Volatility Returns: Where Will Bitcoin's Bottom Be Found?

The market reaction to the September release of CPI inflation data in the US (on Thursday) turned out to be stronger than expected andcaused one of the most volatile days of the current bearish trend. The market is walking a fine line between a strong mid-term rally and another wave of decline.

Volatility amid new CPI data does not disappoint

We mentioned that economicThis week's catalysts could bring volatility to markets. This is what we received yesterday and even more. I will not go into detail about the components that led to this «surprise» in the inflation data - a topic that many traditional market sources will weigh in on - but the key point is that the core CPI was higher than expected, at 6.6% annualized and 0.4% monthly, and the key factors were housing (rent, housing cost components, etc.) and medical services. This is the fastest rate of change in the annual core CPI since 1982. If you're interested in comparing different components over the last three months, take a look at this chart.

Core CPI (excluding energy and food) US yoy (top) and monthly (bottom)

The markets reacted to this with extremevolatility. We initially saw a significant sell-off in the stock, bitcoin and bond markets in response to the publication. Then - the liquidation of late sellers, since the aggression of sales ran into significant liquidity. But ultimately the day ended rather quietly. Leaving aside the factors behind the recovery from the initial downward momentum, this is a clear sign of an unhealthy, illiquid and uncertain market facing strong risks of big moves on both sides. At any moment, either an aggressive rally or another fall can occur. The S&P500 showed a 6.11% movement from the low point of the «wick» to the daily maximum; Bitcoin recovered 10.06% in a similar move.

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In terms of Fed rate forecasts, the latest data from the Eurodollar market points to a peak just above 5% in March 2023, after which the rate is gradually reduced until the end of the year.

Fed Rate Curve For Eurodollar Markets

Where is the Bitcoin price bottom?

With a drop to $18 thousand at the moment.and new yearly lows for Bitcoin approaching, it's worth taking a look at a few key lower price levels to determine where the price could end up. First, let's take a look at Bitcoin's trading volume profile for the range since the December 2018 lows, where the bottom of the last cycle was found.

Most of the trading volume came from$10K area, which is also a key psychological level. In a strong downtrend, around $10k is the spot cost position level for many market participants where they can begin to experience the real financial pain of a drawdown and have their confidence tested.

The highest trading volume since the minimum of the previous cycle was in the $10 thousand area.

Although GBTC is not at all the same as spotBitcoin, the current settlement price of Bitcoin for an investment in GBTC is $11,641, with a 38.7% discount to the trust's net asset value. GBTC has its own specific risks—custody, long-term lock-ups, and legal—but it can still serve as a market indicator of institutional demand for Bitcoin. And even at a current discounted price to market of $11,641, and with plenty of upside potential if the trust were to convert into a spot ETF, we still don't see much demand for the trust's notes at current levels.

Discount of the settlement price of bitcoin in GBTC (blue graph) to the market price of bitcoin (grey graph)

Regarding the bear market, andduration of the cycle, let's look at the Bitcoin drawdown chart in this and the previous cycle. As of today, the drawdown from the maximum closing price ($67,589) is 72.23%. If the maximum drawdown in the current cycle is slightly less than in the previous two - say, 80% - this gives a target price of about $13.5 thousand. Assuming that in this cycle the decline will be noticeably stronger - say, about 85% , - then we will see a price of about $10.1 thousand. The bullish scenario implies that the market will form a fairly strong bottom at $18 thousand, and the maximum drawdown in this cycle will not exceed 73%.

Depth of BTC price drawdowns after market cycle peaks

From the point of view of on-chain indicators, one of the mostThe interesting areas of realized price are the realized price for a cohort of addresses with balances of 10-100 BTC. (Let me remind you that the realized price is the average cost of “coins” for their holders, calculated by multiplying the denomination of each UTXO by the price at which it last moved on-chain.) So, specifically for addresses with balances of 10–100 BTC accounts for about 22.6% of the total circulating supply of Bitcoin. This group certainly represents a significant portion of long-term holders, and it is reasonable to argue that in a deep and prolonged bear market, long-term holders do not appear to have yet experienced the levels of financial pain or capitulation that we have seen in the past.

In the second chart below, we have highlighted the NUPL metric(net unrealized profit/loss ratio) for all long-term holders. The result suggests that we have indeed not yet reached maximum capitulation unrealized loss levels for long-term holders due to cohorts with a much lower cost basis. Either there is an increasing trend in market cycles over time to reduce unrealized losses against the cost basis, or we have simply not yet seen a capitulation period for long-term holders. And I'm leaning more towards the latter option.

Realized price for long-term holders. The price of bitcoin has never dropped below the green line before. : Whale Map

LTH-NUPL adjusted by user. :Glassnode

 

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