Bitcoin: on-chain perspective (June 25, 2022)
Bitcoin from the highs of $69,000 reached in November 2021 has lost nearly 75% touching $17,622 on June 18, the cryptocurrency that capitalized $1.3 billion currently has a market cap of just over $400 billion.
On-chain analysis makes it possible to assess the fundamentals of Bitcoin and its network through various metrics that reflect the behavior of investors, miners, and speculators. Thanks to this type of analysis, it is possible to get an idea of the changes taking place in the market at a macro level, and consequently build or adapt one’s investment strategy based on them.
Bitcoin technical analysis
Bitcoin is currently above a key support area between $17,622 and $19,798, which corresponds to the previous all-time high in 2017. The price got there after losing previous support at $28,850 and is currently in a stalemate around $21,190. For the time being, there do not seem to be any signs of the formation of a solid bottom for the quotes; therefore, it is important to wait for the price action to develop better as we are always in a downtrend with decreasing highs and lows.
Bitcoin on-chain
The following are five metrics belonging to different categories that allow everyone to build an overall picture of the market, especially during bearish phases (as well as for bullish markets).
The first is the SOPR, or spent output profit ratio, this metric allows one to understand whether the Bitcoins spent (moved on-chain) were sold at a loss or at a profit by holders. The SOPR considers the aggregate dollar value of UTXOs at the time they were spent and divides it by the value of the UTXOs at the time they were created. UTXOs are nothing more than Bitcoins not spent during a transaction; they represent the output that is returned to the user when the transaction is completed. By analyzing the creation and spending of UTXOs, it is possible to understand whether a Bitcoin wallet performs loss-making or profitable transactions.
The SOPR is generally taken on a daily timeframe; therefore, outputs are analyzed on a daily basis.
How is the SOPR generally interpreted?
This metric fluctuates around the value of 1, when it is below 1 Bitcoin is being spent at a loss, if above 1 on the other hand Bitcoin is being spent at a profit, one, on the other hand, indicates a neutral value, Bitcoin is being spent at break even.
SOPR in uptrend suggests that users are making profits on Bitcoin, if in downtrend instead, it indicates the realization of losses.
From this chart, it is possible to see how values of the SOPR below 1 coincide with downward phases of the price and vice versa for values above 1. Generally, in oversold phases, the SOPR tends to anticipate the reversal of the trend as happened in March 2020 or July 2021. The trend of the SOPR can be compared with that of the price to see if one is in a solid bullish or bearish phase, note how divergences of the SOPR have anticipated declines as the price of Bitcoin continued to rise and the SOPR reversed. Currently, the SOPR is at a value of 0.9946, has spent much of the time below 1 since May 2022, and is in a downtrend, this indicates that many Bitcoins are currently being moved at a loss. However, values well below 1 have not yet been there, if one takes March 2020 or July 2021 as examples, this could indicate that the downtrend is not yet over.
The second metric considered is the MVRV or market value realized value ratio, this value is obtained by dividing the market value by the realized value of Bitcoin. The market value is nothing more than the market capitalization (price multiplied by the number of Bitcoins in circulation), while the realized value is the sum of the product of the Bitcoins by the price they had when they were last moved (e.g. if 10 Bitcoins have never been spent since day X, and on that day the price was 8,000, the contribution to the realized value of those 10 Bitcoins will be 80,000).
The MVRV has two distinct bands one green and one red, these correspond to historical values of the MVRV at which the price of Bitcoin has reversed the trend. Specifically, when the price exceeds the MVRV value of 3.75 the market is usually at its peak, while for values below 1 usually, the quotes find a bottom. As with the SOPR, the positive trend of the MVRV indicates that the market is in a strong bullish phase and vice versa for bearish phases. Currently, the value of this metric is at 0.944, a value that could confirm that Bitcoin’s price has reached a bottom.
The third metric is the NUPL or net unrealized profit or loss, this is calculated by subtracting the realized capitalization from the market capitalization and the value obtained is in turn divided by the market capitalization. This metric assumes that the last currency movement was the result of the purchase and stands for the total amount of profit/loss in all Bitcoins in the form of a ratio.
NUPL value above zero indicates that investors who are in profit outnumber those who are in loss. For the NUPL to be positive the market cap must be greater than the realized cap.
The opposite occurs for values below zero, the market cap, in this case, is lower than the realized caps and the market price is lower than the realized on-chain value of Bitcoin.
Again, it is possible to observe the trend of the NUPL and understand what market conditions one is in, if the NUPL is trending positive it means that more and more Bitcoins are in profit, and it is expected that sooner or later the selling pressure will start to rise due to profit taking. Conversely, if the NUPL is in a negative trend, more coins will be in loss and investors accordingly.
Values of the NUPL above 0.7 tend to occur at market tops, for values of -0.2 or below, on the other hand, we approach market bottoms. Currently, the NUPL is at a value of -0.04, however, values around -0.11/-0.12 have already been reached in June and this may indicate that Bitcoin is currently near a market bottom.
The fourth metric measures Bitcoin reserves held by miners, i.e., the validating nodes in the Bitcoin network that receive new coins after mining a new block. The higher the reserves are the less selling pressure there will be in the market because miners prefer to hold Bitcoins; conversely, if miners start to reduce their inventories more selling pressure will be created in the market, this can happen in the presence of bullish phases of the market where Bitcoin has already appreciated a lot (miners take profit).
As can be seen in January 2021 the miners had already started to get rid of many Bitcoins, the market continued upward until May and then reversed. In this case, by following the miners’ behavior we could have anticipated the market, made profits, and sold as close as possible to the highs. Note that when the market is down miners usually accumulate Bitcoin. Since after January 2021, miners have continued to accumulate Bitcoin as evidenced by the positive trend in reserves; however, the price trended sideways and then began to reverse downward. Currently, Bitcoin reserves held by miners total approximately 1.86 million Bitcoins.
The fifth and final metric is funding rate, this is one of the most important metrics along with open interest when analyzing the Bitcoin derivatives market. Thanks to funding rates it is possible to keep the price of a Bitcoin futures contract in line with the spot price, every Exchange that offers perpetual derivatives products on Bitcoin adopts funding rates. These are periodic payments that those with a long or short position pay to keep the futures price pegged to the spot price. If funding rates are positive, it means that speculators are optimistic about the market trend, and will pay those with short positions; conversely, with negative funding rates, it is the shorts who will pay the longs.
When funding rates are negative (below zero) the sentiment of most traders is negative, these are willing to pay a fee to keep open short positions. It tends to be when funding rates are negative for a long period of time that one is in a bearish phase, and vice versa when, they are positive. In the last period, funding rates have alternated a lot, and there have been no major spikes on either side. Funding rates to date are negative just below zero; however, this is a metric that adjusts every eight hours and is therefore highly variable.
Conclusions
After examining all five metrics, it is possible to conclude that Bitcoin is in a bearish and strongly negative phase; however, not all of them seem to suggest that prices have reached a bottom. It may still take some time for the price to stabilize; further declines are still plausible in the short term before we have a reversal of the trend from negative to positive.
Websites:
https://cryptoquant.com/asset/btc/summary
https://www.coinglass.com/FundingRate
This article is not intended to be investment advice. Seek a duly licensed professional for an investment recommendation.