Data assessment of Bitcoin bull market risks

Author: Glassnode

Compiled by: Felix, PANews

This article evaluates market risk from a data perspective using various on-chain indicators and compiles all indicators into a heatmap to assess the risk integration of various data categories. Note: The data in this article is as of February 7, and the "risk" in the risk categories refers to the risk of a significant drop in Bitcoin prices.

Macroeconomic Risk Analysis

Analysts can use many models and indicators to assess market risk at any point in the cycle. This article will specifically consider the "risk" of a significant drop in Bitcoin spot prices. Therefore, "high risk?" indicates that the market may be in a speculative bubble. In contrast, "low risk?" indicates that most speculative behavior has disappeared, and the market is more likely in a bottom formation phase.

Price Bubble

This module monitors the price deviation of two long-term mean reversion baselines:

MVRV Indicator?: Measures the ratio of market price to realized price.
Mayer Multiple?: Determines whether Bitcoin is overbought or oversold by calculating the ratio of Bitcoin price to the 200-day moving average to determine the extent of price deviation from long-term averages.
In the chart below, the following risk categories are defined by combining the MVRV and Mayer Multiple (MM) models.

Extreme High Risk?: MVRV > 1 and MM > 1, with the Mayer Multiple exceeding its cumulative average by two standard deviations (MM > +2 STD).
High Risk?: MVRV > 1 and MM > 1, with the Mayer Multiple below its cumulative average by two standard deviations (1.0 < MM < +2 STD). Low Risk?: MVRV > 1, but MM < 1.
Extreme Low Risk?: MVRV < 1 and MM < 1.

When the Bitcoin price is $42,900, the realized price and the 200-day moving average price are $22,800 and $34,100, respectively. The market is in a high-risk? environment.

Measuring Supply Profitability

Percent of Supply in Profit (PSIP) Indicator? refers to the proportion of circulating Bitcoin that is profitable. As investors become increasingly motivated to take profits, this indicator helps identify potential risks of increased selling pressure.

Extreme High Risk?: PSIP is more than one standard deviation above the historical average (PSIP > 90%).
High Risk?: PSIP is less than one standard deviation above the historical average (75% < PSIP < 90%).
Low Risk?: PSIP is below the historical average but above the statistical lower limit (58% < PSIP < 75%).
Extreme Low Risk?: PSIP is more than one standard deviation below the historical average (PSIP < 58%).

When this indicator is above the upper limit, historically, it aligns with the "prosperity phase" of the market entering a bull market. During the market rebound surrounding the launch of the spot ETF, this indicator suggested that the market was in extreme high risk?, followed by a price contraction to $38,000.

Measuring Fear and Greed

Another quantitative tool related to market fear and greed sentiment is Net Unrealized Profit and Loss (NUPL). This indicator examines the dollar value of total net profit or net loss as a percentage of market capitalization. After estimating the number of profitable tokens using PSIP, NUPL can be used to measure the magnitude of investor profitability.

Extreme High Risk?: NUPL exceeds the 4-year average by one standard deviation, indicating that the market is in an excited phase with unrealized profits reaching extreme levels (NUPL > 0.59).
High Risk?: NUPL is between the upper limit and the 4-year average, indicating that the market is in a net profit state but below statistical highs (0.35 < NUPL < 0.59).
Low Risk?: NUPL falls below the 4-year average but above statistical lows (0.12 < NUPL < 0.35).
Extreme Low Risk?: NUPL falls below statistical lows, aligning with the discovery phase of historical bear market bottoms (NUPL < 0.12).

After the rebound in October 2023, NUPL entered the high-risk? range, reaching 0.47. Although the number of tokens held in profit has significantly increased, the magnitude of dollar profits has not reached extreme high risk? status. This indicates that a large portion of tokens were accumulated at around $30,000 in the second half of 2023.

Realized Profit and Loss Ratio

The Realized Profit and Loss Ratio (RPLR) indicator tracks the ratio between profit and loss events occurring on-chain. Here, the 14-day moving average (14D-MA) of this ratio is used to clearly identify investor behavior.

Extreme High Risk?: RPLR > 9, meaning that over 90% of on-chain moving tokens are used for profit, which is a typical characteristic of market demand exhaustion.
High Risk?: 3 < RPLR < 9, indicating that 75%-90% of tokens are in profit, a structure that often appears before and after market peaks.
Low Risk?: 1 < RPLR < 3, which usually occurs during the transitional phase between high-risk and low-risk states in the market.
Extreme Low Risk?: RPLR < 1, indicating that most tokens are at a loss, signaling investor capitulation, which is common in the later stages of a bear market.

As Bitcoin prices reached $48,400 at its peak, this indicator suggested that the market was in an extreme high risk? state. Currently, RPLR is at 4.1, indicating a high-risk? state.

Short-term and Long-term Risk Analysis

The above risk analysis considers a relatively macro and global perspective. Below, we will consider the behavior of short-term and long-term holders.

Short-term Holders

The Short-term Holder Profit and Loss Ratio (STH-SPLR) reflects the ratio of profits to losses among new investors holding tokens.

Extreme High Risk?: STH-SPLR > 9, indicating that 90% of new investors' tokens are in profit.
High Risk?: 1 < STH-SPLR < 9, indicating that 50% to 90% of new investors' tokens are profitable, with moderate expenditure risk.
Low Risk?: 0.11 < STH-SPLR < 1, indicating that 10% to 50% of new investors' supply is profitable.
Extreme Low Risk?: STH-SPLR < 0.11, indicating that over 90% of new investors' supply is at a loss, which is typical in the later stages of a bear market.

This indicator recently showed an extreme high risk? status from mid-October 2023 to mid-January 2024, when ETF speculation peaked. This indicates that the vast majority of new investors were profitable, increasing the likelihood of profit-taking. Since then, this ratio has trended towards a neutral low-risk? range.

Long-term Holders

The MVRV ratio for long-term holders (LTH-MVRV) measures the unrealized profits of long-term holders. This indicator can measure the difference between market price and the average cost of long-term holders.

Extreme High Risk?: LTH-MVRV > 3.5, indicating that the average unrealized profit for long-term holders is 250%. This situation typically occurs at market ATH.
High Risk?: 1.5 < LTH-MVRV < 3.5, which usually occurs in the early stages of bear and bull markets.
Low Risk?: 1 < LTH-MVRV < 1.5, indicating that long-term holders' average profits are thin, typical of the later stages of a bear market and early stages of a bull market.
Extreme Low Risk?: LTH-MVRV < 1, with prices falling below the average cost of long-term holders. This often highlights seller exhaustion and investor capitulation.

After recovering from the FTX collapse, this indicator has risen to 2.06, entering a high-risk? state. As mentioned earlier, this level typically appears in the early stages of a bull market.

While each of the above indicators can be used individually, using them in combination often provides a more comprehensive reflection of market conditions. The chart below is compiled from data over the past five years. These risk factors reference a range of data and investor behavior, helping analysts and investors establish an analytical framework.