The recovery of Bitcoin signals the arrival of the next bull market?

Written by: UkuriaOC, Glassnode

Compiled by: Annie, Daling Think Tank

After a month of intense volatility, Bitcoin's price currently remains above the on-chain cost basis of several major holder groups. This has resulted in most BTC holders being in an unrealized profit state, suggesting that macro market trends may be shifting.

Despite Bitcoin's price retracing to a weekly low of $22,600, down 6.2%, most holders are still in an unrealized profit state, with several on-chain macro indicators suggesting that market trends may be changing.

In this article, we will explore this from the perspective of spending activity that has recently reacted to market price increases, while considering the cross-sectional study of the Bitcoin market to measure the evolving macro trends through recent market activities. We will also investigate whether the income from sell-offs has begun to exceed the opportunity cost of HODLing (and how we identify this), and as capital begins to change hands, we will explore the relationship between long-term participants and new entrants.

Price from January 31 to February 6 - Bitcoin

Overall Market Recovery to Profitability

We will analyze the realized profits locked in the market during the recent cycle. It can be seen that after October 2020, due to unconventional monetary policies, profit-taking behavior surged. After peaking in January 2021, this sharply declined, with profit-taking behavior returning to 2020 levels over the next two years.

It is not difficult to see that the recent price trend has led to a rebound in realized profits. However, compared to the boom of the entire 2021-22 cycle, it still represents a small gain.

Realized Profits (7-day Moving Average) - Bitcoin During the same period, realized losses began to expand after January 2021, reaching an initial peak during the sell-off in May 2021.

However, it can be seen that the current level of realized losses has decreased to about $200 million per day as a cyclical baseline. If no large-scale sell-off events occur (such as LUNA/FTX), the overall loss situation is contracting.

Realized Losses (7-day Moving Average) - Bitcoin By calculating the ratio between realized profits and losses, we can determine the structural change in dominance between the two. After the price crash following the ATH in November 2021, the loss state dominated the entire market, pushing the realized profit-loss ratio below 1.0, and as prices continued to decline thereafter, the severity of losses increased.

However, we have also observed the first sustained profit period since the sell-off in April 2022, which is an early sign of the market beginning to shift towards a profit state.

PS: A realized profit-loss ratio (7D-EMA) falling below 1.0 would indicate a significant increase in realized losses, suggesting that holders with a higher cost basis are increasing their sell-off behavior.

Realized Profit-Loss Ratio - Bitcoin The Bitcoin Seller Risk Ratio is an indicator we can use to compare the percentage of total realized profits and losses against the realized cap (a measure of network valuation).

From this perspective, the total of realized profits and losses is relatively small compared to the asset scale. This indicates that overall, the scale of sell-offs is actually negligible, especially in relation to the boom experienced during the bull market and the FTX sell-off event.

Overall, the cost basis of most circulating Bitcoin is relatively close to the current spot price.

Bitcoin Seller Risk Ratio

Bitcoin Market Recovery

Net Unrealized Profit and Loss Ratio (NUPL) shows that the recent rebound has pushed Bitcoin's spot price above the average acquisition price across the market. This has returned the market to an unrealized profit state, with most holders back in a healthy financial position.

By comparing the duration of negative NUPL across all previous bear markets, we observe that the current cycle's duration is 166 days, similar to 157 days in 2011-12 and 134 days in 2018-19. The 2015-16 bear market had the longest duration, with the duration of unrealized losses nearly double that of the second-place 2022-23 cycle.

Unrealized Profit and Loss Ratio - Bitcoin The ratio of total unrealized profits to its annual average can provide a reliable macro indicator for the recovering market.

The recent surge in price has exceeded several on-chain cost basis models, indicating a significant improvement in the financial condition of the Bitcoin market. This momentum indicator is currently approaching a balance turning point, similar to the market recovery at the end of the 2015 and 2018 bear markets.

Historically, the breakthrough of this balance point coincides with a shift in macro market structure. In major bear markets, the duration below this balance point has been similar.

Relative Unrealized Profit Trend SOPR (Spent Output Profit Ratio, reflecting the realized profit and loss level of all circulating Bitcoin on-chain) variants can be used to examine the total profit multiples locked in by various holder groups on any given date.

