On-chain observation: How do long-term holders and short-term holders affect BTC prices?

Authors: UkuriaOC, CryptoVizArt, Glassnode

Compiled by: Akechi

Recently, Bitcoin's price has been struggling to return to its historical peak. In this article, we will examine the contributions of long-term and short-term holder groups to market supply and demand during this period. As a complement to this research, we will also utilize new segmentation indicators to assess the impact of different subgroups of long-term investors' consumption and investment behaviors on the market.

Summary

• Since Bitcoin's price reached an all-time high of $73,000 in March, the upward momentum has stagnated, and the market has remained in a consolidation phase. According to our analysis, market demand momentum has turned negative since early May.
• This article will analyze the cost basis of short-term investors and use it as a target to analyze how capital is flowing into the market at this stage.
• To analyze the role of the supply side in the market, this article examines the investment activities of long-term holders, finding that the unrealized profits held by this group are statistically far below previous historical peaks.
• Focusing on the behavior of long-term holders selling their Bitcoin assets, it can be observed that although the Bitcoin assets sold by this group account for only 4%-8% of the total market sales, the profits obtained from these sales typically account for 30%-40% of the cumulative profits during the bull market. This finding highlights the fact that market profits are concentrated in those Bitcoins that are held for the long term, and these profits are gradually realized during the bull market, fully rewarding the patience of these "diamond hands" (referring to investors who steadfastly hold high-risk assets like Bitcoin during extreme market volatility).

Market Demand Side Tracking

In a previous analysis (The Sell-Off is Exhausted! The Market is Forming a New Bottom), we proposed a method to track the capital flowing into or out of the market, determining the direction of this capital flow and estimating its scale. Here, we will continue to use this method, segmenting the short-term holder group based on the duration of their Bitcoin holdings to deepen our analysis:

• When the cost basis of the short-term holder group rises, it indicates that new buyers are purchasing Bitcoin assets at higher prices. At this time, capital is in a net inflow state (and vice versa).
• When the spot price deviates upwards (or downwards) from the current cost basis, we can approximate the unrealized profits held by each group using the MVRV ratio.
• We can use the MVRV value to measure the incentives for investors to take profits (when MVRV reaches high levels) or to identify signs of seller exhaustion (when MVRV falls to low levels).

First, we will compare the spot price with the cost basis of two groups of short-term investors:

• Holders with Bitcoin assets held for 1 week to 1 month.
• Holders with Bitcoin assets held for 1 month to 3 months.

This allows us to determine how capital flows and changes from a macro perspective when the market is in the early stages of both bull and bear markets. The following chart shows how these two price models supported the entire market during the bull market of 2023-24.

Since mid-June, the spot price of Bitcoin has fallen below the cost basis of holders with Bitcoin held for 1 week to 1 month ($68,500) and even below the cost basis of holders with Bitcoin held for 1 month to 3 months ($66,400). Historically, if this situation persists, it could lead to a decline in investor confidence and potentially result in a deeper price correction. Undoubtedly, the market will need more time to recover from such a deep correction.

Figure 1: Realized Prices of Short-term Holders with Different Holding Durations

We can also describe the current market momentum by comparing the cost bases of these different short-term investor subgroups, as shown in the following chart:

• Capital Inflow: At this time, the cost basis of short-term holders with Bitcoin held for 1 week to 1 month is higher than that of investors with Bitcoin held for 1 month to 3 months. The positive momentum in the market is very evident, with strong market trends continuously attracting new capital into the market.
• Capital Outflow: At this time, the market shows the opposite situation—namely, the cost basis of the former has fallen below that of the latter. This market structure indicates a weakening momentum on the demand side, and the market begins to experience a net outflow of capital.

In previous bull markets, this negative capital flow structure has occurred five times in total. Additionally, we can see that this structure has been in place since May and has continued until early June.

Figure 2: Capital Flow of Short-term Holders

Market Supply Side Analysis

To gain a comprehensive understanding of the current market, we need to introduce indicators related to the behavior of long-term holders for further analysis. The long-term holder group is the main supplier of the market during bull markets, as they sell their held Bitcoins to seek profit-taking. In a sense, the formation of market cycle tops can be partially attributed to long-term holders continuously increasing their selling pressure, which will eventually exhaust the new demand that has flowed into the market during the bull market.

In the following chart, we will compare the spot price of Bitcoin with the average cost basis of the long-term holder group (i.e., the realized price of the long-term holder group) for these key multiples.

• 1.0 times the realized price of the long-term holder group (green line in the chart): Based on our historical experience, this situation coincides with the bottom formation phase of bear market cycles and the market recovery phase.
• 1.5 times the realized price of the long-term holder group (orange line in the chart): This price level is often seen as a watershed between the market recovery phase and the long-cycle market equilibrium phase during bull markets. During this period, although Bitcoin prices continue to rise, the rate of increase is very slow. On average, the unrealized profits held by long-term holders during this phase are about 50%.
• 3.5 times the realized price of the long-term holder group (red line in the chart): This price is the boundary between the equilibrium phase and the euphoria phase of the bull market. Once this phase is entered, Bitcoin prices typically rise rapidly. Moreover, during this phase, the unrealized profits held by long-term holders are about 250% or even higher, and under such high profit stimulation, long-term holders often accelerate the sale of their Bitcoin assets.

If we apply the above framework to analyze the current cycle, we can find that, from a macro perspective, the current bull market trend is very similar to that of the 2017 cycle. One particularly similar point is that when Bitcoin prices are consolidating below the current historical peak, the market behavior is entirely consistent with the situation described by the 3.5 times the realized price of the long-term holder group (as indicated by the red line), which represents a watershed between the equilibrium and euphoria phases.

