Bitcoin is down 15% from its August highs, trading below the $22K mark. The market celebrated a much-needed relief rally, altcoins reacted well to the merge & rejoiced in double-digit movements (to the upside), and for a moment, we all thought the good old days were back (finally). But are they? Onchain data suggest something extraordinary!
The Final Test
Paper Hands
Traders And Open Interest
The Market Trend
Game Plan - Let’s Not Quit Now
In the previous editions of the weekly market outlook, we have discussed the relevance of the LTH-STH ratio. To summarize, LTH or Long Term Holders are wallets that hold Bitcoin for more than 155 days (roughly five months). On the other hand, STH or Short Term Holders are wallets that store Bitcoin for less than 155 days. The ratio of these two numbers gives us the LTH-STH ratio.
To clarify, the ratio is not truly representing the number of wallets. But it gives out the profitability estimate. In other words, the Spent Output Profit Ratio (SOPR).
A SOPR value greater than 1 implies that the investors are selling at a profit. However, a value less than 1 signals that investors are selling at a loss. But what happens when SOPR is exactly 1? You guessed it right, the investors might be selling at break even.
Let's discuss the investment psychology of the masses (uninformed investors aka FOMO investors). When the market is moving up after a bearish wave, the uninformed investor is in disbelief. He thinks the relief rally will end at any time and there are more downsides.
Say the market continues to go up, he changes the strategy and buys the local top. Effectively, he is buying the exit liquidity of early investors. The market undergoes a correction, and the FOMO investor panics and exits his position at a loss.
Let's consider another scenario. The market goes down. However, the FOMO investor does not buy the red candles but rather waits for more lows. It doesn't happen, and this cycle continues.
So, how can we apply this logic to SOPR-based investment? When SOPR moves to 1+, the market is overvalued and it is time to exit (DCA exit is best in this case). Alternatively, when SOPR goes under 1, the market is relatively undervalued. This is the best chance to ladder entries or DCA.
LTH-STH ratio - 155-day Moving Average (red line) is entering the green box. It happened in 2016 and 2018 before. In 2018, the 155 MA's entry into the green box is followed by a market correction. In 2022 August the same event is repeating. 155 MA enters the green region, and if we compare the current flow with 2018, the similarities are massive.
At the same time, when the 155-day MA bounced from the bottom part of the green box, that acted as a strong buy indicator.
Long story short, the market can see a swift correction. The good news is that this correction could be the last one in this bear market. Let's not count surprise macro events for this, but strictly following the on-chain data, the market is due for a swift correction. Surprisingly, this coincides with Mt Gox's unlock of 137K Bitcoins. Fasten your seatbelts, we might get juicy investment opportunities at the end of August and in September.
Money is flowing out of BTC and ETH to low caps now. It's normal after a relief rally. If BTC crash again later next week, you can add to your long-term bags (25% again). We had bought 25% in June also. The plan is to accumulate long-term projects between September and November, logically, 25% in each month.
Paper hands are investors who invest for a short time frame. There is a common misconception that diamond hands are the best investors in the market. Not necessarily. Diamond hands are not smart enough to switch their coins and stables at the right time. But let's talk about paper hands now.
Adjusted Output Profit Ratio is the SOPR for wallets that lived for an hour or more. In other words, the profitability estimate of paper hands. Why does it matter?
It helps us to filter out scalp traders and account for the whole market movements. In the grand scheme of bull and bear markets, wallets less than an hour old are mostly inconsequential.
The ratio works similar to SOPR but from a paper hand point of view.
When Adjusted SOPR moves higher it indicates that the illiquid supply might be liquid again. The current market has a liquidity problem. Thus when the indicator trends higher, the sudden introduction of liquidity can create flash crashes.
Now, this remains just a possibility. For example in a bull market, additional liquidity is absorbed effortlessly by the positive market sentiment. But in a bear market, the liquidity creates a supply-demand imbalance, and prices crash.
Open interest is the number of open positions on a derivative exchange. It accounts for both longs and shorts.
