Selling pressure is exhausted, and the market is forming a new bottom

Original Title: 《Surviving Bull Drawdowns》

Author: CryptoVizArt, Glassnode

Compiled by: Akechi, Edward, Daling Think Tank

Summary

• Since Bitcoin reached its historical high of $73,000 in March, the Bitcoin market has shifted into a broad net distribution pattern, where Bitcoin has fully demonstrated its liquidity and perfectly adapted to the new demand flowing into the market.
• According to the NUPL indicator, the Bitcoin market is still in a euphoric phase during the current cycle. However, since the price consolidation began, market sentiment has gradually started to cool down.
• In this article, we will mention an example analysis process to identify potential turning points and local lows driven by various subsets of short-term holders.

Distribution Under Panic

Currently, the Bitcoin market continues to consolidate around the $60,000 range, having been constrained within this price range since reaching $73,000 in mid-March. In this article, we will assess whether investors are more inclined to distribute their assets or accumulate them during this consolidation period.

First, we will use cumulative trend scores to illustrate how the asset accumulation patterns of investors since the FTX collapse have shaped local market tops and bottoms.

In the early stages of the bull markets of 2020-21 and 2023-24, we can see overlaps between local distribution areas (light color) and price contraction ranges. However, as market prices rebound to new highs, the selling pressure on assets will be reawakened, as price movements prompt investors to bring dormant supply back to the market to meet new incoming demand.

As Bitcoin's spot price reached a new high in mid-March, the same local distribution pattern emerged in the market, which was further reinforced by the escalating conflict in the Middle East, leading to a pullback in Bitcoin's price to $60,300.

If we re-examine the breakdown of the above indicators based on wallet size, our analysis will become more detailed. Here, we see that the net outflow 🟥 across all groups in April has significantly increased, indicating a comprehensive selling pressure pattern in the market.

Unrealized Net Profit & Loss Cycle

A unique feature of the current bull market is the positive impact of the U.S. spot ETF momentum on price movements. In the current market, the influence of ETFs on investor behavior can be explained through the Unrealized Net Profit and Loss (NUPL) indicator, which, after normalization by market capitalization, measures the net paper profit (or loss) of asset holders in the market.

Through NUPL, we can identify the classic euphoric phase of a bull market, characterized by unrealized profits exceeding half of the market capitalization (NUPL > 0.5).

In the 2020-21 cycle, this phase was triggered 8.5 months after Bitcoin's halving and continued to drive the price increase for nearly 10.5 months afterward. However, in the current cycle, NUPL broke the 0.5 threshold approximately 6.5 months before the halving. This notable shift highlights the important fact that U.S. ETFs are shaping and accelerating Bitcoin's price movements by introducing strong demand into the market.

Using this indicator as a benchmark, the euphoric phase of this bull market (NUPL > 0.5) has lasted for 7 months. However, we know that even the strongest upward trends will experience adjustments, and events during these adjustment periods will provide us with valuable information about investor positioning and sentiment.

To gain deeper insights into the dynamics of this bull market adjustment, we will consider the following two conditions:

• Relative unrealized profit 🟢 > 0.5, indicating that there is currently a significant amount of paper gains in the market.
• Relative unrealized loss 🔴 > 0.01, meaning that investors are currently facing substantial financial pressure, being forced to hold a large amount of unrealized losses during the market adjustment.

As shown in the figure below, these adjustment events are common and expected during all bull markets. Since the price touched the historical high of $73,100, this structure has appeared in three independent retracement cycles, until the current price returned to around $60,000.

Identifying Local Lows

After confirming that the current market is still in the euphoric range and anticipating a price adjustment, the next part of this report focuses on establishing a "compass" to "navigate" the expected direction of the market when a contraction occurs.

The first step is to identify the aggressive players in the market during the adjustment period, which we define as the group of investors that contributes the most to the duration and depth of each pullback.

We can use realized losses as a breakdown indicator (in USD) to determine that short-term holders (especially recent buyers) currently exhibit a significant market dominance.

Given that the short-term holders currently in a loss state are our focus, we will use a new combination of breakdown indicators to analyze the cost basis of these recent buyers.

Among these shorter-term holders (especially recent buyers of Bitcoin assets), the cost basis of the 1-3 month 🟠 and 3-6 month 🟡 groups will serve as valuable tools to distinguish between bull and bear market structures. The cost basis of the 1 week - 1 month 🔴 group shows that their current situation corresponds to market turning points, helping us identify potential local lows (in a bull market) and local highs (in a bear market).

Spot prices often respond to the cost basis of investors holding for 1 week - 1 month, a conclusion discussed in our recent research articles on the behavior analysis of short-term and long-term holders. The theoretical basis for this conclusion is that recent buyers are more sensitive to price and are more likely to sell in the short term.

Therefore, during bull market adjustments, as the market begins to sell off, short-term holders often increase their selling pace. When market prices approach the cost basis of each subgroup, their selling speed is expected to slow down (selling pressure exhausted).

Here, we choose the realized price (cost basis) of Bitcoin assets held by short-term holders with a holding period of 1 week - 1 month as a barometer to identify potential selling pressure exhaustion positions in the short term.

We can measure the typical statistical deviation generated during price adjustments using the MVRV ratio, which compares the spot price with the cost basis of various groups.

The figure below shows that during bull market pullbacks, the MVRV ratio for investors holding for 1 week - 1 month typically drops to the range of 0.9 - 1. This means that the market generally sees a 0% - 10% decline in the average cost basis for investors holding for 1 week - 1 month.

Now, after assessing the invisible pressure faced by investors holding for 1 week - 1 month, we can directly track the panic level exhibited by this group of investors through the "realized loss" indicator. Our approach is to analyze the aggressive selling pressure currently exerted by the relevant investor group on the market.

Here, we list the realized losses (in USD) of recent 1 week - 1 month holders. Next, we will use some simple statistical methods (standard deviation > 1) to determine the higher realized loss range.

It is worth noting that due to the recent price drop, recent buyers often reach peak realized losses in panic when selling their held crypto assets, which typically occurs at local market lows.

If we combine the two conditions described above, we can derive a specific set of conditions to discover potential local low turning points:

1. MVRV (1 week - 1 month) below 1 but above 0.9
2. Realized losses over +1 standard deviation within a 90-day window (1 week - 1 month)

These two conditions together form a barometer that can help identify under what market structure short-term holders may experience selling pressure exhaustion.

As of the time of writing, the current cost basis for short-term holders with a holding period of 1 week - 1 month is $66,700, and since mid-March, their realized losses have repeatedly exceeded the 90-day +1 standard deviation level. Since Bitcoin's price is currently in the range of $60,000 to $66,700, it meets the aforementioned conditions expressed by MVRV, and we can say that the market is now forming a local bottom. However, this also means that if the current MVRV level continues to drop, it may trigger a series of investor panic and ultimately force the market to seek and re-establish a new balance.

Conclusion

In this article, we assert that since Bitcoin refreshed its historical high of $73,000 in March, the Bitcoin market has shifted to a broad net distribution form. The NUPL indicator also indicates that the current Bitcoin market is in a euphoric phase, but it has clearly begun to cool down since the price adjustment started.

The adjustment in Bitcoin's price provides us with valuable information about investor sentiment and selling activities. We have thus developed a standard analytical method to identify the short-term holder group that has the most significant impact on the market through selling activities. Based on this, the new combination of breakdown indicators has established some simple rules that may help determine that the selling pressure exhaustion of this group is a factor contributing to the current price being a local low.