Glassnode: Why the current decline is still profitable for investors

Author: CryptoVizArt, UkuriaOC, Glassnode; Compiler: Deng Tong, Golden Finance

Summary

• Bitcoin has recorded its largest drop in the current cycle, trading more than 26% below its all-time high. Nevertheless, the drop is still at a historical low compared to past cycles.

• The price contraction has caused a large amount of short-term holder supply to fall into unrealized losses, with more than 2.8 million BTC currently at a loss based on their on-chain acquisition price.

• While the financial pressure on short-term holders has increased, the magnitude of locked-in losses is still relatively small compared to the market size.

Price Performance

The 2023-24 Bitcoin cycle is both similar and different from previous cycles. Following the FTX crash, the market experienced approximately 18 months of steady price appreciation, followed by three months of range-bound price movement following the $73,000 ETF high. The May-July period saw the market experience its deepest cycle correction, falling over -26% from ATH.

While this makes sense, this decline is significantly shallower than previous cycles, highlighting the relative robustness of the underlying market structure and compressed volatility as Bitcoin matures as an asset class.

If we evaluate price performance relative to each cycle low, the market performance in 2023-24 is strikingly similar to the previous two cycles (2018-21 and 2015-17). The reason why Bitcoin has followed such a similar path is a topic of frequent debate, but it continues to provide a valuable framework for analysts to think about cycle structure and duration.

However, if we measure the performance against the Bitcoin halving date, we find that the current cycle is one of the worst performing. This is the first time that the market has broken out to a new cyclical high before the April halving event.

• Epoch 2: +117%（红色）

• Epoch 3: -7%（蓝色）

• Epoch 4: +30%（绿色）

• Epoch 5: -13%（灰色）

We can evaluate on a daily basis the number of times a daily decline in an uptrend exceeded the 1 standard deviation threshold. This helps us assess the number of significant selling events that investors experienced throughout the bull market uptrend.

• 2011-13: 19 events;

• 2015-18: 27 events;

• 2018-21: 26 events;

• Current cycle 2023-24: 6 events (to date).

The current cycle has recorded 6 daily declines that were more than 1 standard deviation below the long-term average. This suggests that the current cycle is either significantly shorter and less volatile than previous cycles, or that investors have more fuel.

New Investors Are in Trouble

Evaluating the supply held by short-term holders, we can see a significant increase starting in January 2024. This was accompanied by an explosive rise in prices after the spot ETF went online, and reflects a strong inflow of new demand.

However, this demand profile has reached a plateau of growth in recent months, suggesting that a balance has been formed between supply and demand in the second quarter of 2024. Since then, the oversupply situation has given way to an oversupply situation as fewer long-term holders have taken profits and fewer new buyers have entered the market to accumulate.

In a sustained bull market, a local bottom is usually formed when the loss supply held by short-term holders reaches about 1 million to 2 million BTC. In more severe cases, the loss supply may peak between 2 million and 3 million BTC.

We can see an example of this in the recent sell-off, when the price dropped to the 53,000 level, causing the number of tokens held to fall below their cost basis to over 2.8 million BTC. This is the second time this has happened in the last 12 months, with August 2023 being another example where over 2 million BTC held by new investors were in unrealized losses.

We can assess the intensity of these periods by counting the number of days that over 2 million short holders’ tokens were underwater for at least 90 days. By this metric, it has been active for 20 days so far.

If we compare with the market conditions in Q2-Q3 2021, short-term holders experienced a longer period of severe financial stress, 70 consecutive days. That period was long enough to break investor sentiment and give way to the destructive 2022 bear market. In contrast, this cycle is currently relatively still in the making.

Profit Stagnation

As spot prices continue to fall, the ratio between investors' actual profits and actual losses has also declined. The indicator has now fallen to the 0.50 to 0.75 range, which is a more neutral level during bull market corrections.

We can also see that the indicator has also shown a similar pattern of violent fluctuations throughout the cycle from 2019 to 2022, which can be seen as a reflection of inherent instability and investor uncertainty.

Looking specifically at the losses of short-term holders, we can see that this group has locked in actual losses of about $595 million this week. This is the largest loss event since the 2022 cycle low.

Furthermore, only 52 trading days (< 1%) out of 5,655 recorded larger daily losses, highlighting the severity of this correction in USD terms.

However, when we look at the losses of these short-term holders as a percentage of total invested wealth (divided by STH realized market cap), we see a very different picture. Relatively speaking, the losses locked up by this group are still fairly typical compared to previous bull market corrections.

In the chart below, we have highlighted (in blue) time periods where both the percentage of losses held by short supply and the magnitude of losses locked up deviated from the mean by more than 1 standard deviation. Looking at the losses locked by long-term and short-term holders, we note that this week’s loss events account for less than 36% of the total capital flows on the Bitcoin network. Major sell-off events, such as the September 2019, March 2020, and May 2021 sell-offs, accounted for more than 60% of capital flows over a period of several weeks, with both groups making significant contributions.

Thus, it can be said that the current market contraction has more similarities with the top formation in the first quarter of 2021 than the severe sell-off event. Nevertheless, it is still the responsibility of the demand side to curb the negative price momentum, otherwise investors' profitability will continue to deteriorate.

Summary

After the FTX crash, the market experienced the deepest correction in this cycle after an 18-month rally and 3 months of sideways trading. Nonetheless, the current cycle’s decline still compares favorably to historical cycles, suggesting relatively sound market fundamentals.

The sharp contraction has left a large number of short-term holders in a position of significant unrealized losses, putting a lot of pressure on that group. However, the size of the losses locked in remains relatively small compared to the size of the market. Beyond that, long-term holders have rarely participated in the losses, suggesting that sophisticated investors have remained profitable despite the subsequent market panic.