On-chain observation: How do long-term and short-term holders affect BTC prices?

Author: UkuriaOC, CryptoVizArt, Glassnode

Compiled by: Akechi

Recently, the price of Bitcoin is trying hard to return to its historical peak. In this article, we will examine the contribution of both long-term and short-term holder groups to the supply and demand side of the market during this period. Complementing this research, we will also use new segmentation indicators to assess the impact of the consumption and investment behavior of different sub-groups of long-term investors on the market.

Summary

• Since Bitcoin hit an all-time high of $73,000 in March, the upward momentum has stalled and the market has been trading sideways accordingly. According to our analysis, market demand momentum has turned positive to negative since early May.
• This article will analyze the cost basis of short-term investors and use it as a benchmark to analyze how capital flows into the market at the current stage.
• To analyze what role the supply side plays in the market, this article examines the investment activities of long-term holders and finds that the unrealized profits held by this group are statistically well below previous historical peaks.
• Looking at the behavior of long-term holders selling their Bitcoin assets, it can be seen that although the Bitcoin assets sold by this part of investors only account for 4%-8% of the total sales volume in the market, they sell these Bitcoins The profits earned by cryptocurrencies usually account for 30%-40% of the accumulated profits during the bull market. This discovery highlights the fact that market profits are concentrated in those Bitcoins that have been held for a long time. These profits are gradually realized in the bull market, and their huge profits fully live up to these "diamond hands" (referring to the violent volatility in the market). Investors who remain steadfast in holding high-risk assets like Bitcoin despite market volatility are waiting patiently.

Market Demand Side Tracking

In the previous analysis article (Sales are drying up! The market is forming a new bottom), we have proposed a method to track the capital flowing into or out of the market, and determine whether the capital is flowing into or out of the market. The direction of flow in the market and inferring its size. Here, we will continue to use this method to use the time of holding Bitcoin assets as a scale to segment the short-term holder group and continue to deepen our analysis:

• When the cost basis of the short-term holder group rises, Indicating that new buyers are purchasing the Bitcoin asset at higher prices. At this point, capital is in a state of net inflow into the market (and vice versa).
• We can use the MVRV ratio to approximate the unrealized profits held by each group when the spot price deviates upward (or downward) from the current cost basis.
• We can use MVRV to measure the incentive for investors to take profits (when MVRV reaches high levels), or to spot signs of seller exhaustion (when MVRV falls to low levels).

First, we compare the spot price to the cost basis of two groups of short-term investors:

• Holders who have held Bitcoin assets for between 1 week and 1 month.
• Holders who hold Bitcoin assets between 1 month and 3 months.

Thus, we can determine how capital flows and changes from a macro perspective when the market is in the early stages of a bull market and a bear market respectively. The chart below shows how these two price models could support the overall market during a bull run in 2023-24.

Since mid-June, the spot price of Bitcoin has fallen below the cost basis ($68,500) of holders with a holding period of 1 week to 1 month, and has even reached the level of holders with a holding period of 1 month to 3 months. below the holder's cost basis ($66,400). Based on historical experience, if this situation continues, it will cause investor confidence to be hit and may lead to a deeper price correction. And there is no doubt that the market will take longer to recover from such a deep correction.

Figure 1: Realized prices for short-term holder segments with different holding periods

We can also describe this by comparing the respective cost bases of these different short-term investor segments Current market momentum. The details are shown in the figure below:

• Capital inflow: At this time, the cost basis of short-term holders who hold the currency for 1 week to 1 month is higher than the cost basis of investors who hold the currency for 1 month to 3 months. . At this time, the positive momentum of the market is very obvious, and strong market trends are constantly attracting new capital to enter the market.
• Capital outflow: At this time, the market has the exact opposite situation - that is, the cost basis of the former falls below the cost basis of the latter. This market structure indicates that the momentum on the demand side is weakening and the market is starting to experience net outflows of capital.

In the previous bull market, this negative capital flow structure appeared five times in total. In addition to this, we can see that this structure has been forming since May and continues until early June.

Figure 2: Fund flow situation of short-term holders

Market supply-side analysis

In order to fully understand the current market, we need to introduce indicators related to the behavior of long-term holders for further analysis. The long-term holder group is the main provider of market supply during bull markets, as they seek to take profits by selling their Bitcoin holdings in the market. In a sense, the formation of market cycle tops can be attributed in part to long-term holders increasing their efforts to sell Bitcoin. A sell-off of this magnitude will eventually exhaust the funds that poured into the market during the bull market. new demand.

In the chart below, we will compare the two important indicators of the key multiple of the Bitcoin spot price and the average cost basis of the long-term holder group (i.e. the realized price of the long-term holder group).

• 1.0 times the realized price of the long-term holder group (green line in the figure): In terms of our historical experience, the occurrence of this situation is consistent with the bottom formation stage of the bear market cycle and the market recovery stage.
• 1.5 times the realized price of the long-term holder group (orange line in the figure): This price position is often regarded as the watershed between the market recovery stage and the long-cycle market equilibrium stage during the bull market. During this period, although the price of Bitcoin will continue to rise, the rate of increase will be very slow. On average, long-term holders hold about 50% of unrealized profits at this stage.
• 3.5x long-term holder group realized price (red line in the chart): This price is the dividing line between the equilibrium phase and the euphoria phase of the bull market. Once this stage is reached, Bitcoin prices typically rise rapidly. Moreover, at this stage, the unrealized profits held by long-term holders are about 250% or even higher. Stimulated by such high profits, long-term holders tend to accelerate the selling of their Bitcoin holdings. assets.