When open interest is large, Bitcoin experience high volatility. This happens because there is a massive amount of liquidity present in derivative trading. Remember the Exchange Leverage Ratio? Open Interest is closely related but is a more accurate measure of derivative health.
On another note, the exchange leverage ratio appears to be unstoppable. Each week the indicator chases its all-time highs. Even in leverage flush-outs, new leverage is added in form of shorts.
Back to open interest, a low open interest indicates the closing of future positions. It is correlated with macro events too. When the Open Interest decrease swiftly, the possibility of a short squeeze increases in a bear market.
Open Interest is trending low. That suggests a short squeeze is inevitable. Combining the LTH-STH SOPR analysis with the Open Interest, we can assume that any quick fall in Bitcoin will be absorbed. Probably if Bitcoin falls steep in September or at August end, that will be the final dump of the bear market.
It does not mean the bear market ends and the bull market begins. We still need volume for a bull market, which is not yet present. The best we can hope for is a sideways market till the end of November.
The estimates are assumptions from on-chain data alone.
Funding Rate is negative now. It is crucial because it is the first assurance that the relief rally is over.
Bitcoin is back to 21k levels and the market is resetting the Open Interest. Shorting for large time frames can backfire at these levels.
But is it good to start DCAing now?
MVRV ratio is an estimate of price fairness. The ratio can spot the market top/bottom quite efficiently for value investors. MVRV ratio over 3.5 indicates a possible market top, and we should start taking profits at values over 3. While values below 0.9 signal a market bottom. An increasing trend in MVRV contributes to increasing selling pressure and vice versa.
Now MVRV is going to 0.9 (not yet there). That means the market is optimal for DCA entries.
If the Market dips as per LTH-STH SOPR, and MVRV touch 0.8 - 0.72, add long-term bags. At all other levels, you can continue DCA.
Alright, that’s a wrap!
Robert Arnott says: “In investing, what is comfortable is rarely profitable”. Let’s follow the plan, and remind ourselves that it is not a time to quit!
Bitcoin is down 15% from its August highs, trading below the $22K mark. The market celebrated a much-needed relief rally, altcoins reacted well to the merge & rejoiced in double-digit movements (to the upside), and for a moment, we all thought the good old days were back (finally). But are they? Onchain data suggest something extraordinary!
The Final Test
Paper Hands
Traders And Open Interest
The Market Trend
Game Plan - Let’s Not Quit Now
In the previous editions of the weekly market outlook, we have discussed the relevance of the LTH-STH ratio. To summarize, LTH or Long Term Holders are wallets that hold Bitcoin for more than 155 days (roughly five months). On the other hand, STH or Short Term Holders are wallets that store Bitcoin for less than 155 days. The ratio of these two numbers gives us the LTH-STH ratio.
To clarify, the ratio is not truly representing the number of wallets. But it gives out the profitability estimate. In other words, the Spent Output Profit Ratio (SOPR).
A SOPR value greater than 1 implies that the investors are selling at a profit. However, a value less than 1 signals that investors are selling at a loss. But what happens when SOPR is exactly 1? You guessed it right, the investors might be selling at break even.
Let's discuss the investment psychology of the masses (uninformed investors aka FOMO investors). When the market is moving up after a bearish wave, the uninformed investor is in disbelief. He thinks the relief rally will end at any time and there are more downsides.
Say the market continues to go up, he changes the strategy and buys the local top. Effectively, he is buying the exit liquidity of early investors. The market undergoes a correction, and the FOMO investor panics and exits his position at a loss.
Let's consider another scenario. The market goes down. However, the FOMO investor does not buy the red candles but rather waits for more lows. It doesn't happen, and this cycle continues.
So, how can we apply this logic to SOPR-based investment? When SOPR moves to 1+, the market is overvalued and it is time to exit (DCA exit is best in this case). Alternatively, when SOPR goes under 1, the market is relatively undervalued. This is the best chance to ladder entries or DCA.
