In recent years, Bitcoin’s market behavior has intrigued investors and analysts alike. From its highly volatile nature to its unique market cycles, Bitcoin stands apart from traditional financial assets. A recent conversation from the “What Bitcoin Did” podcast featuring Checkmate, an on-chain analyst, sheds light on these characteristics and provides a detailed analysis of Bitcoin’s market movements. This blog post delves into the key insights from the podcast, offering a comprehensive understanding of Bitcoin’s market dynamics.
Volatility: A Double-Edged Sword
Volatility in Bitcoin is often misunderstood. Contrary to the belief that high volatility deters adoption, historical data shows that Bitcoin’s volatility increases during periods of significant adoption and price surges. Checkmate explains that unlike the equity markets, which experience unnatural, smooth ascents followed by sharp sell-offs, Bitcoin undergoes high volatility during bull markets and subsequent corrections.
“Volatility is good. Bitcoin trades like a commodity, and volatility goes up in a bull market,” Checkmate notes. This volatility, he argues, is an inherent part of Bitcoin’s market structure, reflecting its nature as a decentralized, nascent asset class. The fee charts during bull markets, which erupt alongside high volatility, further substantiate this point.
The Role of On-Chain Data
On-chain data provides invaluable insights into Bitcoin’s market behavior. It captures the actions of investors on the network, offering a real-time glimpse into market sentiment and movements. “What did the Bitcoiners actually do on the network? We are the thing that drives it up, down, left, right, sideways,” Checkmate states, emphasizing the importance of understanding investor behavior.
Bitcoin’s market can be characterized by a grid, illustrating its unique profile. The euphoric phase of a bull market sees extreme volatility as prices surge past all-time highs. This is followed by equally volatile corrections, marking the transition from bull to bear markets.
Macro View: Quiet and Trending Market
Despite the inherent volatility, Bitcoin’s market can also exhibit stable, trending patterns. Recent trends have shown a stair-stepping behavior where Bitcoin rallies, goes sideways, and rallies again. “On the macro scale, we’ve gone up and sideways, up and sideways, and that’s it,” Checkmate explains. This pattern indicates a quiet, trending market where price corrections are relatively mild compared to previous cycles.
When comparing the price range between the high and low over the last 90-days, one can see just how quiet the Bitcoin market has become. The orange bars in the chart below highlight previous periods where volatility was similarly quiet. Based on prior cycles, higher volatility is likely to still come.
Even with occasional selloffs, the market remains within a stable range, suggesting a strong underlying support structure. This stability, however, can be easily overlooked by those focusing too closely on short-term charts.
Is This the Top?
Predicting market tops is inherently uncertain. Checkmate emphasizes that no one can definitively predict the future, but understanding market mechanics can offer clues. Indicators may signal potential tops, but the market’s behavior often defies expectations. “Markets have like this fuel tank… you can’t go up for 18 months and not have like a four, five, six-month sideways chop,” he explains, highlighting the need for corrections to sustain long-term growth.
A key unknown variable when analyzing bull market tops is demand. No one knows the ultimate amount of demand and when that demand will change. What can be measured is the sell-side pressure coming from current Bitcoin holders. The VDD Multiple measures when long-term holders are selling their coins to “take chips off the table.” Based on current measurements of VDD, the $73k level was a meaningful top…but that doesn’t mean it’s “THE TOP.”
Looking at the distribution dynamics of HODLers over multi-week periods helps one understand the amount of sell-side pressure in the market. Consistent sell pressure is what creates local and global market peaks.
An important market condition to pay attention to is how many short-term holders are in a loss position. Bear market tend to occur after too many recent buyers buy too many coins at too high a price. Right now, approx. 75% of short-term holder supply is in a loss, which proposes that caution is advised right now.
But how big are the losses right now? The chart below shows the percent of the Bitcoin market cap help in an unrealized loss. Right now, the number is very small compared to prior periods. This suggests that we are not near or at “THE TOP,” and that we should remain optimistic about further upside in the current bull market after a period of sideways consolidation.
Impact of ETFs
The introduction of Bitcoin ETFs has raised concerns about potential market manipulation and centralization. However, Checkmate argues that ETFs have had a limited impact compared to traditional Bitcoin trading. “ETFs are essentially a big pool of coins where people deposit and then trade around inside,” he explains, likening them to previous market phenomena like exchanges and the GBTC trust.
While ETFs contribute to market liquidity and accessibility, their overall influence remains relatively small. The core of Bitcoin’s market dynamics is still driven by long-term holders and traditional spot exchanges. In the chart below, the orange and blue areas show the 30-day capital inflows, and Long-Term Holder sell-side occurring onchain. The ETF inflows (green) and outflows (red) are a meaningful (20% to 30%), but not the dominant factor. The classic Bitcoin spot market remains 4-5x larger than the ETFs, which puts that myth to bed (for now).
Psychological Aspects of Market Cycles
Bitcoin’s market cycles are not just about price movements but also investor psychology. Metrics like MVRV (Market Value to Realized Value) provide insights into the emotional state of the market. It describes the unrealized profit/loss held within the coin supply. High MVRV values indicate that investors are in profit, leading to higher volatility as portfolios fluctuate.
“People have seen their portfolio up 200%, down to 100%, up 250%, down 75%,” Checkmate notes, highlighting the emotional rollercoaster that investors experience. This psychological volatility can only be sustained for so long before the market needs to cool off.
Conclusion: Patience and Perspective
Understanding Bitcoin’s market dynamics requires patience and a long-term perspective. The market’s behavior often defies short-term predictions, and success in Bitcoin investing lies in recognizing broader trends and staying resilient during corrections.
“Markets are a game to learn patience,” Checkmate concludes. By observing on-chain data, understanding investor behavior, and maintaining a long-term view, investors can navigate Bitcoin’s volatile yet promising market landscape.
Slides Source: https://newsletter.checkonchain.com/p/wbd-june-2024
