Glassnode: BTC "pacing back and forth", upside meets resistance

Author: CryptoVizArt, Glassnode

Translation: Vernacular blockchain

Key takeaways: BTC strong uptrend met resistance this week, breaking through to a new yearly high of $44,500 before experiencing its third largest sell-off of 2023. Some on-chain pricing models suggest that the “fair value” based on the investor’s cost base and network throughput is lagging and may hover between $30,000 and $36,000 next. In response to the strong price rise in recent months, BTC short-term holders took profits by a statistically significant margin, allowing the BTC to pause its rally. BTC market had a round trip this week, opening at $40,200 before rebounding to a new yearly high of $44,600 before selling off sharply to $40,200 on Sunday night. The upside move towards the yearly highs includes two rallies above +5.0%/day (+1 standard deviation move). The sell-off was equally strong, falling more than $2,500 (-5.75%), the third-largest one-day drop of 2023. As we reported last week, BTC have performed well this year, up more than 150% year-to-date, outperforming most other assets. With this in mind, it’s important to keep an eye on investors’ reactions to new paper earnings as we approach the end of the year.

1. Guide the cycle through the on-chain pricing model

A useful toolset for navigating market cycles is the investor cost base, which is measured in terms of on-chain transactions by different groups. The first cost-based model metric we’ll want to consider, such as the Active Investor Realization Price, calculates the fairer value of the BTC based on our Cointime economic framework. The model applies a weighting factor to the realized price based on the degree of supply tightness (HODLing) of the entire network. Large-scale holdings can limit supply and increase the estimated “fair value” and vice versa. The chart below highlights periods when the spot price is trading above the classic realized price (lower bound model) but below the cycle all-time high. From this we have some observations: historically, the time interval between a successful breakout of the realized price and the creation of a new ATH is 14 to 20 months (11 months so far in 2023). The path to a new ATH always involves active investors achieving a large ±50% swing around the price (shown in an oscillator for each period). If history gives us guidance, it will paint a roadmap around this “fair value” model (currently around $36,000) for a few months of volatility.

Meyer multiples are another popular BTC technical pricing model that simply describes the ratio between the price and the 200-day moving average. The 200-day EMA is a widely recognized indicator for establishing a macro bull or bear bias, making it a useful reference point for assessing overbought and oversold conditions.

Historically, overbought and oversold conditions have coincided with Mayer multiple values above 2.4 or below 0.8, respectively.

The Meyer Multiple indicator has a present value of 1.47, which is close to the level of around 1.5, which has typically formed resistance levels in previous cycles, including the November 2021 ATH. Perhaps as an indicator of the severity of the bear market in 2021-22, it has been 33.5 months since the level was breached, which is the longest period since the bear market in 2013-16.

Another way to evaluate BTC “fair value” is to translate on-chain activity into a price domain through the NVT price model. NVT Price is seeking a base valuation of the network based on its utility as a settlement layer for dollar-denominated values.

Here, we consider the 28-day and 90-day variants, providing a pair of fast and slow signals, respectively. A typical bear-to-bull transition phase sees the 28-day variant trading faster than the 90-day model, which has been in play since October.

NVT Premium can also be used to evaluate spot pricing relative to the slower 90-day NVT price. The recent rally is one of the sharpest peaks of the NTV premium indicator since the market peaked in November 2021. This indicates that there is a potential “overvaluation” signal in the short term relative to network throughput.

2. Marginal investors

Previously, we explored the huge impact that new investors, also known as short-term holders of STH, can have in shaping short-term price movements, such as local tops and bottoms. Conversely, the activity of long-term holders tends to have a greater impact when the market reaches macro extremes, such as a breakout of a new ATH or during painful capitulation events and bottom formation.

To reinforce the impact of STH’s behavior, the chart below highlights the relationship between price movements (trend and volatility) and changes in the profitability of this investor group:

STH Profit Supply: The number of “profitable” tokens held by STH on a cost basis lower than the current spot price.

• 30D-Floor: The minimum supply of “profitable” STH Tokens in the last 30 days.
• 90D-Floor: The minimum supply of “profitable” STH Tokens in the last 90 days.

These 30D and 90D metrics allow us to measure the proportion of STH capital that is “profitable” over different time windows. In other words, we can compare these traces to gauge how many STH Tokens are “profitable” within 30 days, 30 to 90 days, and more than 90 days.

Historically, the rally in new ATH has coincided with the 90-day holding indicator reaching more than 2 million BTC, suggesting that this group (a strong investor base) holds for a moderately longer holding period. The rally since October has largely boosted the 30-day variant, suggesting that a solid STH foundation has yet to be established since trading above mid-cycle levels of the $30,000 cycle.

We also note that 2023 has a relatively low trace compared to past cycles, which reinforces the relatively tight supply situation we discussed earlier.

3. Short-term fear and greed

The next step is to build a tool to identify periods of heightened fear and greed for these new investors, focusing on overbought (top) or oversold (bottom) signals. We discussed earlier the STH- Supply Profit and Loss Ratio, which provides a ratio of unrealized profit and loss. As shown in the figure below:

Historically, a break/loss ratio of > 20 has been consistent with overheating.

Historically, the P&L ratio of < 0.05 has been consistent with oversold conditions.

A profit/loss ratio of ~ 1.0 indicates breakeven and tends to be in line with support/resistance levels within the current market trend.

The indicator has been trading above 1 since January and has had multiple retests and supports at this level. Historically, these conditions have been linked to the “buy the dip” investor behavior pattern that is common during an uptrend.

We also note that the rally in October pushed the indicator well above the overheating level of 20, suggesting a higher risk structure and a similar “overheating” condition to the NTV-Premium indicator.

The above oscillator illustrates the unrealized profit/loss held by the STH, which can be considered as their “spending incentive”. The next step is to assess whether these new investors are taking action and realizing a profit (or loss) that brings supply back to the market and creates seller resistance.

The chart below depicts four different measures of STH’s realized profit/loss, all normalized to market capitalization:

• STH trading platform profit volume and STH realized profit
• STH trading platform losses and STH realized losses

The main insight from this study is to identify the period during which the realized P&L and transaction-to-P&L trading volume are taken. In other words, STH both sends a large number of tokens to the exchange, and the average difference between the purchase price and the disposal price is large.

With this in mind, this week’s rally to $44,200 triggered a high degree of profit-taking activity, suggesting that the group took advantage of the liquidity need to act on paper gains.

We can then further refine this observation by highlighting days when STH realized profit increased by more than one standard deviation from the last 90-day average. We can see that the indicator has been at a local peak for the past three years.

Using the same workflow, periods of high losses for STH typically reach a standard deviation level during a major sell-off event. This indicates that investors panicked and sent their recently acquired tokens back to the trading platform for disposal at a loss.

Of course, we can combine these two metrics into a single chart to create a tool to help identify recent overheating/overselling conditions based on the consumption behavior of the STH group.

As we can see, the recent rally to $44.2k has been accompanied by statistically significant profit-taking at STH. In addition to the NTV premium and the extended realized profit and loss ratio, we can also see a combination of factors suggesting that potential demand saturation (depletion) may be at play.

4. Conclusion

BTC made a round trip this week, rebounding to a new yearly high before falling back to the weekly open. After such a strong 2023 so far, this rally seems to have met resistance, with on-chain data suggesting that STH is a key driver.

We propose a series of indicators and frameworks to highlight the local overestimation and underestimation of BTC. These metrics draw on on-chain fundamentals such as investor cost base, technical averages, and trading volume. We can then look for convergence in unrealized P&L metrics that show when investors start taking their chips off the table.