The Week On-chain Newsletter

Trading Below The Realized Price

Bitcoin prices have now traded below the Realized Price for over a month, with many signals that a deep and complete capitulation has occurred. As a result, numerous signals indicate that genuine bottom formation could be underway.

Checkmate, Glassnode

Jul 18, 2022 • 11 min read

The Bitcoin market caught a breath of upwards relief this week, rallying from $18,999, to the upper end of the consolidation range at $21,596. This follows a volatile response across markets early in the week, as US headline CPI inflation hit a forty-year high of 9.1%. There is also a challenging backdrop of growing civil unrest, rising energy prices, and resource scarcity in many nations around the world.

Within this context, the Bitcoin and wider digital assets market have already experienced one of the heaviest, and fastest downwards repricing events in their history. This process has cleared a great deal of excess leverage from the system, and has driven Bitcoin prices below the Realized Price (the estimated cost basis of BTC holders).

In this edition, we will study the current Bitcoin market structure, through the lens of both unrealized (held coins), and realized (spent coins) losses by various investor cohorts. The target of this study is to gauge whether a similar degree of seller exhaustion is in play compared to previous bear market cycle lows. These tools can help structure a case, and probabilities for a bear market bottom forming around $20k.

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Life Under the Sea

To start this piece, we will first define what is meant by Realized Value and Unrealized Value, as these concepts will be foundational to the insights that follow.

Realized Value (spent coins) is the difference between the value of a coin at the time of disposal, and at the time of acquisition on-chain. For example, an investor buys 0.5 BTC at $40k, and then and withdraws it from an exchange. The investor then redeposits it for sale at $20k. Here, they have 0.5 * ($20k - $40k) = -$10k in realized losses.
Unrealized Value (unspent coins) is the difference between the current value of a coin, and the value at the time of acquisition on-chain. In the example above, if the investor still holds 0.5 BTC, and the price is trading at $21k, they would hold an unrealized loss of 0.5 * ($21k - $40k) = -$9.5k.

The Realized Price is one of, if not the most widely recognized Bitcoin on-chain models, and is often considered to be the on-chain acquisition price (cost basis) of the Bitcoin supply. It is currently trading at $22,092, vs current spot price of $21,060, which puts the average Bitcoin investor at an unrealized loss of -4.67%.

The chart below shows how previous bear cycles have all bottomed and established an accumulation range bellow the Realized Price. Time spent below the Realized Price ranges from 7-days in March 2020, to 301-days in 2015.

If we exclude March 2020 (a flash event), the average time spent below the Realized Price is 197-days, compared to the current market with just 35-days on the clock.

We can visualize the aggregate Unrealized Profit/Loss within the Bitcoin network by taking the ratio between market price, and the realized price, yielding the MVRV ratio.

High MVRV Ratios (> 1.0 🟠) signify a larger degree of unrealized profit is held within the system. Historically values exceeding 3.0 have signalled overheated bull markets.
Declining MVRV Ratios (🔵) signify reducing profitability in the system. This is the result of both falling prices (lower MV), and also coin redistribution, as investors take profits and sell coins acquired at cheaper prices, to new buyers at higher prices (higher RV). A large bearish divergence can be seen between the Apr and Nov 2021 ATHs as a result of this mechanism (shown in blue).
Low MVRV Ratios (< 1.0, 🔴) signify the market price is below the average investors on-chain acquisition price. This is typical of late-stage bear markets, and is often associated with bottom formation, and accumulation.

The MVRV Ratio is currently trading at 0.953 (-4.67% unrealized loss), which is not as deep as the average of 0.85 (-15% unrealized loss) seen in previous bear cycles. This may mean further downside and/or consolidation time is required to establish a bottom. However, it may also signal that a greater degree of investor support exists in this bear cycle.

🔔 Alert Idea: MVRV breaking above 1.0 would signal a Price is breaking above Realized Price, suggesting potential market strength.

In addition to the Realized Price, we have a number of supporting on-chain pricing models which tend to attract spot prices during late stage bears.

Delta Price ($14,215, 🟤) is a form of 'half fundamental, half technical' hybrid pricing model. It is calculated as the difference between the Realized Price, and the all-time Average Price. Delta price has previously caught the bottom wicks of bear markets.
Balanced Price ($17,554, 🔴) takes the difference between Realized Price, and Transferred Price (coinday time weighted price). This can be thought of as a form of 'fair value' model, capturing the difference between what was paid (realized, cost-basis), and what was spent (transferred).

Both the 2015 and 2018 bear market lows were set with a short-term wick down to the Delta Price (green zone). However, both accumulation ranges spent most of the bottom formation process trading between the Balanced Price (range low) and the Realized Price (range high) as shown in blue.

🔔 Alert Idea: Price breaking below $17,545 would signal a break below Balanced Price, and potential market weakness.

Coins Change Hands: Unrealized Loss

Market bottom formation often has a signature of large positive swings in unrealized profit and loss. This is a result of capitulation and coin redistribution to new buyers, who are now less sensitive to price fluctuations.

Thus, we can start by isolating only those coins which hold an unrealized loss (2021-22 cycle buyers), to calculate their aggregate USD value. With the market trading between $17.6k and $21.8k, the aggregate Unrealized Loss has ranged between -$165B and -$198B.

Note how the total unrealized loss in the post-Nov ATH era was much larger in comparison to the May to July 2021 period, even when prices were at $29k (shown in 🔵). This is a result of coin redistribution during and after the Aug-Nov rally, and is the same mechanism that created the bearish MVRV divergence.

This generally confirms that the Aug-Nov rally was more akin to a 'bear market relief' rally, than a resumption of the bull market.