Figure 3: Average Cost Basis Multiple of Long-term Holders

The unrealized profits held by the long-term holder group can be seen as a psychological benchmark to measure whether they have sufficient willingness to sell their Bitcoin assets for profit-taking. We can use the LTH-NUPL (Long-term Holder Net Unrealized Profit/Loss) indicator to visually represent the psychological motivations behind long-term holders' investment decisions.

At the time of writing this article, the LTH-NUPL is 0.66, indicating that the current market is approximately in the "pre-euphoria" phase (as shown by the green line). So far, the Bitcoin market has been in this phase for 96 days, and during the 2016-17 cycle, the market also remained in this phase for such a long time.

Figure 4: Long-term Holder NUPL Indicator (LTH-NUPL)

Through the binary indicator of long-term holder spending, we can determine when long-term holders will significantly sell their held Bitcoin assets. Undoubtedly, during such concentrated selling periods, the total balance of assets held by long-term holders will experience a substantial decline.

This allows us to identify different stages of long-term holders' asset sales:

• Weak Selling Period: Bitcoin supply from long-term holders has been in decline for at least 3 days in the past 15 days.
• Normal Selling Period: Bitcoin supply from long-term holders has been in decline for at least 8 days in the past 15 days.
• Strong Selling Period: Bitcoin supply from long-term holders has been in decline for at least 12 days in the past 15 days.

Figure 5: Long-term Holder Spending Binary Indicator (Last 15 Days)

Our next chart aims to combine the two models above to comprehensively assess and visualize the sentiment and investment behavior of long-term investors. In the following derivation, we will analyze the motivations that lead them to decide to realize profits (or losses) and choose to exit, as well as how they actually operate.

We consider four different motivations that lead long-term investors to choose to liquidate their assets and exit:

• Surrender: At this time, the spot price of Bitcoin is below the cost basis of long-term holders. Therefore, any large sale of Bitcoin assets during this phase can be attributed to a collapse of investor confidence and panic selling.
• Transition: At this time, the spot price is slightly above the cost basis of long-term holders, and they occasionally sell small amounts of Bitcoin assets. Such sporadic sales are generally considered typical daily trading.
• Balance: After the market recovers from a long bear market, it achieves a new balance among a small influx of new demand, weakened liquidity, and the gradual profit-taking of underwater holders from the previous cycle. During this phase, large asset sales from long-term holders are often associated with sudden price rebounds or corrections.
• Euphoria: As a hallmark of this phase, the LTH-MVRV indicator will break through the threshold of 3.5 and align with the level of this indicator when the market reaches the historical peak of the previous cycle. During this phase, the average unrealized profit held by long-term holders exceeds 250%, thereby propelling the market into a euphoric upward phase, prompting these long-term holders to accelerate the sale of their large Bitcoin assets to seek profit-taking.

Through this method, we can see that the long-term holder group exhibited significant asset selling behavior in the fourth quarter of 2023 and the first quarter of 2024, driving the market higher during this period and subsequently re-entering a new equilibrium state.

Figure 6: Selling Behavior of Long-term Holders and Its Impact on Profit and Loss

Who is Influencing Selling Pressure?

The above analysis discussed the different logics behind the selling behavior of long-term holders during periods of declining total supply from this group. Additionally, we can categorize and examine which subgroups with varying holding durations significantly influence changes in selling pressure in the market.

Figure 7: Age Stratification of Bitcoin Supply in the Market

To categorize and assess the extent to which each subgroup of long-term holders influences Bitcoin spending in the market, we will focus on this time period: when the amount of Bitcoin spending in the market is at least one standard deviation above the annual average.

While each investor group may experience occasional explosive spending, during the frenzied phase of a bull market, the frequency of high spending days increases sharply. This indicates that long-term holders tend to choose to take profits during periods of rapid Bitcoin price increases.

Figure 8: Spending of Long-term Holder Group (Z-score)

Considering that only 4%-8% of daily on-chain transaction volume is related to the long-term holder group during the current period, we will use another core on-chain indicator (Realized Profit/Loss) to analyze their relative weight on the market supply side.

Figure 9: Age Stratification of Bitcoin Spending in the Market (SVAB) (30-day Moving Average)

The following chart shows the cumulative realized profit amount from long-term holders during the bull market. We find that profits from long-term holders typically account for 20% to 40% of the total locked profits.

Furthermore, although the trading volume of Bitcoin assets from long-term holders accounts for only 4% to 8% of the total daily trading volume, the profits generated can account for up to 40% of the investors' total profits.

Figure 10: Realized Profits During the Bull Market

Conclusion

Since early March, the market's price trend has been primarily characterized by consolidation. Therefore, we have utilized the cost bases of long-term and short-term holders to assess the current supply and demand levels in the market.

Based on the changes in the cost basis of the short-term investor subgroups, we constructed a toolkit to estimate the trend of capital inflow into the Bitcoin network. The results confirm that following the surge in Bitcoin prices in March, there was a subsequent period of net capital outflow (with this trend indicator being negative).

Subsequently, we further segmented the long-term holder group based on the duration of their holdings and categorized the discussions of each segmented investor group. The conclusion of this analysis indicates that during the euphoric phase of the bull market, the frequency of high spending days increases sharply. Interestingly, although the trading volume from long-term holders accounts for only 4% to 8% of the total daily trading volume, this group’s profits account for 40% of the total profits of investors.