Glassnode: How to Identify Periods of Intensified Greed and Is There a Risk of Overvaluation in the Crypto Market in the Short Term?
Bitcoin experienced a pullback this week, rebounding to a new annual high before falling back to the weekly opening price. After such a strong rebound so far, this rally seems to be facing particular resistance, with on-chain data indicating that STH is a key driving factor.Author: CryptoVizArt, Glassnode
Compiled by: Songxue, Jinse Finance
Summary
Bitcoin's strong upward trend encountered resistance this week, breaking through to an annual high of $44,500, followed by the third-largest sell-off of 2023.
Some on-chain pricing models indicate that the "fair value," based on investors' cost basis and network throughput, is lagging, hovering between $30,000 and $36,000.
In response to the strong price increase over the past few months, short-term holders of Bitcoin took profits at a statistically significant level, pausing the upward momentum.
The Bitcoin market underwent a correction this week, opening at $40,200, then rebounding to an annual high of $44,600, before experiencing a significant sell-off back to $40,200 on Sunday evening. The upward movement towards the annual high included two rebounds exceeding +5.0%/day (a +1 standard deviation move). This sell-off was equally strong, dropping over $2,500 (-5.75%), marking the third-largest single-day decline of 2023.
As reported last week (WoC 49), Bitcoin has performed exceptionally well this year, rising over 150% year-to-date, outperforming most other assets. Given this, it is crucial to closely monitor investors' reactions to new paper gains as the year draws to a close.
Bitcoin: Daily Price Performance
Guiding Cycles Through On-Chain Pricing Models
A useful toolkit for navigating market cycles is the investor cost basis, measured through on-chain transactions of different groups. The first cost basis model indicator we consider is the realized price of active investors, which calculates Bitcoin's fair value based on our Cointime economic framework.
This model applies a weighting factor to the realized price based on the supply tightness (HODLing) across the entire network. Large-scale holding restricts supply, increasing the estimated "fair value," and vice versa. The chart below highlights periods when the spot price trades above the classic realized price (lower bound model) but below historical cycle peaks. From this, we have some observations:
Historically, the time interval between successfully breaking the realized price and creating a new ATH is 14 to 20 months (11 months so far in 2023).
The path to a new ATH always involves significant volatility around the active investor realized price of ±50% (as shown by the oscillators of each cycle).
If history provides us guidance, it will outline a roadmap of volatility around this "fair value" model (currently around $36,000) for the coming months.
Bitcoin: Market and Active Investor Realized Price
The Mayer Multiple is another popular technical pricing model for Bitcoin, simply describing the ratio between the price and the 200-day moving average. The 200-day moving average is a widely recognized indicator for establishing macro bullish or bearish bias, making it a useful reference point for assessing overbought and oversold conditions.
Historically, overbought and oversold conditions correspond to the Mayer Multiple exceeding 2.4 or falling below 0.8, respectively.
The current value of the Mayer Multiple is 1.47, close to the level of around 1.5, which has typically formed resistance in previous cycles (including the November 2021 ATH). Perhaps as an indicator of the severity of the 2021-22 bear market, it has been 33.5 months since it broke this level, the longest period since the 2013-16 bear market.
Bitcoin: Mayer Multiple
Another perspective for assessing Bitcoin's "fair value" is through the NVT price model, which translates on-chain activity into price domains. NVT Price seeks to find the fundamental valuation of the network based on its utility as a dollar-valued settlement layer.
Here, we consider 28-day and 90-day changes, providing a pair of fast and slow signals, respectively. A typical transition phase from bear to bull market sees the 28-day change trading speed exceed the 90-day model, a situation that has been in play since October.
NVT Premium can also be used to assess spot pricing relative to the slower 90-day NVT price. The recent rebound is one of the most severe peaks in the NTV premium indicator since the market peaked in November 2021. This indicates a potential "overvaluation" signal in the short term relative to network throughput.
Bitcoin: Entity-Adjusted NVT Price Model
Marginal Investors
In earlier editions of this series (WoC 38), we explored the significant impact of new investors (also known as short-term holders) on shaping short-term price movements (e.g., local tops and bottoms). Conversely, when the market reaches macro extremes, such as breaking new ATHs or during painful capitulation events and bottom formations, the activity of long-term holders often has a more significant impact.
