Long-term > 60 days, Sentiment: Bullish - Bitcoin market conditions and price are strong in both derivative and spot markets. On-chain data places us firmly in the middle of this bull market with an expectation of bullish price action over the coming three to six months
Mid-term > 14 days < 60, Sentiment: Bullish - Long-term holders (LTH) started to sell their coins, a significant change after months of accumulation. This is the typical middle of a bull run behavior when LTHs expect price appreciation. This year’s setup looks very similar to Q4 2020, and arguably better.
Short-term < 14 days, Sentiment: Bullish with Caution - The short-term outlook is bullish even as a high level of Futures Open Interest increases the probability for the volatility of Bitcoin. As speculators and short-term holders (STH) may move to capture quick profits in the coming weeks, price fluctuation may happen. This is healthy and expected. With a $100,000 Bitcoin possible in the mid-to-long term, the question on the minds of most at the moment is not if, but when to buy Bitcoin.
BTC Price Expectations:
Long - $100,000+
Mid - $75,000+
Short - $58,000-$75,000
Long-term > 60 days - Sentiment: Bullish $100,000+
The long-term price of Bitcoin is nearly exclusively driven by supply and demand dynamics. The short-term news, events, and sentiment play much less a role. It, therefore, is particularly important to analyze advanced on-chain data to reach a conclusive answer to where we stand in a market cycle and what kind of price movement is expected in the coming three, six, or 12 months.
In this context, tracking the buying and selling behaviors of the long-term holders (experienced investors) can give us a clearer picture as to what we can expect in regards to pricing when we look past the new year into Q1 of 2022.
Long-Term Holders Start to Sell BTC
Notably, long-term holders of Bitcoin have begun selling down their holdings (see chart above). This is a significant change in their behavior and provides insights into what could happen over the next four to six months. As you can see from the below metric (Long-Term Holder Net Position Change), the distribution by LTHs has almost always coincided with the price appreciation of Bitcoin.
Smart money - which among others includes long-term holders - begins to sell into strength in the middle of bull markets. Even though the general supply dynamic appears to be changing, we should note that LTHs sold less than 1% of their positions in recent weeks. This suggests strategic profit-taking rather than liquidating whole positions and outlines the expectation of LTHs for continued price appreciation. That relatively small 1% was quickly bought up with little effect on the price. The current price signals strong demand at around the $60,000 price point. Please note as well that this is the first time in history that the Bitcoin price has sustained a closing daily price of over $60,000 for a month.
Net Unrealized Profit/Loss (NUPL) is the difference between Relative Unrealized Profit and Relative Unrealized Loss. This metric can be calculated by subtracting realized capitalization from market capitalization and dividing the result by market capitalization.
The metric answers the question, if all Bitcoins in circulation are sold today, what percentage of holders would be in profit. The NUPL is currently in the 0.6 range, which means 60% of the market is in unrealized profit. Comparing this value to previous market cycles, it becomes evident that 0.6 is a mid-bull market reading, which usually was followed by strong price growth that leads to a bull market peak within three to six months. Once the NUPL goes above the 0.75 mark, you will need to pay attention as historically the price peaked soon after in bull markets.
Until we see smart money going back to accumulation and large profits being taken, the long-term expectation is that the price of Bitcoin will continue to grow.
Mid-term > 14 < 60 days - Sentiment: Bullish $75,000+
As we focus on the market behavior in the mid-term, we can use similar on-chain data to add further clarity. For the long-term, we analyzed supply and demand dynamics, and how much of the total supply of Bitcoin is net unrealized profit. Combining the profitability perspectives of both STHs and LTHs together, helps us visualize how supply changes hands from long-term to short-term holders throughout the market cycle.
Bull Market Confirmed
We can see that during the summer LTHs were continuing to add to their stacks. Since late October, we are finally seeing the first coins coming back into distribution from LTHs. This is not surprising with rising prices and new ATHs, all signs that we are in a bull market with healthy demand.
Going back a year, we can see a very similar pattern in mid-November when LTHs began to distribute coins back into the market. The dark blue pattern slowly decreases in size on the chart above, a direct result of short-term speculators and new money beginning to flow into the network. As if almost on cue, the price of Bitcoin peaks, and LTHs change from selling to accumulating Bitcoin. The cycle of coins being transferred back and forth between LTHs and STHs can be observed over and over again throughout the history of Bitcoin. One thing to note is that LTHs are capturing more and more Bitcoin during their accumulation cycles (usually during the bear market until early to mid bull market). We will be watching closely to see how many Bitcoins end up staying in wallets for the long-term even as the price continues to rise.
Comparing Fall 2020 to Fall 2021
We can also use Net Unrealized Profit/Loss to look at shorter time spans to give us an idea of how the market behaved last year at the same time. In 2020, we had a similar summer with an early fall rally followed by a retest that set up the market for strong growth in winter and spring of 2021. The current market setup looks quite similar in many ways, albeit with much higher prices, greater potential for expansion with the approval of Bitcoin ETFs, and more nations looking into using BTC as legal tender. All these factors indicate an extremely bullish outlook for the next 60 days.
Short-term < 14 days, Sentiment: Bullish with Caution $58,000-$70,000
Bitcoin pricing in the short term is often subject to significant volatility. This volatility is due to a number of reasons. Derivatives markets, leverage in the system, whales, black swan events, and retail FOMO can all affect the price of Bitcoin one way or another.
Retail on the Sidelines
With on-chain data, we can look at the futures markets to see how frothy, or overheated a market is becoming. When a market gets overheated, prices can fluctuate between 10-40% in the short term. Looking at the futures markets, we can see funding rates are relatively low at key exchanges that service primarily retail investors.
Last year at this time things started to heat up in the fall and then became very active over the winter and spring. This year, we don’t see funding rates from these exchanges very hot, at least not yet.
The fact that retail investors are still on the sidelines combined with the fact that futures open interest is currently just below its former April 2021 ATH paints a very bullish short-term picture, though which increased the probability for volatility. As news breaks in the media concerning ETF approvals and greater adoption, expect to see more and more retail investors getting involved, driving the price as a consequence.
Weak Hands got Flushed
The volatility in Bitcoin markets makes liquidations a common occurrence at exchanges that allow investors to leverage their Bitcoin holdings. Just as the price of Bitcoin reached a new ATH, we saw Bitcoin go from $69,000 to $62,800 in a matter of hours on Wednesday.
We can see a pattern of “weak” hands getting flushed out with liquidations. As the price of Bitcoin soars, investors get overly confident and overly leveraged. Once this happens, we have seen the price drop quickly followed by cascading liquidations. With this leverage out of the market, strength returns and the price begins to rise again.
If this last round of liquidations removed enough risk from the market, we can expect to see prices fairly stable in the mid-60s with the potential for price appreciation. Otherwise, we could see prices drop further from the recent ATH down to the mid-to-upper 50s.
This week Bitcoin has made history again with new ATHs and continues to thrive as it becomes more widely accepted and used. From a short-term perspective, indicators paint a bullish outlook even as excess leverage may create some downside risk. In the mid and long-term, the picture looks bullish for a continued bull run over the coming four to six months.
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