Important on-chain indicators in the buy signal zone

Dormancy Flow, a key on-chain metric, signaled a potential price bottom this weekfor Bitcoin. The Dormancy Flow Ratio, developed by David Puell, is the ratio of market capitalization to the average annual value of the ratiodormancyin dollar terms.

The meaning itselfdormancy(English: state of rest, inactivity) is defined as the ratio of the number of coin days destroyed (CDD) to the total volume of on-chain transfers (adjusted for change). Smaller valuesdormancy, or CDD, compared to the total volume of on-chain transfers, indicate less activity of “older” coins, that is, relatively low activity of hodlers. Higher valuesdormancythey say that more “old” coins began to move or were spent on-chain.

To obtain the average annual costdormancy, the coefficient value for each day is multiplied by the price in USD, then a 365-day moving average is taken. When market capitalization versus higher average annual valuedormancy(expressing the level of expenditure of oldercoins) is at historical lows, the Dormancy Flow coefficient signals the potential formation of a bottom against the backdrop of complete market capitulation. Historically, this has meant great buying opportunities for the long term.

As of January 14, the Dormancy coefficientFlow is below the fifth percentile compared to its own historical values; it has reached such a low level only six times in the history of Bitcoin. You can learn more about Dormancy Flow from the article by David Puell, the author of the indicator: original / translation.

Dormancy Flow for BTC adjusted by users

Dormancy Flow for BTC adjusted by users

Gain insight into changing trends inBTC spending is also aided by the 90-day rolling cost of “Crashed Coin Days” (CDD). The user-adjusted CDD is now below the 25th percentile of its own historical values, signaling solid hodling.

90-day CDD Rolling Amount Adjusted by User

The growth, which was quite modest compared to historical values, slowed down and began to decline as Bitcoin fell to ~$40 thousand.

90-day CDD Rolling Amount Adjusted by User

With a metric like CDD, you can alreadythe spending of coins that has occurred, but what about the incentive to sell? In its simplest form, this can be calculated in terms of price: the higher the value of bitcoin, the more attractive profit-taking seems to become. And for this, on-chain analysis also has an indicator called Reserve Risk.

As we explained in detail in this post, Reserve Risk tracks the ratio of selling incentive (price) to the total opportunity cost of holding bitcoin for hodlers (using a metric such as CDD).

Reserve risk

The Reserve Risk indicator is currently below the 2021 lows and has just entered a buy signal zone.

We can also refer to the Value multiplierDays Destroyed Multiple provided by analyst TXMC, which is calculated as the ratio of 30-day and 365-day moving average from Value Days Destroyed (CDD multiplied by price).

"Value Days Destroyed Multiple compares the levelrecent spending of coins with an annual average to determine periods of “overbought” and “oversold” of the market. The effectiveness of this multiplier is based on the nature of how market tops are formed: through increased spending of old coins, which eventually exceeds demand and ends the price rally. And vice versa, when “old” coins remain mostly motionless and accumulation begins, this indicator will decrease and form a bottom against the backdrop of market capitulation and periods of accumulation,”Glassnode.

Value Days Destroyed Multiple

As of January 14, the Value Days Destroyed Multiple is 0.52; this is below the threshold level of 0.75 and indicates that the dominant factors today are retention and accumulation.

 

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