To reinforce the impact of STH behavior, the chart below emphasizes the relationship between price movements (trends and volatility) and changes in profitability for this investor group:
STH Profit Supply: The number of "profitable" tokens held by STH, whose cost basis is below the current spot price.
30D-Floor: The minimum "profitable" STH token supply over the past 30 days.
90D-Floor: The minimum "profitable" STH token supply over the past 90 days.
These 30D and 90D indicators allow us to measure the proportion of "profitable" STH capital across different time windows. In other words, we can compare these traces to gauge how many STH tokens are in a "profitable" state within 30 days, 30 to 90 days, and over 90 days.
Historically, the rebound to new ATHs coincided with the 90-day indicator exceeding 2 million Bitcoins, indicating that this group (a strong investor base) has a moderately longer holding time. The rebound since October has primarily boosted the 30-day change, indicating that a solid STH base has yet to be established since trading above the mid-cycle level of $30,000 (see WoC 43).
We also note that the traces in 2023 are relatively low compared to past cycles, reinforcing the relative supply tightness situation we discussed in WoC 46.
Bitcoin: Supply of Short-Term Holders in Profit Cycles
Short-Term Fear and Greed
The next step is to establish a tool to identify periods of heightened fear and greed among these new investors, focusing on overbought (tops) or oversold (bottoms) signals. We introduced the STH-Supply Profit and Loss Ratio in WoC 18, which provides the proportion of unrealized gains and losses. As shown in the chart below:
Historically, a profit-loss ratio > 20 corresponds to overheating conditions.
Historically, a profit-loss ratio < 0.05 corresponds to oversold conditions.
A profit/loss ratio ~ 1.0 indicates breakeven and often aligns with support/resistance levels within the current market trend.
Since January, this indicator has been trading above 1, with multiple retests and support at this level. Historically, these situations relate to the common "buying the dip" investor behavior pattern during uptrends.
We also note that the rebound in October pushed this indicator far above the overheating level of 20, indicating a higher risk structure and a "overheated" condition similar to the NTV-Premium indicator.
Bitcoin: Profit and Loss Ratio of Short-Term Holders
The above oscillation indicators illustrate the unrealized gains and losses held by STH, which can be viewed as their "spending incentive." The next step is to assess whether these new investors have taken action and realized profits (or losses), bringing supply back to the market and creating selling resistance.
The chart below depicts four different measures of STH realized profits/losses (all standardized by market cap):
STH Exchange Profit Volume and STH Realized Profit;
STH Exchange Loss Volume and STH Realized Loss.
The key insight from this study is to determine periods for reading realized profits and losses and trading against loss volumes. In other words, STH are sending large amounts of tokens to exchanges, and the average difference between acquisition price and disposal price is significant.
Given this, the rise to $44,200 this week triggered a high level of profit-taking activity, indicating that this group capitalized on liquidity demand and acted based on paper gains.
Bitcoin: Profit and Loss Activity of Short-Term Holders
We can further refine this observation by highlighting days when STH realized profits exceeded the average of the past 90 days by more than one standard deviation. We can see that this indicator has been at local peaks over the past three years.
Bitcoin: Profit-Taking Activity of Short-Term Holders [Normalized]
Using the same workflow, periods of high losses for STH typically reach a standard deviation level during significant sell-off events. This indicates that investors are panicking, sending recently acquired tokens back to exchanges for loss disposal.
Bitcoin: Loss Activity of Short-Term Holders [Normalized]
Of course, we can incorporate these two indicators into a single chart, creating a tool to help identify recent overheating/oversold conditions based on the consumption behavior of the STH group.
As we can see, the recent rise to $44,200 coincided with statistically significant profit-taking among STH. In addition to the NTV premium and extended realized profit-loss ratios, we can observe a confluence of various factors indicating that potential demand saturation (exhaustion) may be at play.
Bitcoin: Supply Behavior Analysis of Short-Term Holders
Conclusion:
Bitcoin underwent a correction this week, rebounding to an annual high before retreating to the weekly opening price. After such a strong rebound so far, this pullback seems particularly met with resistance, with on-chain data indicating that STH is a key driver.
We have presented a series of indicators and frameworks highlighting Bitcoin's local overvaluation and undervaluation. These indicators draw from on-chain fundamentals such as investor cost basis, technical averages, and trading volumes. We can then seek convergence in (un)realized profit-loss indicators, which show when investors begin to take chips off the table.
