Bitcoin Price Cycle Analysis. Who Can Profit From It?
Bitcoin has managed to attract a wide investor’s variety - from private funds to venture capital funds, from holders to miners and traders. Cryptocurrencies in particular have gained a lot of attention because of the late dramatic price rise.
With the sharp rise came upsetting price correction. This market has been showing its cycliсal nature over the years. Today we will try to understand the change patterns and principles of these cycles.
Based on some on-chain metrics, we will break down various patterns of market players' behavior and give you the opportunity to plan your investments so that you will always be a winner.
During the price drop (Bear Market), people lose interest in cryptocurrency. By the cycle's end, there are only holders, enthusiasts and bitcoin-maximalists who are left in the market. They strive to maximize their crypto assets.
The chart below shows the long-term holders’ asset accumulation and price change during the least fortunate times.
During the price rise (Bull Market), holders sell their coins at a higher price so they could buy more coins at a lower price. Meanwhile, short-term traders are taking advantage of the price rise to buy cryptocurrency at a lower price and sell it at a higher price in a short period.
Holders' goal is to accumulate as much crypto assets as possible and profit from it at the bull cycle end. Thus, their crypto asset amount multiplies during bear markets as BTC accumulates and goes to cold storages.
We can see this in the HODL wave metric, where the older bands (the cooler shades of blue) get thicker thus indicating that coins are in strong hands. The thicker these cool bands get, the more coins are in long-term holders’ possession.
Conversely, as older coins are spent, they flow into younger coins (warm shades of yellow) with a new HODL wave getting thicker. Note that coins older than five or six months are generally considered HODL coins.
The age range indicates the coin distribution on a particular day. The table below has been filtered to show coins older than one year, which means holders’ coins. We can see that older coins are sold mostly during high market volatility, in particular:
● During bull markets as old coins are distributed by market strength
● During bear markets upon capitulation and bear market rallies
The more cryptocurrency holders there are, the less old coins are being sold -- CDD tends to be low. In the latest bull market stages, older coins are sold for profit more often, leading to a sharp CDD increase. Applying a long-term moving average (e.g., 90DMA) may help ease the “noise” and reveal these macro shifts, as well as even bring market tops and bottoms forward.
As holders sell coins to new hands, the young coin supply will increase in volume. Realized Cap HODL Waves are the perfect tool to track this wealth transfer by increasing the young coin supply. The chart below shows that the new coin band level (warm colors) rose on three different occasions during the late stages of the 2013 and 2017 bull markets. These peaks coincided with major rallies and corrections.
In the current bull market, we’ve witnessed the first serious young coin supply surge. What’s interesting is that the warmest colors (the youngest coins) have not yet reached such a high cycle level. This probably makes for two phenomena:
● Coin holders being confident (including new institutional buyers) that Bitcoin is going through maturation therefore proving its worth.
● Wider access to speculation through derivatives, resulting in young coins having a less prominent footprint in the on-chain.
With this value transfer in mind, we can observe the old coin supply share (1-2 years, blue color) and compare it to the young coin supply (1 week to 1 month, orange color).
At the bear market end (green areas): the supply of 1-2 year old coins is at its maximum, while 1 week to 1 month young coin supply share is at its minimum. This is the holders’ asset accumulation mentioned above.
At the bull markets end (red areas): the 1 week to 1 month old coin supply is relatively high (as more new speculators come in), while the matured coin supply has been reduced due to selling.
With this observation, we can mark a Realized HODL ratio (RHODL) that shows the ratio of coins (several years old) to young coins (1 week old) as RHODL waves and creates a cycle oscillator that tracks the market swings.
This indicator describes the value transfer events cyclical nature.
At the bull market top, old holders sell coins to new holders, thus increasing the liquidity supply (maximum number of new holders, high RHODL).
At the bear market bottom, more experienced players buy most of the coins from newcomers, thus reducing the liquidity supply (maximum strong hands, low RHODL).
It would be a mistake to say that there are only holders and quick profit traders in the market. There are also crypto investors who do not just invest in cryptocurrency, but consider crypto as a separate asset. They have a significant role in the market. In our opinion - the most profitable one.
We placed crypto-holders at the end of the article for a purpose. In fact, they combine the best holders and traders’ traits while holding crypto and constantly profiting from it.
That is to say, crypto investors invest their crypto in income generating assets. This hybrid method is the most efficient, and here's why.
Crypto investors profit regardless of the market cycle. It doesn’t matter if it's a bear market or a bull market. During price rise, they increase their assets and make additional profits. During a price drop, in turn, the asset value is compensated by profit. Sometimes it even exceeds it.
Crypto investors of this kind are rarely affected by analytics, as it is difficult to make data cross-section due to the variety of offers. However, all experts recognize this method as the most efficient and profitable.
Of course, while the market nature is cyclical and its behavior can be predicted, the market players’ reaction can be difficult to predict. Therefore, whatever strategy you choose, it is important to stick to the basic principles and rules, keeping your finger on the market pulse.
However, we would like to give our clients some guidance on what to do when the market situation is unstable. We do it with great caution, but sincerely.
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Just as the Bitcoloan CFO said in his market analysis, crypto price will rise in the nearest future, but the correction may not be over yet.
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