By: Joshua Aldio, Business Associate
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With Bitcoin down over 70% from its November all-time highs, experts search for signs of a bottom as the staunchest of long-term holders are feeling pressured to halt their selling. Bitcoin, the largest digital asset by market value, is hovering around $19,000, down from roughly $69,000 at the end of last year. Longstanding investors spending their coins are locking in a 33% loss, data from Glassnode indicates.
There is an increased probability that a long-term holder (LTH) capitulation is underway. That could signal a redistribution of coins to new buyers is near. Bottom formation is often accompanied by LTHs shouldering an increasingly large proportion of the unrealized loss. In other words, for a bear market to reach an ultimate floor, the share of coins held at a loss should transfer primarily to those who are the least sensitive to price, and with the highest conviction (read more below in our “Bitcoin: on-chain Analysis”).
Elsewhere, an influx of smaller transactions from smaller entities seems to be growing, signaling a potential recovery in demand and speculation, according to the firm’s research. Meanwhile, Bitcoin miners, which can be thought of as an influential source of selling pressure during bear markets, have slowed their spending of late. Still, none of these gauges are a definitive read on the market and finding the bottom may prove elusive. During prior bear markets, the supply held by short-term holders was just 3% to 4%, according to Glassnode. Now, with short-term holders still owning roughly 16% of the Bitcoin supply, it could be some time before the coin is largely redistributed to price-insensitive, more confident holders to calm volatility. “Bitcoin investors are not out of the woods yet,” said Glassnode.
Calling a bottom on any asset is a fraught venture. Stock-market investors, facing 20% losses this year, are similarly looking for signals the worst of the selling has passed. Bitcoin continues to trade largely in tandem with US equities, and with tech stocks in particular. “At the moment, Bitcoin is correlating downward with other risk assets but there isn’t any fundamental reason for it to do that,” said Quantum Economics Founder and Chief Executive Officer Mati Greenspan. “Once it breaks correlation with the stock market, Bitcoin’s price will better reflect its true value.”
Capitulation in finance describes the dramatic surge of selling pressure in a declining market or security that marks a mass surrender by investors. The resulting dramatic drop in market prices can mark the end of a decline, since those who didn’t sell during a panic are unlikely to do so soon after.
Capitulation typically follows significant downturns in price, which can take place even as many investors remain bullish. As the downturn accelerates, it reaches a point where the selling by the investors unwilling to suffer further losses snowballs, leading to a dramatic plunge in price.
The heavy trading volume accompanying the decline shakes out “weak hands“—the investors lacking conviction—and replaces them with more risk-tolerant holders who may not have suffered prior losses and were willing to buy at the end of a protracted decline capped with a dramatic drop.
Traders look for unusually high trading volume accompanying sharp declines in price to signal capitulation. They try to anticipate the surest sign of a capitulation: the rebound in price that follows once the panic selling has run its course.
Bitcoin on-Chain Analysis :
Capitulation of Diamond Hands
With the loss of the $30k price level, miners and long-term holders (LTHs) have come under stress (as explored in Week 25). To demonstrate the ongoing capitulation of 2021-22 cycle LTHs, we can monitor their profitability on two fronts; their actualized losses (spending) and unrealized losses (coins held below cost basis).
Long-Term Holder Spent Output Profit Ratio (LTH-SOPR) is a metric which indicates the profit ratio captured by LTHs (i.e. a value of 2.0 means LTHs are spending coins at a price which is 2x their cost basis). Therefore, when LTH-SOPR is less than one, these players realize losses or spend coins at a price below their cost basis.
LTH-SOPR is currently trading at 0.67, indicating the average LTH spending their coins is locking in a 33% loss.
Long-Term Holder Cost Basis estimates the average price long-term holders paid for their coins. Hence, as the market valuation falls below the LTH-Cost Basis, this cohort can be considered to be in aggregate loss. Similarly, LTHs are currently underwater on average, holding an aggregate unrealized loss of -14%.
The following chart combines these concepts and shows intervals which satisfy both conditions (in green). These moments are where LTHs are both underwater on held coins, and locking in losses based on their spending. In combination, this indicates there is an increased probability that a LTH capitulation is underway. With the current value of LTH-SOPR at 0.67 and the LTH-Cost Basis at $22.3k, it means LTHs are realizing an average of -33% losses on each spent coin, despite spot prices only being ~6% below their cost basis. This signifies that LTHs who acquired coins at much higher are the primary spenders at the moment, and those who still hold coins from the 2017-20 cycle (or earlier) are largely sitting tight.
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