The chart below shows this total unrealized loss, as a proportion of the current market cap, to normalize for size. Here, we can see that the total unrealized losses are equivalent to around 55% of the market cap, which is larger than in March 2020, and not dissimilar in magnitude to the 2018 bear market lows.

The gradual downtrend of this metric (shown in 🟢) during largely sideways, accumulation style price action, is indicative of improving holder profitability:

Coins are sold during capitulation events, and bought by lower time preference buyers.
Losses transition from unrealized to realized
Coins are thus re-valued to a new and lower cost-basis, with a new owner.

As prices start to rise, these newly acquired coins switch from holding an unrealized loss, to an unrealized profit, usually starting the bullish cycle again.

Inspecting the total BTC supply in profit can bolster this argument. When prices fell to $17.6k, a total volume of 9.216M BTC were holding an unrealized loss. However, after the 18-June capitulation, one month of consolidation, and a price rally to $21.2k, this volume has declined to 7.680M BTC.

What this suggests is that 1.539M BTC were last transacted (have a cost-basis) between $17.6k and $21.2k. This indicates that around 8% of the circulating supply has changed hands in this price range.

We can also inspect the coins holding an unrealized profit, this time through the lens of Long- and Short-Term Holders. We can see that all previous bear market lows reach a point where there are effectively no Short-Term Holders in profit, as the market dives well below their acquisition price.

For a strong market recovery, analysts can monitor whether the volume of STHs in profit swells rapidly should prices rally out of the consolidation range. An event like this has followed every major bear market floor (green), as investors who capitulated, transferred their coins to new buyers, with a lower, and thus less price sensitive cost basis.

Deep Capitulation: Realized Losses

In order for a market floor to be established, Bitcoin investors typically need to experience a wide-ranging capitulation event. This acts to flush out all remaining marginal, and forced sellers, effectively creating seller exhaustion.

May and June 2022 have seen two such events, both during the LUNA collapse, and when prices plunged below the 2017 cycle ATH on 18-June. On a 30-day sub basis, these events triggered total realized losses of $27.77B, and $35.5B over a 30-day window, respectively. As shown, these eclipse anything seen historically on a USD basis.

The same can be said about BTC denominated losses, which are so large, that we have to look back to 2011, when BTC was trading below $3, to find an equivalent. A simply staggering volume of BTC locked in a realized loss between May and July, with 538k BTC spent during the LUNA collapse, and another 480k BTC spent on 18-June.

The structure of the aSOPR metric also displays many similarities to bear market capitulation events. As profitability declines (blue), investors start to lock in increasingly large losses, until a final waterfall moment of capitulation (red) takes place. The market eventually reaches seller exhaustion, prices start to recover, and investor pain starts to subside (🟢).

A recovery of aSOPR back towards (and ideally above 1.0) would help bolster the observations above, that complete capitulation has taken place, accumulation is underway, and the market is recovering well.

🔔 Alert Idea: aSOPR on 14-day SMA breaking above 1.0 signals a return to profitable spending, and a potential market recovery.

The proportion of transfer volume in profit is also has market structure similar to previous bear market lows. During the 2015 and 2018 capitulation phases, over 58% of transfer volume was realizing a loss, and momentum had compressed after months of bearish price action.

As the market started to bottom, a greater proportion of coin volume had a lower cost basis, and spending was no longer heavily dominated by panic sales, and/or forced sellers.

At the moment, 54% of the transfer volume is in loss (46% in profit), which is very close to 2015/18 recovery levels. Similar to aSOPR, upwards recovery of this metric would provide signal that seller exhaustion may have been reached, and recovery could be underway.

🔔 Alert Idea: Percent Transfer Volume in Profit on a 90-day EMA breaking above 48% would signal a recovery of profitability, and potential market strength.

Impacts on Supply Dynamics

To close out this piece, we will inspect the Realized Cap HODL waves, which map out the distribution of the USD wealth stored in Bitcoin, by various age bands. We have split this into two cohorts; Coins aged 3-months or less (Hot Money), and Coins aged 3-months or more (HODLer Money).

The total USD value held in the 'Hot Money' is in a structural downtrend, and has now fallen below 20%. This describes two phenomena:

Older coins have largely slowed their spending, else these younger age bands would be swelling (as is the case in bull markets, as long-term investors take profits). This is a signal of high HODLer conviction.
Long-term investors are gradually accumulating 'Hot Coins' and taking them off-market, allowing them to age and mature in cold storage (as seen in WOC 27 with historically large exchange withdrawals).

Finally, inspecting the older cohort of coins, we can see the mirror image, where over 80% of the USD wealth is now older than 3-months (acquired before LUNA collapsed). This trend continues to increase, driven strongly by the 6m-1y and 1y-2y brackets. This is despite a great majority of the capitulation and forced sellers being from these 6m-2y cohorts (as we explored in Week 26).

Again, this has numerous hallmarks of the Bitcoin market approaching seller exhaustion.

Conclusions and Summary

The Bitcoin market has corrected hard, and fast in 2022, driven by the unwind of excess leverage, and a plethora of forced sellers and liquidations. In a relatively short 7-month period, BTC has traded from an ATH, all the way into what resembles a bear market bottom.

In the piece above, we explored the current markets structure through the lens of Unrealized and Realized Losses, seeking signals of seller exhaustion. A common thread amongst almost all metrics explored above, is a trend resembling the majority of bear market lows in the past, albeit lacking a component of duration.

Against a backdrop of extremely challenging macroeconomic, and geopolitical turmoil, Bitcoin is reaching peak investor saturation by high conviction HODLers, and it is becoming quite plausible that a genuine bottom formation could be underway.

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