This week we will look at three main concepts in on-chain analytics that describe the watershed moment in capital inflows, spending patterns and tools to help navigate the next stage of the bull market:</p>
- Increased coin spending by long-term holders and macroeconomic impact on destroyed coin days.
- Estimating the magnitude of capital inflows as new investors buy the allocated coins.
- Models for identifying market cycle tops using both mean reversion techniques and on-chain spending observations.
The turning point in spending
In the previous on-chain pulse, we described two typical phases of a bull market and the transition of market structure from the accumulation phase of smart money to the phase of distribution.
One of the most powerful on-chain tools forThe definition of this tipping point is the concept of life expectancy, measured by the destroyed coin days (CDD). Each unit of BTC accumulates one coin-day per day (i.e. 0.5 BTC accumulates half a coin-day per day). When a coin is spent, the accumulated lifespan is destroyed, reset to zero, and starts to accumulate again.
When old coins with a lot ofaccumulated service life, this destroys a large number of coin days and is often associated with the exit of long-term investors from positions. Bull markets can typically absorb many months of this distribution, but as selling continues, the likelihood of a local or global high increases.
The chart below shows a 30-daymoving average CDD and shows the current transition from the phase of intense accumulation from July to November and moves to an uptrend, indicating an increase in spending. Note also that the CDD value in the first half of 2021 was markedly higher and persisted for several months. This underscores how the abundance of demand was able to absorb new supply.
Binary CDD with 7-day moving averagethe medium reflects these trends in a more flexible format. This metric will tend to rise when the CDD is higher than the long-term average over extended periods. It can be seen that, despite the increased value at the moment, Binary CDD barely exceeds 0.2, which corresponds to September-November 2020, preceding the primary bullish impulse. Old coins are being used up, although they remain relatively small.
On a macro scale, we look at the vivacity scorebitcoin (Liveliness), which takes into account the ratio between the cumulative number of coin-days destroyed and the cumulative number of created ones. The simple interpretation is as follows:
- liveliness decreases when more coins are at rest and hodlers are in play;
- liveliness grows when there are more destroyed coin days and spending coins in the game;
- steeper curves mean more coin retention / distribution as needed.
We see that after 6 months of hodling(downtrend, green) vigor has risen and started to form a very small uptrend. Like CDD and Binary CDD, this uptrend is just beginning to emerge and is much weaker at the moment than in the first half of 2021. This again speaks to this tipping point in the spending dynamics of older holders.
The new metric this week is BinaryLiveliness. Borrowing concepts from Binary CDD, this metric sets up a similar oscillator for determining accumulation (0) and distribution (1) trends using two methods:
- Green: When liveliness is higher than 30-day MA, return to 1, otherwise - to 0.
- Blue: when liveliness is higher than the previous day, return to 1, otherwise - to 0 (using 7-day moving average)
Again, we can see a surge in recentweeks, confirming a noticeable increase in the destroyed coin days. However, as in the previous charts, it remains modest in size. If the next phase of the bull market does occur, this indicator can be expected to reach and be maintained at higher levels for weeks or months.
Assessment of capital inflows
We have established that the dynamics of the spending of coinsmore experienced investors have recently become higher. The next step is to measure the magnitude of the selling pressure and, therefore, the capital inflows required to absorb it. While a lot of trading happens off-chain on spot and derivatives exchanges, we can use on-chain data to establish a lower bound for capital inflows and outflows into the network.
One of the clearest examples of thisis the realized capitalization (in this case adjusted for users to filter out internal transfers). This metric values each coin at the price it was last moved on-chain at, reflecting the accumulation of net realized gains less losses. Each time a coin moves profitably, it increases the realized capitalization value. Conversely, realized losses will be deducted to reflect capital outflows.
Realized capitalization resumeduptrend and reached $ 450 billion as coins are distributed and revalued at a higher price. This represents a net capital inflow of $ 50 billion since the previous peak in May, set during the sell-off.
Daily total value of coins sold sinceprofit or loss, requires the buyer with capital to absorb it. The graph below shows what is being sold daily with a total value of $ 1.5 billion to $ 2.1 billion in coins spent this month. Considering that the price in November mostly consolidated sideways, we can see this as the lower bound of the total capital inflow in Bitcoin.
On a relative basis, the overallrealized value with market cap or realized cap to normalize to market size. This sets up a simple oscillator for the total capital inflow versus the network's valuation.
Previous market highs (namely 2017 and 2021years) occurred when the total value realized at expense exceeded 0.3% of market capitalization and 1.0% of realized capitalization (often reaching much higher levels). In the current market, costs are less than 50% of these thresholds. This serves as further evidence that healthy demand in a bull market must be able to absorb significantly more coins.
Identifying market tops
Determining the top of the Bitcoin market is trickytask. However, with more than a decade of on-chain and market data at our disposal, we can use tools to identify the behaviors and cyclical patterns that have signaled market tops in the past.
The first tool is Mayer Multiple,calculated as a simple but effective relationship between price and the 200-day moving average. Using statistical techniques, we can establish that a Mayer Multiple of 2.4 reflects an unlikely extreme when price rallied 2.4x in the long term and the 200-day MA was well observed. This provides an upper price band that is currently $ 110k, although it will tend to rise (or fall) as the 200-day MA price changes.
The maximum price model was created by Willie Wu andis an empirically fitted model that multiplies the all-time average price ($ 6.1K) by 35 times. This gives the current cycle maximum value of $ 214k. Note that the all-time average price moves much more slowly than the 200-day MA, and therefore the maximum price will be a less volatile pattern.
Next, consider the MVRV Z-Score metric. Using statistical normalization, this metric reflects how many standard deviations the spot price differs from the realized price.
In addition, very high metric valuesmean that the market holds a large unrealized profit, and therefore the maximum value of the incentive to sell. Conversely, a bottom can be found when the market is severely at a loss and investors are likely to capitulate. The current market is about halfway after the sharp chill after the April peak.
As bull markets develop, old investorscontinue to sell, and new, less experienced buyers absorb the offer. Market bottoms are set when smart money buys and sells the maximum supply, and conversely, tops occur when large volumes of coins change into weak hands.
The RHODL ratio reflects this phenomenon by takingratio between weekly and one-year HODL wave ranges adjusted for realized capitalization. Simply put, it will peak when the number of very young coins is high compared to older coins. RHODL is currently consolidating very similarly to 2013, which suggests a stable balance between weekly and one-year-old coins.
Finally, we have the reserve risk metric, a tool that is full of on-chain wisdom. It can be viewed as follows:
- Higher prices increase the incentive to sell.
- Every day that a hodler decides not to sell, he sacrifices lost profits in the expectation that prices will be higher in the future.
- As more hodlers decide not to sell, fewer coin-days will be destroyed and the risk of the reserve will decrease.
- As prices rise, more and more hodlers end upeventually reach their target selling price. As a result, more coins are sold, the opportunity cost is realized, and the reserve risk will tend to rise and peak.
Given the significant accumulation that has taken place over the past 6 months, the risk of a provision is currently impressively low. CDD is starting to resume its uptrend, although there is still a lot of fuel left.
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