On November 10, 2021, Bitcoin reached its all-time high of $ 69,000 according to the Bitstamp exchange rate.
It is truly an incredible fact that BTC was able to rise so high that the total market capitalization of assets increased by $ 3 trillion, according to CoinGecko. But not too long ago, in June and July of this year, the situation did not look so rosy. BTC was relatively weak, at least for many, to make such an impression, and at times, it seemed that BTC could test low levels of $ 12,000 to $ 16,000.
And there were other developments that made investors nervous at the time, such as Chinese regulators’ claims, deep attention from U.S. regulators, and the tendency for retail investors to continue to panic.
But the first cryptocurrency that has definitely taught us is that it is difficult to estimate value. So, what should we be guided by? There are many great trading strategies out there, but today I am proposing to analyze Bitcoin using on-chain supply metrics.
In my opinion, the supply metrics have performed well in the current assembly, and I think they will continue to generate valuable signals for us, which are suitable for analysis.
Let us look at two methods of analyzing BTC using supply in profit / loss metrics. But first, let me remind you of the meaning of the term.
Percentage of BTC supply in profit: This is the percentage of supply performed in profit, or in other words, percentage of existing Bitcoin for which it was less than the current BTC price at the time of their last movement. Generally, when an irresistible percentage of total BTC supply is profitable, it means that the market is facing a bullish cycle or is about to see a bullish rally. The period that coins can gain can range from a few weeks to months before any significant bearish correction in the market. The indicator is based on UTXO values.
Percentage of BTC supply at a loss: This currently represents the absolute amount of Bitcoin in a given network at a loss (i.e., when they were last moved, their value was higher than the current BTC price). This metric helps to highlight the bottom of the market by suggesting when investors may be ready to re-enter the market. The percentage of loss BTC supply does not account for the amount of loss. This metric is also based on UTXO values.
Analyze BTC supply at profit / loss using technical trend line
As a basis for this approach, I have taken net percentage of BTC supply in profit / loss metrics. I applied an additional setting in the form of a 21-day simple moving average to avoid the sawy effect of the display and to analyze more conveniently. Anyone can create identical data settings on a blockchain data provider’s account, such as Glassnode, CryptoQuant, etc.
After configuring the indicator, the technical analysis method needs to be applied, in particular, the trend line. However, I have rarely seen traders start using trend lines in on-chain data. In my opinion, this is a significant oversight, because by doing so we can get very effective signals.
Explain the supply of bitcoin for profit
When profitable supply is consistently between 90% and 99%, it means that BTC starts parabolic growth. When a profitable supply curve breaks its trend line (marked by a light gray circle), it suggests that Bitcoin has completed its global or local growth and will soon decline.
Often, the maximum value of Bitcoin and the moment the supply curve breaks through its support are separated within a few days. There are times when the profitable supply curve rises to a level close to 90% to 99% and does not stay there for long, after which the trend line breaks and the BTC price starts to decline.
You can check out the chart below:
Explain the supply of bitcoin in losses
In the example of non-profit supply, one can see that the significant level of loss is 50%. The supply curve is virtually never too long and there is no bright consolidation period.
The supply-in-loss metric (21-day moving average) allows our surrender zones to state where the BTC buy signal is generated (light gray circle). The method of using the trend line is similar to the example above with profitable supply. This should be mentioned in an example dated July 29, 2021, where the metric value did not reach the required level of about 50%. There, I call the “break” of the profitable and unprofitable supply curve, which signals the purchase due to the surrender of traders.
The application of this method seems to be useful not only for long-term analysis but also for short-term and medium-term analysis.
Evaluation of net percentage of BTC supply in profit / loss
From time to time, in the vastness of the cryptocurrency community, I find this view to be a bearish factor as the percentage of BTC supply in profits exceeding 90%. I understand why some people may have such an opinion, but it is not entirely true.
To know if profitable supply is bullish, we need to compare it with inflow / outflow (netflow) along with BTC exchange reserves. This method is more suitable for medium to long term understanding of Bitcoin price action.
The conditions of the bullish model are as follows:
- Significant outflow of BTC from crypto exchange
- Decrease in BTC reserves;
- Profitable supply above 80% to 90% on average
The chart below shows a few examples (white rectangle area) where all the conditions are met for a bull race.
In all other cases, when there is no significant outflow of BTC, or the flow of different energies, and the growing reserves of BTC on the cryptocurrency exchange are simultaneously increasing the non-profit supply, this indicates a bearish mood. After traders, trader capitulation often occurs (indicated by a light yellow circle at the bottom), showing a local or global bottom reaching.
In conclusion, I would like to say that so far, many professional traders and newcomers in the world of cryptocurrency have been ignoring the value of blockchain (on-chain) data. On-chain data (primarily related to supply metrics) seems to demand more attention and in-depth study, as this data has performed well in the current bull assembly. I think these metrics will continue to show themselves as valuable in this way.
This is a guest post by Twelve Virtual. The opinions expressed are not entirely their own and do not necessarily reflect those of BTC Inc. Bitcoin Magazine.