Bitcoin has seen a major capitulation from all-time highs and on-chain indicators suggest the worst may be behind us, but significant macro challenges remain.
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On-chain data trends
November was a painful month. Looking at the on-chain profit and loss data, we can see that this was true for many bitcoin forced sellers. Prior to any bitcoin low price, a hallmark you want to see is long periods of forced selling, capitulation, and increasing realized losses. One way to look at this is to look at the sum of realized profits and losses for each month against the total market capitalization of Bitcoin. We saw these background signals in November 2022, and similarly during the Terra/LUNA crash of July 2022, the COVID scare of March 2020, and the cycle capitulation events of December 2018.
Looking to the 2018 cycle, the end was marked by excessive realized losses, although that was very different with the forced liquidations and cascades of private balance sheet leverage and paper bitcoin unwinding that we have seen. seen this year.
We’ve talked about the current bitcoin price decline and how it compares to previous cycles several times over the past few months. Another way to look at cyclical declines is to focus on Bitcoin’s realized market capitalization – the network’s average cost base that tracks the last price where each UTXO last moved. Since the price is more volatile, the realized price is a more stable view of bitcoin growth and capital inflows. The realized market capitalization is now down 17.33%, which is significantly higher than the 2015 and 2018 cycles of 14.13% and 16.51%, respectively.
As for the duration, we are 176 days in total after the price is lower than the realized price of bitcoin. These are not consecutive days as the price may temporarily rise above the realized price, but price trends are below the realized price during bear market periods. For context, trends in 2018 were short-lived at around 134 days and trends in 2014-15 lasted 384 days.
On the one hand, bitcoin’s realized market capitalization took a big hit in the previous capitulation cycle. This is a promising bottom sign. On the other hand, there is reason to believe that the price below the realized price could easily last another six months from historical cycles and the lack of capitulation in the stock markets remains a headwind and a major concern.
According to the net-unrealized-profit/loss ratio (NUPL), we are firmly in the capitulation phase. The NUPL can be calculated by subtracting the realized capitalization from the market capitalization and dividing the result by the market capitalization, as described in this article written by By Tuur Demeester, Tamás Blummer and Michiel Lescrauwaet.
It is undeniable: for bitcoin native cycles, we are firmly in the capitulation phase. Currently, only 56% of the circulating supply was last moved on-chain profitably. On a two-week moving average basis, less than 50% of supply last moved above the current exchange rate, which only happened at the depths of previous market lows bearish.
When thinking about the bitcoin exchange rate, the numerator side of the equation is historically cheap. The Bitcoin network continues to produce a block approximately every 10 minutes relentlessly as the hash rate increases and the ledger provides an immutable settlement layer for global value. Speculation, leverage, and fraud from the previous cycle are collapsing, and bitcoin continues to trade hands.
Bitcoin is objectively cheap relative to its historical history and adoption phases. The real question about the immediate future is the denominator. We have talked at length about the global liquidity cycle and its current trajectory. Although historically cheap, bitcoin is not immune to sudden dollar strengthening because nothing really is. Exchange rates are relative and if the dollar tightens, everything else will fall thereafter, at least momentarily. As always, position size and time preference are key for everyone.
As for the catalyst for a rise in the dollar denominator of the bitcoin exchange rate (BTC/USD), there are 80 trillion possible catalysts…
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