On-chain Was Revealing, How Smart Money Works?
Case Study into Bitcoins on-chain analysis (Part #1)
This is a case study and will be divided into multiple articles.
Who should be reading this?
Digital assets mainly crypto assets are fairly young and at a nascent stage of their possibly longer life span, which accounts for the volatility in this new asset class.
Thus with volatility comes an investor, with an investor comes psychology, especially when talking about crypto assets as many people in these markets are not learned speculators.
If you are someone for whom the last 3–4 months have been a psychological rollercoaster having seen the crypto market making unprecedented moves, or you sold your assets at heavy losses only to realize your mistake when the markets recovered recently this article series is for you!
Why am I writing this?
I am someone who has been interacting with these markets for a while now and have prepared myself mentally to not throw up in such nervous environments. I successfully predicted the market crash up to 42k for BTC only to be surprised by its later accumulation between 30k-40k, during this turmoil I kept a bullish outlook of the market and gave out buy signals as per my strategy in the zones of 31k-32k to play it safe.
This case study is a testimonial and a detailed look at how on-chain analysis powered by technical analysis has helped me keep myself sane and not be influenced by bears in the markets.
What are UTXOs and their significance?
A UTXO is an unspent transaction output. When a new raw transaction gets created and is later validated, the inputs can only come from unspent outputs of former transactions before signing. Therefore, for transaction creation validating and signing, unspent transactions are more important than spent transactions (outputs).
For the ledger's consistency, unspent transactions are of importance for things like time-stamping, proof of existence, data storage, and block creation and mining. When a transaction takes place, inputs are deleted and outputs are created as new UTXOs that may then be consumed in future transactions.
Since all this data is available on the open-source network itself, it can be used to determine when a particular token/coin was bought thus telling us its age, at what price was it bought thus telling us whether it is in profit/loss as per the current market price and many such things which help us understand the behaviour of various market players like short term investors(STH), longer-term investors(LTH), miners etc.
The on-chain displayed has been taken from glassnode.
May 3, 2021 to May 9, 2021
This is the week I went super bearish on bitcoin and for good reason.
What is URPD?
URPD shows us at which price the current set of bitcoin UTXOs was created, in other words, it shows in what price range all the existing coins in the network were exchanged for.
At the x-axis, we see the price range and on the y-axis, we have the amount of existing bitcoin last moved within that specific price range.
What it shows me is that there has been a lot of exchange that took place at the price range between 55k to 58k, people have either sold or bought more coins. My personal take was that bitcoin was changing hands from the learned hands to STH investors. That is why I went bearish on it, which was also supported by my technical analysis.
Which later proved out right.
May 10, 2021 to May 16, 2021
This drop was not a surprise, and here is why.
Having a deeper look at the 2017 bull cycle…
The 2013 all-time high(ATH) was around 1.2k, which was broken in the bull run of 2017 at the start of April, after about 160days of this break we saw a major correction of 40%.
Now have a look at the present bull cycle, we see a similar pattern followed. So according to this analysis, I saw 40k-42k as a good buying zone with strong support at 38k-40k. We all know how that will turn out(pun intended).
This graph shows us the percentage of entities in profit, clearly, it is not an indicator to be used to time to market but gives an overall idea by looking at what price most of the UTXOs were created and their present market price.
So when the market price was in the lower forties about 23% of on-chain entities were in loss, but there is more detail to this.
SOPR(Spent Output Profit Ratio)
This shows us the degree of realized(sold/booked) profit or loss for all the coins moved on-chain, this also is calculated using the UTXOs, I hope you realize how important the unspent transactions are.
It is calculated by taking the ratio of when a UTXO is spent to when it was created. In simple terms ratio to the prices when the coin was sold to when it was bought, so if you sell it at a profit its value will be greater than 1(on an average) and less than it if sold at a loss.
The retest on the SOPR at the 1 level can be used as a bull signal, not a market timing indicator though.
aSOPR (Adjusted SOPR)
This filters out all the UTXOs with a lifespan less than 1hr, to get rid of the traded UTXOs, and all the noise created due to recently settles transactions.
STH-SOPR
This takes into account the UTXOs with a life span of less than 155days, to indicate the profitability of the short-term holder.
Notice that the STH is substantially lower as compared to aSOPR, this means the new entrants are panic selling that too at a loss.
This graph shows us the number of addresses that have more than zero bitcoins, there has been a 2.8% decline in the addresses which amounts to 1.1 million addresses. This shows that 1.1 million accounts have spent all their coins, as per earlier metrics these are likely the STH who are panic selling.
What are accumulation addresses?
These are the addresses that have at least two incoming non-dust( dust is a term used to define very small fractional transactions) transfers that have never spent funds. Basically, it indicated the Long-term holders.
This shows that the LTH are accumulating and buying the dip as the accounts have increased by 1.1%. This is a noteworthy behaviour which new entrants in the markets should look at carefully, I love the saying and will repeat it many times in my case study.
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffet
Understand that big money is not made in bull runs, when everyone is winning, it is made in crashes when the smart money exchanges hands with uneducated investors who bear the loss for the realized profits of smart money investors. Someone has to lose in order to realize profits for others. Pick a side!
The important thing to notice over here is that there is a lot of buying taking place at around 42k spot price, which also goes on to show that the events which followed were really unprecedented moves.
May 17, 2021 to May 23, 2021
The above is for information purposes only. It is not investment advice.
