Wen Bitcoin bottom? Using on-chain analysis to find out

Wen Bitcoin bottom? Using on-chain analysis to find out

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This bear market has been tiring and nerve-wrecking for many crypto investors and users.

Good news: markets have a cyclic character, and after a recession always comes a period of growth… although its timing is often a mystery.

Another good news: there are ways to try and pierce this mystery with on-chain, markets, macro and technical analysis.

In this Newsletter we’ll give you the main notions of the on-chain Bitcoin analysis, based on the blockchain data available to everyone.

We will explain how Bitcoin’s halving, its miners’ and its long-term holders’ behaviour is influencing its price, giving you some tools to try and answer the question that has been haunting the whole crypto industry for quite some time:

“Has the crypto market bottomed?”

*this is not a financial advice, but a mere introduction to the science (art?) of crypto price analysis.

Bitcoin’s 4-year cycle

Historical analogies must be taken very carefully in the context of market cycles: a trend that has repeated itself a couple of times in the past will not necessarily repeat itself in the future, or not necessarily within the same time frame.

➗ Unless, of course, it has a true economic meaning to it – like the Bitcoin halving.

Bitcoin protocol has an in-built mechanism that decreases its issuance over time, ensuring that there will never be more than 21 million $BTC in circulation. This mechanism is called the halving, and it divides in half the reward that miners receive for adding new blocks to the blockchain (learn more about Bitcoin mining here).

Halving makes bitcoin scarcer, hence more valuable.

Happening approximately every 4 years, the halving has always been a landmark event for the Bitcoin price. Its anticipation causes optimism and price increase, which transform into a true rally after the halving takes place. Quite naturally, each rally reaches an “overbought” point, where the price does not correspond to the real market sentiment, and it rolls back, starting the recession. And there it stays until the next halving anticipation.

Here’s a very high-level graph by that sums up nicely Bitcoin price action viewed through the lens of halving (price is shown on log scale).

Bitcoin has historically bottomed 477 days prior, and topped 480 days after the halving. The next one is expected to happen around March 22, 2024, which suggests that we might see the bottom on November 30 – in just two days, and the price peak – some time in July 2025.

This is not precise of course, and it is not impossible for the price to dip in December or January. However, the general trend is to be taken into consideration.

Bitcoin miners’ behaviour

⛏️ Miners are among the biggest BTC holders and at the same time – natural BTC sellers, obliged to liquidate some of the newly mined bitcoin to pay their operational costs, of which electricity is a big part.

Depending on the state of their affairs, miners can create a varying selling pressure and influence the price, and it happens that miners’ affairs are not great at the moment.

Bitcoin difficulty (the difficulty of the task needed to produce a Proof-of-Work and add a block) is near its all-time high, while $BTC price has lost 76% since its all-time high last November.

As the electricity bill for an average mining company is becoming greater than its revenue, it might consider either dipping into its reserves, or switching off the machines. Since all miners believe in Bitcoin’s potential (and some have signed power purchase agreements and hosting contracts, which require them to consume energy), the first choice of most miners was to endure.

Some of them have even doubled down on their effort, trying to get rid of more vulnerable competitors, which would explain the 68% difficulty increase since last year (the bigger the network’s hashrate, or the collective computational capacity, the higher the difficulty).

However, there’s an economic limit to such obstinacy.

Top 9 miners have declared a 18% decrease in their BTC reserves in Q3, followed by a sharp decrease amid FTX-induced panic earlier this month. Some of them, like the Australian Iris Energy, have already started to unplug the rigs, as they did not produce enough cashflow to cover their debt obligations.

This event on a massive scale is known as miners capitulation, and it has always been a sign of a market bottom.

One of the clear markers of miner capitulation is the decrease in the network’s hashrate, followed by the decrease in mining difficulty. Crypto market observers have expected it on November 20th, but this did not happen. The last week, however, witnessed a drastic fall in hashrate, which may mark the beginnig of a capitulation.

With decreased difficulty, miners will be able to sell less BTC to stay afloat, thus decreasing the selling pressure and allowing the coin to begin a new market cycle.

Bitcoin holders behaviour

Markets are made by the sellers and the buyers, and it is the continued determination of the latter that keeps the price afloat or rising.

? Bitcoin is 13 years old, and its long-term holders have evolved from a small group of die-hard zealots to an ever-larger community of people who see its real potential and who are not scared by yet another “Bitcoin is dead” headline in mainstream media.

The strategy of investors who accumulate bitcoin over the long-term (and sometimes even at a loss) is paid generously during bull runs, where they can sell their coins to market newcomers at much higher prices. This process is clearly seen on data aggregates, like those provided by an on-chain analytics firm Glassnode:

The current situation, where long-term holders are doubling down on their investment despite being at a loss, is one of the signs that the buying pressure is now being created by some of the most astute market players.

What’s more, some smart newcomers enter the Bitcoin game too: the number of addresses holding 1 BTC or more has reached an all-time high of over 952k, suggesting an increasing adoption and preparing the basis for a rebound.

As any study aiming at forecastin, the on-chain analysis is to be taken with a grain of salt, mostly because it does not take into account all the other factors affecting the price. Macro events (such as interest rates change), financial factors (technical trading indicators and financial markets), as well as “black swans” (like the FTX crash), also have their impact on the price… but this will be the topic of some other Newsletter ?

 Please let us know if you would like to learn more on those !