I don't have a crystal ball, so I can't tell you if it's time to buy the dip for sure. DYOR. These are some thoughts to help you in that process.
What I'm going to do is walk you through some indicators derived from on-chain data that suggest the bottom is near--according to past history.
We'll be looking at day traders as a cohort since they most commonly exhibit selling fatigue.
Data is z-scored, meaning that it's scaled to be put on a standardized index. This way we can look meaningfully at whether or not the amount of day-trader selling is one standard deviation, 2 deviations, etc. We need some ratios to measure that exhaustion.
A common one is the Market Value to Realized Value (MVRV) ratio.
- Market Value (MV): The current market capitalization of BTC, calculated as the current price multiplied by the total supply of coins.
- Realized Value (RV): The value of all BTC based on the price at the time they were last transacted. You can think of this as the bag-holder value of BTC purchasers.
MVRV Ratio = Market Value / Realized Value
- MVRV > 1: This means that the market value is higher than the realized value, indicating that investors, on average, are in profit. A high MVRV ratio suggests that the asset might be overvalued, meaning that a correction could be coming.
- MVRV < 1: This means that the market value is lower than the realized value, suggesting that investors are, on average, at a loss. A low MVRV values indicate that the asset might be undervalued, meaning that it could be a good dip-buying opportunity.
Here's a chart of what that looks like for Bitcoin for a bit longer than the 2024 period. Bitcoin's price is in black. the MVRV is in teal. A -1 standard deviation is in dark blue. A -2 standard deviation is in dark red.
What you'll notice is that whenever the MVRV drops below the red line (2 standard deviations) price tends to snap back up because a bottom is in. We are currently in that situation.
The next ratio we'll look at is the Spent Output Profit Ratio (SOPR). This is a measure of profit ratios for transactions, while the MVRV is a measure of profit ratios for bag-holding.
The SOPR is calculated as the ratio of the realized value (the bag-holder value) relative to the value at the time the coin was transacted (created).
The formula is: SOPR = Realized Value / Value at Creation
- SOPR > 1: Coins are being sold at a profit. This typically indicates that investors are in a profit-taking mode, which can be seen as a sign of a bullish market if it sustains.
- SOPR < 1: Coins are being sold at a loss. This often suggests that investors are capitulating, potentially indicating bearish sentiment.
- SOPR = 1: Coins are being sold at their cost basis. This implies that the market is in a state of equilibrium, with neither significant profits nor losses being realized.
The image below takes a longer view on the SOPR, beginning in mid-2022. BTC is in black, while the ratio is in teal. Dark blue indicates a -1 standard deviation, while dark red indicates a -2 standard deviation.
You'll notice that the signal tends to indicate trader exhaustion only when the red line returns to its baseline. We haven't quite hit that yet, but if history is any guide, then perhaps in a day or so.
Bringing these points together we have this picture:
- the bag holders are reaching sell exhaustion,
- individual transactions (e.g., from day traders likely) are still making enough money that they haven't quite yet exhausted.
- The bottom is near, but it might be a few days yet.
Given this analysis, you'd probably not want to buy anything except Bitcoin since the market has a fair chance of drifting lower. A DCA strategy might make sense. If you want some price ranges, then consider the following.
- A 33% decline from BTC's all-time high is ~$48,900.
- A 35% decline would be ~$47,400.
- A 39% decline would be $44,530.
If BTC drops below 39%, then we're in a bear market (statistically) and I wouldn't buy until BTC drops below 50% from its all-time high.
But to repeat, history suggests the bottom is near, not that a bear market is incoming.
Happy Trading!
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