It can be seen that the current SOPR for short-term holders (red) has sustained values above 1.0, marking the first profit-taking since March 2022. This indicates that a significant amount of Bitcoin has been traded at lower prices in recent months.

The overall market (blue), after experiencing prolonged severe losses, has recovered to profitability.

Entity Adjusted SOPR and STH SOPR

By assessing the long-term holder (LTH) group, we can observe a sustained loss trend since the LUNA collapse. Although this group has been continuously losing over the past 9 months, there are early signs of recovery, with a potential upward trend forming in LTH-SOPR.

LTH-SOPR (7-day Moving Average)

Changes in Major Holder Groups

The entity-adjusted Reserve Risk Indicator can be used to depict the behavior of HODLers. This cyclical indicator quantifies the balance between all sell-off expenditures and the actual expenditures of long-term illiquid Bitcoin.

• A higher value indicates that both price and HODLer expenditures are increasing.

• A lower value indicates that both price and HODLer expenditures are decreasing.

Currently, this indicator is approaching its balance position, suggesting that the opportunity cost of HODLing is decreasing while the motivation to sell is increasing.

Historically, previous breakthroughs of this equilibrium position indicated a transition in market trends from HODLing to a trend of increasing realized profits, and a shift in the types of Bitcoin holders from early bear market accumulators to newer participants.

Entity Adjusted Reserve Risk Indicator

We can enhance the credibility of the capital transfer theory by examining the Realized Cap HODL Waves indicator. Here, we study Bitcoin held for 3 months or less and record two key observations:

• The proportion of Bitcoin held by new holders is increasing, albeit slightly. Since trading is not a one-sided action, this indicates that Bitcoin must be transferring from early holders to new holders.

• The depth of this turning point aligns very well with historical precedents.

Realized Cap HODL Waves

Subsequently, we can use the Realized HODL Ratio to further supplement the above observations. This indicator compares the value of Bitcoin held for 1 week to that held for 1-2 years, illustrating macro trends.

• A higher value indicates that wealth held by new buyers and speculators is disproportionately large.

• A lower value indicates that wealth held by long-term, higher conviction HODLers is disproportionately large.

When evaluating the Realized HODL Ratio, the rate of change and trend of movement are often more important than the absolute value. Currently, we are witnessing the formation of an arc-shaped rounded bottom, indicating that Bitcoin wealth is net transferring, and the trend is beginning to shift upwards.

Realized HODL Ratio

In this context, we can introduce a new variant of the RHODL ratio, which compares the wealth of long-term holders (holding for 6 months to 2 years) with that of the latest short-term holders (holding for 1 day to 3 months). This aims to assess the turning point of capital cycles across periods.

Long-term holders' Bitcoin can only exit this group by either holding for a longer time or by selling Bitcoin, which completely resets the holding time of Bitcoin. Currently, we can see a large and sharp turning point in the RHODL ratio variant, indicating a significant and sudden shift of capital from the long-term holders of the previous cycle to the new buyer group.

This market phenomenon has been remarkably consistent in previous bear markets, with the sudden transfer of capital indicating a significant change in market characteristics and structure.

RHODL Ratio - Long-term Holders and Short-term Holders

The Market is in a Transitional Phase

After enduring a long and brutal bear market, and being affected by consecutive deleveraging events, there are signs that we are likely at the end of the bear market and undergoing a cyclical transition towards a bull market. Typically, this period also manifests as a sharp change in the dominance of total profits and losses, which seems to be occurring.

However, whether from the perspective of duration or the relative scale of realized profits and losses, this trend remains weak. Over the past 12 months, capital has been continuously transferring from long-term holders to short-term holders. This reflects well that short-term holders are purchasing Bitcoin from long-term holders, while long-term holders continue to sell Bitcoin (often at a loss).

The market appears to be in a transitional phase, moving from the late stages of a bear market towards the early stages of a bull market. Historically, the road is long and fraught with difficulties. The historical characteristics of these transitional periods are prolonged macro sideways markets and frequent localized bidirectional fluctuations.