Recent data suggests that 75% of the absolute price gains & losses in Bitcoin since 2020 occurred in just 25% of the days
Ever wondered why there is so much talk around Bitcoin & crypto prices going up or down? That’s because most of the time, these moves happen n a short span combined with a lot of volatility — which is a trademark for digital assets. If you are like me, who has followed the crypto markets for many years now, you would know how the Bitcoin market switches into phases of extreme price change depending on supply and demand and the price ceiling or floor of these phases.
Looking back at the Bitcoin market action since Mar. 2020, we see these phases playing out. After plummeting in the post-pandemic disarray, Bitcoin gradually began to rise and remained in a strong bullish run still early April of this year. After a relentless bullish run, BTC reversed its course in the following two months — losing over 50% of its value at one point.
July has provided much-needed relief and although BTC spent almost three weeks declining to below $30k on July 20, it rose sharply to over $40k twice — hovering around $39.7k at the time of writing. Today’s analysis by the Chainalysis Market Intel looks at how the bitcoin market price swings play out, by whom & what are the current technical price levels.
Looking at the first chart (Figure 1), shows the most important statistic — since 1 March 2020, around 75% of the absolute price gains occurred in just 25% of the days when the bitcoin price gained. Interestingly, the chart above compares similar price action for the U.S benchmark index S&P 500. For the stocks index, 55% gains occurred in 25% of the days when the S&P 500 gained. Clearly, fortunes are made or lost in Bitcoin in a shorter period of time.
This means that the Bitcoin market goes through phases of extreme price gains and losses with periods of relative calm as we saw recently. An experienced trader would be the one who can figure out when the extreme phase is about to get underway and what the price ceiling or the floor would be for that particular phase.
Unlike the traditional financial markets, where fundamentals and the associated price action usually have a strong correlation, price change in Bitcoin can be much greater than the associated change in fundamentals. Having said that, there are some highly correlated metrics playing out in the Bitcoin market. As the chart above (Figure 2) suggests, one of them is between the bitcoin wallets that have held the digital currency for 3–4 years & the price action in BTC.
For example, since the start of 2020, Bitcoin sent by wallets that have held their bitcoin for 3 to 4 years has a correlation of 0.76 with the bitcoin price. This shows that long-term Bitcoin holders only sell off their holding at the highest possible price — fundamentally increasing supply, which puts pressure on the price.
The next two charts (Figure 3) highlight the price floor for the Bitcoin floor in the short-term (last three months) and long-term (since 2017). The good news for Bitcoin bulls is that the average cost of bitcoin held by investors entering the market in the last 12 months is currently $37.3k — the last time I covered this topic, the BTC price floor stood at $35k in early March. The price floor can be quantified by looking at how a large enough group of investors is willing to buy and hold BTC & is a demonstration there is demand at that level, which can provide a floor to the price.
The performance of the on-chain price floor versus moving averages of price is even clearer in the long-term chart. For example, as the late 2017 and April 2021 bull markets ended, the on-chain price floor flattened far earlier than the 50-day moving average price went below the 200-day moving average — the ‘death cross’ of technical analysis.
According to the analysis, existing BTC whale investors are buying again, but new large investors are still missing. Although the demand seems to be returning to the BTC market, the supply is only as liquid as it was in December 2020 — suggesting the market is at least in a sideways state and is unlikely to enter an extreme price fall phase.
Originally Published on Medium