LTH-STH ratio - 155-day Moving Average (red line) is entering the green box. It happened in 2016 and 2018 before. In 2018, the 155 MA's entry into the green box is followed by a market correction. In 2022 August the same event is repeating. 155 MA enters the green region, and if we compare the current flow with 2018, the similarities are massive.
At the same time, when the 155-day MA bounced from the bottom part of the green box, that acted as a strong buy indicator.
Long story short, the market can see a swift correction. The good news is that this correction could be the last one in this bear market. Let's not count surprise macro events for this, but strictly following the on-chain data, the market is due for a swift correction. Surprisingly, this coincides with Mt Gox's unlock of 137K Bitcoins. Fasten your seatbelts, we might get juicy investment opportunities at the end of August and in September.
Money is flowing out of BTC and ETH to low caps now. It's normal after a relief rally. If BTC crash again later next week, you can add to your long-term bags (25% again). We had bought 25% in June also. The plan is to accumulate long-term projects between September and November, logically, 25% in each month.
Paper hands are investors who invest for a short time frame. There is a common misconception that diamond hands are the best investors in the market. Not necessarily. Diamond hands are not smart enough to switch their coins and stables at the right time. But let's talk about paper hands now.
Adjusted Output Profit Ratio is the SOPR for wallets that lived for an hour or more. In other words, the profitability estimate of paper hands. Why does it matter?
It helps us to filter out scalp traders and account for the whole market movements. In the grand scheme of bull and bear markets, wallets less than an hour old are mostly inconsequential.
The ratio works similar to SOPR but from a paper hand point of view.
When Adjusted SOPR moves higher it indicates that the illiquid supply might be liquid again. The current market has a liquidity problem. Thus when the indicator trends higher, the sudden introduction of liquidity can create flash crashes.
Now, this remains just a possibility. For example in a bull market, additional liquidity is absorbed effortlessly by the positive market sentiment. But in a bear market, the liquidity creates a supply-demand imbalance, and prices crash.
Open interest is the number of open positions on a derivative exchange. It accounts for both longs and shorts.
When open interest is large, Bitcoin experience high volatility. This happens because there is a massive amount of liquidity present in derivative trading. Remember the Exchange Leverage Ratio? Open Interest is closely related but is a more accurate measure of derivative health.
On another note, the exchange leverage ratio appears to be unstoppable. Each week the indicator chases its all-time highs. Even in leverage flush-outs, new leverage is added in form of shorts.
Back to open interest, a low open interest indicates the closing of future positions. It is correlated with macro events too. When the Open Interest decrease swiftly, the possibility of a short squeeze increases in a bear market.
Open Interest is trending low. That suggests a short squeeze is inevitable. Combining the LTH-STH SOPR analysis with the Open Interest, we can assume that any quick fall in Bitcoin will be absorbed. Probably if Bitcoin falls steep in September or at August end, that will be the final dump of the bear market.
It does not mean the bear market ends and the bull market begins. We still need volume for a bull market, which is not yet present. The best we can hope for is a sideways market till the end of November.
The estimates are assumptions from on-chain data alone.
Funding Rate is negative now. It is crucial because it is the first assurance that the relief rally is over.
Bitcoin is back to 21k levels and the market is resetting the Open Interest. Shorting for large time frames can backfire at these levels.
But is it good to start DCAing now?
MVRV ratio is an estimate of price fairness. The ratio can spot the market top/bottom quite efficiently for value investors. MVRV ratio over 3.5 indicates a possible market top, and we should start taking profits at values over 3. While values below 0.9 signal a market bottom. An increasing trend in MVRV contributes to increasing selling pressure and vice versa.
Now MVRV is going to 0.9 (not yet there). That means the market is optimal for DCA entries.
If the Market dips as per LTH-STH SOPR, and MVRV touch 0.8 - 0.72, add long-term bags. At all other levels, you can continue DCA.
Alright, that’s a wrap!
Robert Arnott says: “In investing, what is comfortable is rarely profitable”. Let’s follow the plan, and remind ourselves that it is not a time to quit!
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