On-Chain Analysis

Hello to all members of TradingView and my followers.

With so many market signals pointing to a broad surrender, attention is turning to whether a bottom is forming in Bitcoin. Here, we analyze the characteristics and duration of previous downtrend cycles to assess what may lie ahead.

Bitcoin price remains in the $20,000 range this week as the market digests June's extreme bearish swings.

With the price of Bitcoin down more than 75% from its previous high, even the most die-hard Bitcoin holders are feeling the pressure. Both long-term holders and miners are in the spotlight this week as the market attempts to reach new lows amid ongoing macroeconomic uncertainties.

In today's review, we will identify the key features that have historically characterized the formation of Bitcoin support floors. This period occurs when forced selling occurs, and the bearish pressure begins to subside.

Redistribution of wealth:
The current bear market is often structurally very similar to the end of 2018, where we can see the decline from that year's previous high. The following compares the current 2022 downtrend with the 2018 downtrend:

December 2017 – March 2019: The price collapse in 2017 lasted almost 15 months, with an 85% drop from the previous peak. The $6,000 area can be seen as the breaking point of an important support level before the final capitulation, the price after which the remaining 50% of the decline occurred over the course of 1 month.

November 2021 – January 2022: The current bear market has experienced a 75% drop from the all-time high, with the $29,000 floor serving as the base level for a similar breakout. The last submission in mid-June saw prices drop by 40%, reaching the $17,600 range in just two weeks.


Bitcoin downtrend chart from ATH ranges

One of the main results of a long bear market is the redistribution of wealth among the remaining shareholders. This gradual change of hands can be analyzed by tracking the actual UTXO price distribution (URPD). Past bear markets have had two distinct phases.

The first stage of the post-ATH phase: is where investors and short-term traders gradually come to terms with the reality of a bear market and exit the market in a bearish trend.

The second stage of reaching low support is a decrease in profitability and a long period of financial hardship, which leads to a decrease in new demand and creates favorable conditions for the final surrender.

First, we examine the market from December 2017 to March 2019. Notice how the price acts like a magnet; first, the support floor attracts the top buyers towards the $6000 area, and finally, a massive redistribution occurs after submitting the $3-4k price. It describes a two-part capitulation cycle and the formation of terminal support.


In the current 2022 market, we have a similar structure after the November 2021 ATH. A similar redistribution pattern occurs around the $30,000 floor, originally established in May-January 2021. From May to June this year, we can see the price drop towards the $20,000 area, which has become an important starting point for both old investors and new buyers to surrender. Therefore, this area is an important node for changing the hands of bitcoins.

Miners and long-term holders (LTHs) were under pressure as the price level missed the $30,000 level. To illustrate the continued surrender of LTHs of the 2021-22 cycle, we can consider their profitability in two ways below. Actual losses or unrealized costs and losses or bitcoins held below cost.

Long-Term Holders Spent Profit Output Ratio (LTH-SOPR) is a measure of the ratio of profits taken by LTHs (i.e., a value of 2.0 means that LTHs are selling bitcoins at two times their cost ). Therefore, when the LTH-SOPR is less than 1, they realize a loss or sell the bitcoins for less than their cost.

LTH-SOPR is currently trading at 0.67, indicating that the average price at which LTHs are selling their bitcoins is a 33% loss.

The cost basis of long-term holders estimates the average price they pay for their bitcoins. Hence, since the market value is less than the cost basis of LTHs, this group can be considered in total loss. Similarly, LTHs are currently in losses on average, with a combined negative 14% unrealized loss.

Capitulation events result in an immediate redistribution of bitcoins to new buyers, often initially classified as short-term holders. However, over time, the dominance of long-term holders among offerings increases.

For a bear market to ultimately bottom, the share of bitcoins held at a loss must be primarily transferred to those with the least price sensitivity and the highest conviction.

The result of the two mechanisms is the withdrawal of institutions with weak beliefs about holding and the gradual transfer of bitcoins to institutions with strong beliefs.

This shows that the market still needs a floor while there are many signals for lower floors. The main Bitcoin investors have not yet exited the market.

Finally, we pay attention to the group of miners, who often tend to hold out until the last moment in bear markets and become an effective source of selling pressure in the closing stages. This is a result of their revenue cycle, and the current bear market is no exception.

In this part, we examine a two-part model that looks for the intersection between the implicit income index of miners (Puell Multiple) and the reduction of the hash rate.

The Puell Multiple tracks the total earnings of miners in US dollars relative to a 1-year average. Here, we see that Bitcoin miners currently earn only 49% as much as the 12-month average. This means that miner income pressure is a likely factor in the downtrend.

The purple area indicates that the hash rate has decreased, causing the network activity to decrease significantly. It is a clear observation that ASIC devices are being shut down due to the pressure of declining revenue.

The yellow ranges for miners highlight periods where both indicators show significant declines and are generally associated with bearish market bottoms and miners' surrender events.

We can confirm that the miners' bitcoin balance has been distributed up to 4.47 thousand bitcoins per month. This began primarily after the collapse of the LUNA-UST project.

The revenue pressure on these miners has resulted in the distribution of a total of 7.9 thousand Bitcoins from their coffers in two months. However, miners have recently reduced their fees and are currently distributing their stored coffers at a rate of 1.35K Bitcoins per month.

Miners currently hold approximately 66.9K Bitcoins in their vaults, so the next quarter will likely be at risk of further distribution unless the price of Bitcoin improves significantly.

Conclusion:
The current market structure bears many of the hallmarks of the next phase of a bear market, where high-conviction groups, including long-term holders and bulls, are under significant pressure to capitulate.

Overall, the fingerprints of a massive surrender and severe financial pressure are certainly there. However, there may still be a risk of further downward pressure to fully test investors' resolve and enable the market to form a resilient floor.

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