Cyclicity Of Panics, How To Time Crashes?
Case Study into Bitcoins on-chain analysis (Part #3)
This story is the third part of the case study I have been writing; check out the previous ones…
Part#1: On-chain Was Revealing, How Smart Money Works?
Part#2: How I Kept My Sanity In The May Time Panic?
In the previous stories, I showed how on-chain analysis can be used alongside technical analysis for identifying long-term investment opportunities.
I even showed a possibility of how the price could give us another restest around the 31k range.
June 27, 2021 to July 3, 2021
So here we were, and the price was unable to break out of the resistance around the 36k price point. This short term accumulation did look relatively lethargic if I may say so, for good reason.
Due to the Chinese ban, the hash rate came down like a souffle in the 2nd week of June, and it was still trailing way below the mean range. Clearly, this lack of hash power makes the network slow, thus the price was acting lethargic.
Hash Difficulty Ribbon
Let’s break it down first, what this chart shows is various moving averages of the hash rate. Think of it as the average hash rate over some days. As the name suggests it tell when it gets difficult for the miners to keep mining the token/coin.
This shows that bitcoin has reached a bottom as bitcoin mining becomes too expensive, important thing to notice is that ribbon inversion historically happens at the end of bear markets. Thus signifying a strong bullish market reversal.
Puell Multiple
This chart looks at the supply side of bitcoin i.e the miners and their revenue. Thus measures the revenue generated by the bitcoin miners. This is achieved by dividing the daily issuance of coins by the average issuance over the last 365 days.
When the puell ratio is in the red region, it means the daily supply is very high and miners are incentivized to sell the coins to realize their profits, but this is not why I use this chart. This chart is best used to look for entry opportunities in the green region when the daily supply of bitcoin is very less, thus the possibility of outsized returns is very high.
Looking at it carefully we see that it predicts the market bottoms very well as compared to market tops.
Another observation I have is that each successive peak in the puell ratio is lower than the previous one, thus indicating the reduced supply of bitcoin with time, which we can also see with the inflation rate.
The issuance rate of Bitcoin fell to an all-time low of 0.71%, which was averaging between 1.5–2% caused by the mass migration.
July 11, 2021 to July 17, 2021
The price was back at the 31k support reaching the end of the week, which was concerning. As bitcoin price tends to move up during the latter half of the week and we see a drop in price at the starting of every week. Now, this timing error opened me to the possibility to see another spring state in the following week.
What was more concerning was that the fundamentals i.e the news was becoming more negative. So I went back to on-chain analysis which glassnode released after the week ends, so I stayed patient.
The important news which kept me from entering the market at this price range was that on 17th July Grayscale Bitcoin unlock was about to happen. Thus fresh bitcoin supply was bound to come into the market which could take the price lower.
When I was studying these on-chain metrics, the price was consolidating between 31–32k price range and my long-term indicators turned bearish. This furthered my worry as it followed suit with the Grayscale news.
Note that I was still bullish on bitcoin, but keeping an eye out for better buying opportunities.
Who is a network entity?
As per glassnode an Entity is a unique on-chain cluster of associated addresses. If a cluster of addresses interact and demonstrate heuristics to suggest a single owner, they will be classified as a single entity.
Sending entities(green), this sees the on-chain data of spending of UTXOs at a particular price point. It tries to show how many entities are holding their coins as opposed to spending them in these price ranges. We can see a clear decline in this, thus people have started to hodl their tokens/coins.
Receiving Entities (pink), tries to measure the creation of new UTXOs, which means that new purchasing of coins is taking place at these price ranges.
Net Entities Growth (blue), shows the difference between the first two which is in an uptrend thus telling us rising hodlers.
Notice that this growth is even clearer when the price is around 30k.
What this chart shows is that people have started to move their tokens off the exchanges thus do not want to sell them or swap for some other tokens into other forms of storage like cold storage. Thus pulling them out of open market circulation thus reducing supply and indicating long term hodling.
During June & July about 36.3k bitcoins have been moving out of circulation per month.
We have discussed this chart many times before, what assured me was that long-term holders have been accumulating tokens even though they are in drawdowns. Notice how the unrealized loss of LTHs has been skyrocketing.
Notice how the LTHs started to offload their coins in profit as soon as the price crossed 2017 all-time high and are now accumulating, which goes on to say that smart money holders are time trading as per my observation of a pullback which happened about 160days after bitcoin crosses previous all-time high. (explained in detail in Part#1)
Golden time 17:30(IST)
Ok, so let me share an amazing observation of mine with you.
Notice that each time price touched the 30k major support, first on 19th May when we saw the panic sell-off, next at the spring stage of our Wyckoff accumulation, it happens at the same time of the day. Even the over 20% move which took place in the 2nd week of June bottomed out at 17:30 Indian Standard Time.
This was a very important time trading observation which I will later capitalize upon.
July 18, 2021 to July 24, 2021
The above is for information purposes only. It is not investment advice.
