Bitcoin pulling back after setting new all-time highs, what’s next?
Hope all is well and you had a great week. Coming off last week’s all-time high daily close, Bitcoin has reached new all-time highs of $66,999 on Coinbase.
Since then we’ve seen price correct, reaching as low as $61,200.
Let’s dive into the dynamics behind this recent price action and what to look for as we presumably move higher towards the end of the year.
Following the all-time breakout, we saw a massive influx of leverage come into the market.
This was evident through a leverage ratio (OI/Exchange balances), high open interest (specifically COIN margined open interest), tight liquidation levels, and of course funding rates.
Funding reached upwards of 150–175% APR on some exchanges, which is not sustainable.
Where I really became concerned was when funding was rising as the price was grinding down.
These dislocations between price action and funding are where I find using funding as a tool most useful.
Seeing this dynamic meant that the effort perps were exerting to push price up was being overwhelmed by selling from the spot. In other words, perp traders were longing for the dip in leverage.
This cleansing is not surprising and there were several early warning signs that this would occur. (not that you can ever have 100% confidence)
After this correction, following briefly reaching price discovery, we now have a bit of overhead supply, although still minimal.
Currently, only 1.59% of supply is overhead.
Looking at my illiquid supply shock ratio, we’re continuing to see supply move to on-chain entities with minimal history of selling. (<0.25% of the coins they take in)
This is a leading indicator, showing that although we’re experiencing a short-term correction/leverage flush, the mid-longer term picture remains unscathed.
We have been following the behaviour of long term holders (entities who have held their BTC for >155 days) for months now, going all the way back to summer.
After reaching all-time highs in the long term holder supply shock ratio (very macro bullish), we are finally starting to see these LTHs begin to distribute. We have been expecting this.
As we’ve talked about, long term holders buy into weakness and sell into strength.
They don’t perfectly buy the cyclical bottoms and they don’t perfectly sell the cyclical tops.
Seeing this distribution (long term holders selling their bags to new market participants) is natural Bitcoin investor behaviour and I suspect we’ll continue to see long term holders’ supply decrease.
Entity adjusted realized-cap has reached another all-time high, now at $447.5B.
Dividing realized cap by supply, we get realized price which sits at an all-time high of $22,600.
The realized cap is the capitalization of Bitcoin based on the last time a coin was moved; in other words, it’s a way to measure the amount of value stored in the Bitcoin network.
Seeing this decline over the summer meant investors were realizing losses, but now seeing RC back in decline means that coins are realizing profits as new capital inflows enter the market and absorb those realized gains.
With this in mind, let’s check out some ways we can utilize realized cap moving forward to identify when the market becomes overheated, as we presumably see higher prices over the coming months.
First off we have MVRV; market value to realized value.
This illustrates when the marginal bid far overshoots the actual cost basis of investors or value stored on-chain.
Z-scoring this ratio (adjusting it for volatility) has given very clear top signals in the past.
Note we never reached a true overheated peak earlier this year and are starting to climb back upwards after almost a full reset over summer.
Next up, we have a crossover between realized cap and liveliness.
Taking a ratio between realized cap and liveliness gives us the orange line, which has historically been a key level that Bitcoin’s price has interacted with.
Going a step further, we can then divide Realized price-Liveliness by price itself, giving us the blue line.
This ratio has provided some good de-risking zones, as well as accumulation zones in bear markets.
Next up we have an on-chain cost basis.
This looks at long term holder realized price (or cost basis) and short term holder realized price (or cost basis).
When the long term holder cost basis breaks above the short term holder cost basis, it has historically been a great time to accumulate. In addition by running a ratio between long and short term, you get the dark blue line.
This ratio can be used to identify times to de-risk in the bull market as well as accumulate in the bear market.
Last but not least for this week we have our delta valuation model, which I introduced a few weeks back.
Delta cap (dark purple line) is the difference between average cap (all-time moving average capitalization of Bitcoin) and realized cap.
This has been a conservative floor estimate and has never been broken.
Taking a multiple of this, we get the delta top line, which has also been a pretty accurate way to model macro peaks for BTC.
This currently sits just above $117,000, but because it is partially based on mean reversion, would slope upwards if we see continued price appreciation.
Last, we take a look at the lightning network capacity. This has exploded throughout the year, reaching new all-time highs of 3,123 BTC this week.
Although still small, it is very cool to watch capacity grow, as lightning will be crucial for Bitcoin to transition towards a medium of exchange.
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