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Chain Data Trends
November was a painful month. If we look at the profit and loss data realized on the chain, we can see that this is true for many forced bitcoin sellers. Before any bitcoin price bottom, the telltale sign you want to see is a long period of forced selling, surrenders, and increases in realized losses. One way to look at this is to look at the sum of realized gains and losses for each month relative to the total market value of bitcoin. We saw these sub-signals in November 2022 and similarly in the Terra/LUNA crash in July 2022, the COVID scare in March 2020, and the bottom delivery events in December 2018.
Looking back at the 2018 cycle, the last one was marked by overrealized losses, although this was very different from the forced liquidations and personal balance leverage and paper bitcoin unbundling cascades we saw this year.
We’ve talked about the current decline in bitcoin’s price and how it compares to previous periods many times over the past few months. Another way to look at cyclical declines is to focus on bitcoin’s realized market capitalization—the average cost of the network that tracks the most recent price each UTXO moved to. With the price being more volatile, the realized price is a more stable view of bitcoin growth and capital flow. The realized market capitalization is now down 17.33%, which is higher than the 2015 and 2018 periods of 14.13% and 16.51% respectively.
As for the duration, we are only 176 days away from the price below the realized price of bitcoin. These are not consecutive days, as the price may temporarily rise above the realized price, but during bear market periods the price trends below the realized price. For context, the trends in 2018 were short for about 134 days, while the trends in 2014-15 lasted 384 days.
On the one hand, bitcoin’s realized market capitalization took a significant hit from the previous capitulation round. This is a promising bottom sign. On the other hand, the fact that price underrealization could easily last six more months than historical periods and the lack of capitulation in equity markets is still a major headwind and concern.
Based on the net-unrealized profit/loss (NUPL) ratio, we are definitely in capitulation. As described in this article authored by NUPL, Tuur Demeester, Tamás Blummer and Michiel Lescrauwaet, realized capital can be calculated by subtracting market capitalization and dividing the result by market capitalization.
There’s no denying it: for bitcoin-native times, we’re definitely in capitulation. Only 56% of the current circulating supply was last moved on-chain at a profit. Based on the two-week moving average, the bid below 50% was the last time it rose above the current rate, something that only happened at the lows of the previous bear market.
When considering the bitcoin exchange rate, the distribution side of the equation is historically cheap. The Bitcoin network continues to produce blocks approximately every 10 minutes as the hash rate gets higher and the ledger offers an immutable settlement layer for global value. The speculation, leverage and scams of the previous era are being washed ashore, and bitcoin continues to play hand-in-hand.
Bitcoin is objectively cheap relative to its all-time history and stages of adoption. The real question about the near future is the denominator. We talked at length about the global liquidity cycle and its current path. Despite being historically cheap, bitcoin is not immune to a sudden strengthening of the dollar, because nothing really is. Exchange rates are relative, and if the dollar tightens further, then everything will fall later – at least temporarily. As always, position size and timing advantages are key for all.
As for the catalyst for Bitcoin (BTC/USD) moving higher in the dollar denominator, there are 80 trillion possible catalysts…