Long-term > 60 days, Sentiment: Bullish - The long-term outlook for Bitcoin remains strong with on-chain data supporting future growth. Illiquid supply is increasing, contributing to a supply shock that will drive the price of Bitcoin higher in the months to come. Long-term holders (LTH) have been selling into this bull market at relatively low volumes, suggesting the expectation for a rise in the price of Bitcoin.
Mid-term > 14 days < 60, Sentiment: Bullish - Mid-term forecast also looks promising with more BTC adoption over the next months due to factors such as upgrades to the Bitcoin Network (Taproot) and ETFs in traditional markets.
Short-term < 14 days, Sentiment: Bullish with Caution - Open interest (outstanding derivative contracts) remains at near all-time highs with excessive leverage presenting a short-term risk. The recent drops in price have however flushed some of the weak hands out of the market and should build a platform for short-term price appreciation. The latest dip in price was quickly absorbed by retail investors, a healthy bull market behavior.
BTC Price Expectations:
Long - $100,000+
Mid - $70,000+
Short - $53,000-$70,000
Long-term > 60 days - Sentiment: Bullish $100,000
On-chain data allows us 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. Short-term news, events, and sentiment play a relatively small role when looking at the price of Bitcoin long-term. The long-term price of Bitcoin is nearly exclusively driven by supply and demand dynamics. On-chain analysis provides us with hundreds of key performance indicators to observe the economic activity of its’ users, providing a unique view into Bitcoin’s supply and demand environment.
Experienced investors selling into strength
The below chart highlights that experienced investors have accumulated Bitcoin since the significant price drop in Q2 2021, a strong sign that smart money expects price appreciation. On-chain data shows us that these long-term holders have recently begun selling some of their holdings. This is a notable change in their behavior and provides perspective into what may transpire long term. In the past, we’ve observed that when these investors begin to sell their Bitcoin, it has almost always coincided with price appreciation of Bitcoin. There are very few exceptions to this observation. One outlier to highlight was the unexpected Covid equity market crash in early 2020.
The typical behavior is that experienced investors begin to sell into strength in the middle of bull markets, with an expectation that they can load off a part of their holdings into price appreciation. Even though the general supply dynamic appears to be changing, we should note that LTHs between 1-2% of their net 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 ~2% was quickly bought up by retail investors, a healthy bull market behavior.
Illiquid Supply Shock is forming
A supply shock is an (unexpected) event that changes the supply of a product or commodity, resulting in an unforeseen change in price. Assuming aggregate demand is unchanged, a negative supply shock causes a product's price to spike upward.
We can observe in the above chart that a strong supply shock is forming in the BTC market. The available liquid supply of Bitcoin has been reduced by over 700,000 Bitcoins in the last 18 months and reached a four-year low in November 2021. In other words, 77% of the total circulating supply of 18.8m Bitcoins is illiquid, a figure that is rapidly growing. With the demand for Bitcoin staying at least unchanged, the continued reduction in supply is expected to lead to price appreciation over the coming two to six months.
Mid-term > 14 < 60 days - Sentiment: Bullish $70,000
The Spent Output Profit Ratio (SOPR) metric is useful for understanding the overall market sentiment regarding profits and losses in the mid-term timeframe. There are three key ideas to understand when reading this model.
When SOPR is greater than one (>1), coins are transacting at a profit.
When SOPR is less than (<1), coins are transacting at a loss.
“SOPR reset” (SOPR=1) can signal the start or end of a mid-term cycle.
SOPR is useful for looking at specific periods, in which it oscillates above and below the value of one. When SOPR hits one, it is referred to as a “SOPR reset”. During the last year, there have been seven key SOPR resets. In bull markets, each reset has corresponded with a bounce in prices and higher profitability. During bear markets, SOPR mainly stays below one with less profitability as coins are spent at a net loss.
In late September 2020, SOPR reset and then went on a 150-day run that extended well past its next reset on 27 February 2021. Since then in 2021, SOPR resets have corresponded with upward and stable price action in the 30-60 day range. The only exception to this was during the mini bear market between May and August this year. During that time, SOPR was consistently below one, confirming an overall bearish sentiment in the market.
SOPR reset last week which indicates that we should see positive price action over the coming weeks into the new year.
Bitcoin has already seen significant growth in price, is a recession looming?
One way to answer this question is to look at the metric NUPL. Net Unrealized Profit/Loss (NUPL) is the difference between Relative Unrealized Profit and Relative Unrealized Loss. This metric can be calculated by subtracting realised capitalisation from the market capitalisation, and dividing the result by the market capitalisation.
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. The expectation is that prices will appreciate in the mid-term as they have in 2013, 2017, and last year. Once the NUPL goes above the 0.75 mark, you will need to pay attention as historically the price peaked soon after.
Short-term < 14 days, Sentiment: Bullish $53,000-$70,000
The short-term price volatility of Bitcoin is not really driven by supply and demand dynamics but rather by short-term sentiment, speculation, news and the behaviour of other asset classes including equities. It is common to see 10%, 20%, 30% or even 40% drops in price during a bull market, only to shortly thereafter reach a new ATH.
This volatility in Bitcoin markets triggers - and is partly driven by - liquidations at exchanges that allow investors to leverage their Bitcoin holdings. November saw heavy long liquidations that happened all month as prices soared and dipped from $69,000 to $53,000 over the course of two weeks.
In the chart above, we can see a pattern of “weak” hands getting flushed out with liquidations. As the price of Bitcoin soars, investors - particularly inexperienced retail investors - use leverage to increase their holdings. Once this happens, even a relatively small spike in price volatility might trigger cascading liquidations driving the price significantly lower within a short period of time. We have seen such liquidations over the last month
Whereas our on-chain mid and long-term indicators paint a clearly bullish picture, the short-term outlook is much more mixed and is dependent on other - non-fundamental - factors. Recent liquidations have mostly flushed the weak hands out of the market, building a more sustainable basis to stabilize prices here and start its ascend over the course of the coming weeks.
In recent weeks, Bitcoin has made history 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 but caution is warranted as excessive leverage may create some downside risk. In the mid and long-term, the outlook remains strong and the expectation is for the bull run to continue over the coming two to six months.
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