- May 27, 2022
Bitcoin could fall further for analysts
Chain analysis fascinates me. Exclusive to the blockchain, it does not exist outside of crypto. But by jumping on the chain, we can often get intriguing information about market sentiment, and specific indicators have even been predictive of future price developments.
Of course, given Bitcoin’s short history of just over a decade, it is not yet clear which indicators are just coincidences and which ones have real value. But that’s part of the fun, right?
Percentage of supply in profit
I came across an exciting indicator this week on Twitter, compiled by @OnChainCollege, which is a great follow if you like chain analysis. It looks at the percentage of Bitcoin’s supply in profits to assess how overheated (or cooled) the market is. Historically, this has pretty well signaled the beginning and end of bear markets for Bitcoin.
And these bands are very close to intersecting right now.
To explain what the metric is, for those who don’t know, the profit bid percentage refers to the percentage of existing bitcoins where the current price is higher than the price at which these bitcoins were purchased. When the percentage of the offer in the profit exceeds 50%, this is a strong signal. When the percentage falls below 50%, this is a low signal. Or so the theory goes.
The graph below shows this, going back to 2011. Note that @OnChainCollege has represented it graphically by also placing the percentage of offer in loss (red) on the graph, as well as the percentage of offer in profit (green). These two intersecting lines would be the indicator of this.
As you can see, this has only crossed four times before. The most recent was in March 2020, when the onset of COVID shook the markets. In my opinion, this was the scariest period in the history of cryptography – a real existential event (to be honest, it was as if it was an existential crisis for the world as a whole).
To play devil’s advocate, you could probably think of this instance as a black swan event and ignore the awesome bounce that followed the crossover here – fine. But looking at the other cases, the prediction ability is valid in all three cases: 2019, 2014 and 2011.
It’s very beautiful. But what does the market say now? Well, the percentage of supply in loss has not yet exceeded the percentage of profit. If the model holds, it means that there may still be more pain to give before the bottom is reached.
Warnings about chain analysis
Obviously, any chain analysis is accompanied by the caveat that not only is the sample space small, but the data can be non-structural, with significant changes in the landscape. Today we are witnessing rampant inflation, a hawkish Fed and a frightening geopolitical climate. That triggered the worst start to the year for stocks since 1939.
These macro headwinds mean that, for the first time in Bitcoin’s history, it is swimming upstream against serious and consistent bearish sentiment – April was the worst month for stocks since October 2008. Moreover, Bitcoin has almost nothing in common today with the Internet money niche. he was back in 2011, or even 2014. Today, it is taking its place among the authentic asset classes, with institutional money flowing in and a seat at the macro table.
All this means that it is far from guaranteed that history will repeat itself here, if these strips recross. Nevertheless, it’s a fascinating trend to watch and a neat use of an analyst’s chain analysis which is one of my favorites. It will be fun to follow in the future.