Executive Summary
- On average, BTC investors are holding relatively small unrealized losses compared to prior cycles, suggesting a relatively favourable position overall.
- However, Short-Term Holder unrealized losses remain quite elevated, indicating they are the primary cohort at risk.
- Profit and Loss taking activities remain remarkably light, with critical metrics such as the Sell-Side Risk Ratio alluding to a potential for heightened volatility in the near future.
A Downwards Tilt
Bull Market Correction
Price action has been stagnant, and investor sentiment apathetic over the last six months. However, a notable change has occurred over the last three months, with downward pressure increasing, and causing the market to experience its largest drawdown of the cycle.
Nevertheless, from a macro perspective, the spot price is trading around -22% below the ATH, which remains a relatively shallow drawdown compared to historical bull market regimes.
Current Market Pressures
With downwards price pressure increasing, it becomes prudent to assess the unrealized loss held by investors as a tool for evaluating the financial stress they are experiencing.
From the perspective of the wider market, unrealized losses still remain historically low. Total unrealized losses amount to just 2.9% of the Bitcoin market cap, which is historically low.
This suggests that the aggregate investor remains relatively profitable, even in the face of continued price declines.
If we take the ratio between total Unrealized Profit and Unrealized Loss, wwe can see that profits remain 6x larger than losses, supporting the above observation. Around 20% of trading days have seen this ratio above the current value, underscoring the surprisingly robust financial position of the average investor.
Short-Term Concerns
The Short-Term Holder cohort, representing new demand in the market, appear to be shouldering the majority of the market pressure. Their unrealised losses dominate overall, and with the magnitude consistently increased over the last few months.
However, even for this cohort, the magnitude of their Unrealized Losses relative to the market cap is not yet in full scale bear market territory, and more closely resembles the choppy 2019 period.
We can bolster the above observation by assessing the STH MVRV Ratio, which has collapsed below the breakeven value of 1.0. This metric is trading at levels similar to Aug 2023 during the recovery rally after the FTX failure.
This tells us that the average new investor is holding an unrealized loss. Generally speaking, until the spot price reclaims the STH cost basis of $62.4k, there is an expectation for further market weakness.
We can increase our confidence in this assessment by inspecting the subsets within the STH investor cohort. Presently, all age bands within the STH cohort are holding an unrealized loss, with their average cost basis as follows:
- 🔴 1d-1w: $59.0k
- 🟠 1w-1m: $59.9k
- 🔵 1m-3m: $63.6k
- 🟣 3m-6m: $65.2k
Investor Reactions
Assessing unrealized losses provides crucial insight into the pressure that market investors are experiencing. We can then supplement this with analysis of the volumes of profit and loss realized (locked-in) to better understand how these investors are responding to this pressure.
Beginning with realized profit, we can see a drastic decline following the $73k ATH, indicating that a majority of coins spent since then have locked in increasingly small profit volumes over time.
Moving towards realized losses, we note that loss taking events are elevated, and starting to trade towards higher levels as the market downtrend progresses.
The loss taking events are not yet at the extreme levels seen during the mid-2021 sell-off, nor the 2022 bear market. However, the gradual drift higher does indicate some fear is creeping into investor behavior patterns.
From the lens of the Sell-Side Risk Ratio, we can see that total realised profit and loss is relatively small compared to the total market size. We can interpret this metric under the following framework:
- High values indicate that investors spend coins at a large profit or loss relative to their cost basis. This condition indicates that the market likely needs to re-find equilibrium and usually follows a high volatility price move.
- Low values indicate that most coins are being spent relatively close to their break-even cost basis, suggesting a degree of equilibrium has been reached. This condition often signifies an exhaustion of ‘profit and loss’ within the current price range and usually describes a low volatility environment.
Currently, the Sell-Side Risk Ratio has declined into the lower band, suggesting that the majority of coins transacted on-chain are doing so close to their original acquisition price. This suggests there is a progressive saturation of profit and loss-taking activities within the current price range.
Historically, this alludes to an expectation for heightened volatility in the near future, and has some similarities to the 2019 period.
Navigating the Cycle
During downtrends, patience, and HODLing naturally becomes a dominant market dynamic. A substantial amount of Long-Term Holder coins were spent for profit into the March ATH, which creates a net overhang of supply.
More recently, LTHs have slowed down their profit taking, and supply accumulated during the ATH run-up is gradually maturing into Long-Term Holder status. However, historical examples of LTH supply increasing like this show that this usually occurs during the transition towards a bear market.
Compounding the above observation, we note that the wealth held by new-demand investors has continued to decline over recent months, as coins mature and transition into Long-Term Holder status.
The percentage of wealth held by new investors did not reach the elevated limits experienced during previous ATH distribution events. This may indicate that the 2024 peak is more aligned with the 2019 mid-cycle high, rather than the macro highs seen in 2017 and 2021.
To conclude our analysis, we shall consult a simplified framework for thinking about historical Bitcoin market cycles using key onchain pricing levels:
- 🔴 Deep Bear Market: Prices trade below the Realized Price.
- 🔵 Early Bull Market: Prices trade between Realized Price and True Market Mean.
- 🟠 Enthusiastic Bull Market: Prices trade between the ATH and True Market Mean.
- 🟢 Euphoric Bull Market: Prices trade above the previous cycles ATH.
Under this framework, price action remains within the Enthusiastic Bull Market structure, which a constructive observation. However, in the event of a local downturn, the pricing level of $51k remains a critical area of interest that must be maintained for further price appreciation.
Summary and Conclusions
With Bitcoin residing only mere 22% drawdown from its ATH, a considerably shallower drawdown than prior cycles, the average BTC investor remains largely profitable, highlighting the robustness of their positioning.
Nevertheless, the Short-Term Holder cohort continues to carry elevated unrealized losses, indicating they are the primary cohort at risk and the expected source of sell-side pressure in the event of a downturn.
Alongside this, Profit and Loss taking activities remain remarkably light, suggesting a saturation of our current range with critical metrics such as the Sell-Side Risk Ratio alluding to a potential for heightened volatility in the near future.
