoin bottom formation is one grounded in observable dominance of strong hand investors, historically significant lows in numerous macro oscillators, and a strong confluence with prices hovering in striking distance of several bear market pricing models.

However, can these HODLers hold the line?

New Glassnode Research: A Bear of Historic Proportions

As the Bitcoin and Etheruem prices plunge below the 2017-18 cycle highs, we quantify the magnitude of statistical deviation away from numerous 'fair value' means. What we find is that the 2021-22 bear market is arguably the most significant in digital asset history.

Read our latest research piece here.

Hammering Out The Lows

There are a handful of metrics which are signalling that the market is in the process of hammering out a painful floor, likely best described as a capitulation and entry into a re-accumulation period.

The general trend of Active Addresses provides us with a reasonably good roadmap for progress through many phases of Bitcoin market structure. Bullish impulses are quite clear (green) whilst bear markets tend to oscillate sideways, or grind higher as the market recovers.

Active addresses have been largely constant at around ~800k per day and are range-bound within in the Bear Market Channel (red). As we have noted in prior editions, this supports the thesis that it is only the HODLers that remain. As such, 2022 has been a process of prices correcting towards the price floor their demand is sufficient to set.

Previous bear market floors have all bottomed out at a Percent Supply in Profit of around 40 to 45%. In other words, more than half of the coin supply was underwater. During the sell-off to $17.6k, the market did reach just below 50% supply in profit, triggering a significant capitulation and coin redistribution event (covered last week).

The net result of this redistribution is that a large volume of BTC has now changed hands below $20k. If we consider ~40-45% of supply in profit as an potential bear market floor threshold, how far must price now fall to plunge an additional ~5-10% of supply into loss?

In the URPD chart below, we can see that around 1.43M BTC changed hands between the recent $17.6k low, and the current price of $21.6k. This means that after the recent supply redistribution, and capitulation event, a retest of those lows would put an equivalent amount of supply into a loss as during previous bear market floors.

The market structure of aSOPR also resembles a deep capitulation event, where the average spent coin was realizing a loss of -7%. The preceding early phase bear can be argued to include both mid-2021, and all of 2022 as shown in blue, which is similar to both 2018 and 2019 in structure.

New Glassnode Research: The Great DeFi Deleveraging

The Ethereum DeFi market is undergoing a dramatic deleveraging, with over $124B in capital flushed out in just six weeks. The Ethereum investor base is now heavily underwater on spot positions, and is locking in historically large realized losses.

Read our latest research piece here.

Have We Shaken HODLer Confidence?

Through the month of June, Long-Term Holder (LTH) supply declined by around 181.8k BTC, taking the total balance back to Sept 2021 levels. However, this equates to just 7.16% of the supply that was added between March and October 2021. Should this metric fall further, it would signal further sell-side pressure and a potential deterioration of LTH conviction. However a stalling and even recovery would work strongly against that notion.

In this final section, we will attempt to assess whether the conviction of these Bitcoin HODLers has been shaken, given they are the final line of defence. We will do so by estimating the age of coins being spent against the following thesis:

If the LTHs who are spending are predominantly from the 2021-22 cycle, it is more likely to be a classic capitulation, as investors holding underwater coins, through great volatility, finally throw in the towel.
If the LTHs who are spending are from the pre-2020 cycle, it is more likely to reflect a widespread loss of conviction across some of Bitcoin's strongest, and longest believers.

We will further unpack which sub-set of LTHs are driving this 181.8k BTC in spending pressure by looking at increasingly senior age bands, to apportion an approximate weight to each cohort.

The chart below shows Supply older than 6-months. This supply has declined by 168.5k BTC in June. Given the LTH threshold is ~5-months, this means that an estimated 13.3k BTC spent were 5-6months old, representing around 7.3% of the total.

For coins older than 1yr, this has declined from 65.72%, to 64.93% of circulating supply, equivalent to 150.7k BTC. Thus around 9.8% of LTH spending is attributed to 6m-12m old coins.

Continuing the logic, we can see that spending by coins older than 1yr accounts for around 82.9% of the BTC spent by LTHs, which is the lions share of spending during the June capitulation event.

However, if we consider the Supply last active 2yrs+ ago, we can see it has more or less stabilised around 44.5% of circulating supply since April 2022.

As such, we can deduce that of the 181.8k BTC spent by Long-Term Holders, approximately:

82.9% attributed to coins between 1yr and 2yrs old.
9.8% attributed to coins between 6m and 12m old.
7.3% attributed to coins between 5m and 6m old.

Thus our conclusion is that the recent LTH capitulation is almost entirely driven by 2020-22 cycle investors, and is most probably representative of a classic capitulation event, rather than a loss of conviction of very long-term Bitcoin investors.

Summary and Conclusions

Within the current macroeconomic framework, all models and historical precedents are likely to be put to the test. Based on the current positioning of Bitcoin prices relative to historical floor models, the market is already at an extremely improbable level, with only 0.2% of trading days being in similar circumstances.

Long-Term Holders have experienced a long-overdue, but seemingly classic capitulation in June, driven mostly by 2020-21 cycle investors. Almost all macro indicators for Bitcoin, ranging from technical, to on-chain are at all-time lows, coincident with bear market floor formation in previous cycles. Many are trading at levels with just single digit percentage points of prior history at similar levels. This aligns with the very large statistical deviations to the downside that we explored in our recent analysis piece.

With so many floor formation signals flashing, the question is, will this time be different?

Product Updates

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New Glassnode Homepage is live at Glassnode.com
Improvements to Dashboards: Video module, textbox scroll feature, reformatted sizing.
Cloning workbench charts with description.

New Product Launch: Tutorial Dashboards

We are pleased to release four new pre-set dashboards, video guides, and Written notes designed to help Glassnode users explore and up-skill in on-chain concepts, starting with Bitcoin.

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