If we apply the above framework to analyze the current cycle, we can find that from a macro perspective, the current bull market trend is very similar to the 2017 cycle. What is particularly similar between the two is that when the price of Bitcoin was consolidating below the current historical peak, the market performance was consistent with the 3.5 times long-term holder group achieved price point (shown as the red line in the figure). This picture of the watershed between the equilibrium and euphoric stages is entirely consistent.

Figure 3: The average cost basis multiple of long-term holders

The indicator of unrealized profits held by the long-term holder group can be regarded as a psychological benchmark to measure whether they have Willing enough to sell their Bitcoin holdings in order to take profits. We can use the LTH-NUPL (Long-Term Holders Net Unrealized Profit/Loss) indicator to visually demonstrate the psychological motivations of long-term holders when making investment decisions.

At the time of writing this article, LTH-NUPL is 0.66. This value indicates that the current market is probably in the "pre-euphoria" stage (shown as the green line in the figure). The Bitcoin market has been in this phase for 96 days now, and it was also in this phase for that long during the 2016-17 cycle.

Figure 4: NUPL indicator for long-term holders (LTH-NUPL)

Through the long-term holder spending binary indicator, we can determine in which time period long-term holders will be large Large-scale dumping of their Bitcoin assets. There is no doubt that during such a period of concentrated selling, the total balance of assets held by long-term holders will decline significantly.

This allows us to identify different phases of asset selling by long-term holders:

• Weak sell-off periods, where the supply of Bitcoin from long-term holders has been declining for at least 3 of the last 15 days.
• Normal sell-off period, Bitcoin supply from long-term holders has been declining for at least 8 of the past 15 days.
• Powerful sell-off period, Bitcoin supply from long-term holders has been declining for at least 12 of the last 15 days.

Chart 5: Binary indicator of long-term holder spending (last 15 days)

Our next chart aims to combine the two models mentioned above to comprehensively evaluate and visualize long-term investments investors’ emotions and investment behavior. In the following derivation, we will comprehensively analyze what motivations make them decide to cash in profits (or losses) and choose to exit, and how they actually do so.

We consider four different motivations that lead long-term investors to choose to liquidate their assets and get out:

• Surrender: This is when the spot price of Bitcoin is below the cost basis of long-term holders. Therefore, any large sales of Bitcoin assets during this phase can be attributed to a collapse in investor confidence and panic selling.
• Transition: At this time the spot price is slightly higher than the cost basis of long-term holders, who will occasionally sell small amounts of Bitcoin assets. Such sporadic sales are generally considered typical day-to-day transactions.
• Balance: When the market recovers from the long-term bear market, it will achieve a new balance between the three-party game between a small inflow of new demand, weakening liquidity, and the gradual profit-taking of underwater holders in the previous cycle. During this phase, large asset sales from long-term holders are often associated with a sudden rebound or pullback in price.
• Euphoria: As a sign of this phase, the LTH-MVRV indicator will cross the threshold of 3.5 and converge with the level of the indicator when the market reached its historical peak in the previous cycle. At this stage, the long-term holder group held an average of more than 250% of unrealized profits, thus pushing the market into a euphoric upward phase, which prompted these long-term holders to accelerate the dumping of large amounts of their Bitcoin assets. , in order to seek profit-taking.

Through this method, we can see that the long-term holder group has experienced large-scale asset selling in the fourth quarter of 2023 and the first quarter of 2024, which pushed the market higher during this period. and then re-enter a new equilibrium state.

Figure 6: The selling behavior of long-term holders and the resulting profits and losses

Who is affecting the seller’s pressure?

The above analyzes the different logic behind the selling behavior of this part of investors during a period when the total supply from long-term holders decreases. In addition, we can also look at the segmented groups with different holding times and see who has played a decisive role in the changes in seller pressure in the market.

Figure 7: Coin age stratification in market Bitcoin supply

In order to assess separately the extent to which each segment among long-term holders affects the market Bitcoin spending, we will focus on this time period: the volume of Bitcoin spending in the market is at least one standard deviation above the annual average.

While every investor group experiences occasional bursts of spending, the frequency of high spending days increases dramatically during the manic phases of a bull market. This shows that during the period when the price of Bitcoin is rising rapidly, long-term holders will invariably choose to profit and exit.

Figure 8: Spending of the long-term holder group (Z-score)

Considering that in the current time period, only 4%-8% of the daily on-chain transaction volume is related to the long-term Holder groups are correlated, so we will utilize another core on-chain metric (realized profit/loss) to analyze their relative weight on the supply side of the market.

Chart 9: Bitcoin Age Stratification (SVAB) by Market Spending (30-day EMA)

The chart below shows the cumulative amount of realized profits for long-term holders during the bull market . We find that profits from long-term holders typically account for 20% to 40% of total locked profits.

Furthermore, although the trading volume of Bitcoin assets from long-term holders only accounts for 4% to 8% of the total daily trading volume, the profits generated can account for up to 40% of investors’ profits. .

Figure 10: Realized profits in bull market

Summary

Since the beginning of March, the market’s price action has been mostly sideways. Therefore, we utilize the cost basis of long-term and short-term holders respectively to assess the current degree of supply and demand in the market.

We built a toolset to estimate the trend of capital inflows into the Bitcoin network based on changes in the cost base of short-term investor segments. The results confirm that March’s all-time high was followed by a period of net capital outflows (the trend indicator was negative).

After that, we will further subdivide the long-term holder group according to the currency holding time, and discuss the investor groups after each subdivision. The conclusion of this analysis shows that the frequency of high spending days increases dramatically during the euphoric phase of a bull market. Interestingly, while trading volume from long-term holders accounts for only 4% to 8% of total daily trading volume, this group nevertheless accounts for 40% of total investor profits.

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