This week, the Bitcoin market was affected by a massive deleveraging event, falling below its all-time high of $20,000 in 2017. As exchanges, lenders and hedge funds go bankrupt, illiquid or liquidate, both on-chain DeFi markets and off-chain entities are deleveraging.
On June 18, Bitcoin fell below its 2017 all-time high of $20,000 on June 18, reaching an eye-catching low of $17,708. But bitcoin prices recovered to the $20,000 level on Sunday.
With bitcoin and digital assets the only tradable instruments over the weekend, macro concerns and the need for US dollar liquidity appear to have been ruled out. As a result of this extreme deleveraging event, we have started to see capitulation signals from some entities, including miners, long-term holders and the market in general
In this installment, we’ll explore these different areas to assess whether the most pain point has been reached.
With the market trading below its all-time high of $20,000 in 2017, investor faith and market profitability have been put to the test.
The Realized Loss metric measures the total value increment between a token acquired at a higher price and the price when it is subsequently spent on-chain. Realized losses hit an all-time high, with the overall market having realized losses of more than $2.4 billion per day for three consecutive days, for a total of $7.325 billion. The aforementioned earnings pressure seems to come into play when investors realize losses.
The fact that the previous three groups were all in unrealized losses is only consistent with a late bear market capitulation, which is consistent with the aforementioned profitability metrics.
As we said in previous articles, a powerful tool for tracking bear market extensions is the decline in profits across supply and wallet-based metrics. What we’re looking for is the ultimate financial pain threshold for investors that has exhausted sellers in previous cycles.
The most pain-point thresholds in these supplies can be investigated from different dimensions:
- Profitable supply fell to just 49.0% as market trades fell to $17,600, leaving more than half of supply into unrealized losses. The historical bear market low is between 40% and 45% of the profitable supply.
- Profitable addresses evaluate profitability across wallets and return similar results to the profitable supply. The metric is now only 10% above its lowest level during the 2018-2019 bear market and COVID crash, indicating slightly less pain now than at those two bottoms.
- Profitable UTXOs (Unspent Transaction Outputs: Unspent Transaction Outputs) allow us to measure market profitability based on all unspent outputs. The indicator shows that 26.7% of all unspent transaction outputs (UTXOs) are in the red. Historically, at the bottom of a bear market, 50.2% – 81.1% of all UTXOs are in the red.
- The profitable LTH supply monitors the profitability of long-term holders as a measure of the severity of stress among Bitcoin’s strongest investors. Currently, 35% of the LTH supply is in the red. This means that this group still suffers less than in past bear markets, where 42% to 51% of LTH’s supply was in the red.
There is an expected natural drift in the bottom line of these metrics over time as tokens are lost and deeply held. As such, it can be argued that the weekend sell-off has plunged earnings and investors into historic, meaningful levels of financial pain.
Miner surrender that happens in real time
There are good reasons to think that Bitcoin is a digital commodity, and like many commodities, it is often tied to its production costs. By running a log-log regression model between difficulty and market cap, we can estimate the full sustaining cost of mining BTC.
The production cost model predicts that BTC should currently trade at $17,600, which, interestingly, was the lowest price last weekend.
We found in our previous survey that miner revenue is under pressure due to falling revenue and rising production costs. Now the miner behavior confirms that the miner capitulation phase has begun. The first piece of evidence is the hash ribbons, which are now inverted as hash power is down 10% from its all-time high, implying an imminent miner downtime.
We can further verify that miner pressure is at work using two tools:
- The Puell Multiple , an oscillator that tracks miners’ dollar-denominated revenue, currently shows total revenue 61% below its annual average. Judging by the drop in miner revenue, we can assume that miner pressure likely played a role.
- Then, the ( normalized) Difficulty Ribbon Compression provides an explicit model of miner pressure, and like hash bands, it monitors whether miners are really going to shut down. Given the recent upward trend in difficulty we have seen, we can also be sure that the production cost of BTC has increased.
Based on these two models, continued miner revenue reduction is worse than during the May-July 2021 Great Migration. However, miners had already had a tough time in the 2018-2019 and 2014-2015 bear markets, when the Puell Multiple hit 0.31 (69% drop in revenue compared to the annual average).
To assess the probability of miner capitulation, we can combine these two metrics to find a suitable value between Puell Multiple < 0.6 and Difficulty Compression Band < 0.06 as a miner capitulation tool (shown in the yellow area in the figure below).
To further support this argument, we can also estimate the miner’s realized price (excluding Patoshi tokens) as a measure of the cost basis of their mining balance, which currently stands at $26,170.
Interestingly, in multiple cases, the highlighted capitulation areas overlapped with time periods when the market price was below the estimated miner’s realized price. This overlapping structure was noticed for the first time since the COVID crash during the recent market crash to $17,600.
As miners face enormous financial pressure, their outflows have reached a rate of 5k to 8k BTC per month, comparable to the bear market capitulation event of 2018-2019. Notably, after BTC failed to maintain its consistently consolidated low ($28,000), miners stopped spending and real balances grew at a rate of 22,000 BTC per month.
Long-term coin holders : about to capitulate
The dominoes that are about to fall in the current bear market are entering a new phase. Besides miners, long-term holders are now starting to feel the pinch, which is forcing many of them to sell more quickly. Last week, the supply of long-term holders decreased by 178,000 BTC, equivalent to 1.31% of their total holdings.
The supply recovery over the past year or so confirms that old coins are being spent, accelerating to a rate of 20,000 to 36,000 BTC per day. This reflects the fear and panic emerging even among Bitcoin’s strong cohort.
We can use LTH-MVRV (the ratio between market price and LTH realized price) to map the incentive financial stress for long-term holders. The recent market plunge to $17,600 pushed the metric to 0.85, implying that LTH is holding an average of 15% unrealized losses. This is lower than the LTH-MVRV during the COVID slump and just above the bottom of the 2018-2019 bear market capitulation.
As a long-term currency holder, the unrealized loss will be magnified, and the strength of this sell-in loss can be monitored by LTH-SOPR. This metric compares the market price to the cost basis of paying tokens in LTH per day.
LTH has capitulated in the past when the indicator traded below 1, suggesting that LTH is losing money after long holdings. At bear market lows, the indicator had previously fallen into the 0.4 to 0.6 range, indicating losses of 40% to 60%.
As such, LTH’s current loss-spending behavior coincides with March 2020, but not as severe as the 2015 or 2018 bear market lows.
We can also track the net token distribution of LTH over 30 days to assess relative seller activity. Here, we normalize value by total LTH supply to get a comparative overview of how these investors have behaved in past bear markets.
LTH investors spent just over 1% of its supply per month during the most recent sharp drop, a rate that coincides with the correction following the COVID crash and the December 2021 all-time high. This level is almost 2x the largest outflow from the 2018-2019 bear market.
Note that the LTH max outflow is actually related to a bull market (profit) rather than a bear market (sophisticated investors panic and suffer losses).
Tracing the pain of exchanges
Exchanges are still the primary trading venue for BTC, so characterizing incoming token flows can improve our observations about the market’s reaction to volatility and retracements. The graph below shows only weekly net flows into (red) or out of (green) exchanges that exceed 1% of the total exchange balance.
A look back at recent major events:
- During the 2018-2019 bear market, weekly inflows > 1% of total exchange balances continued for over a month.
- LUNA collapsed, with net inflows reaching over 4% of the total exchange balance.
- This metric for the current market returned a net outflow of -2.8%, similar to the outflow after the COVID crash.
As a result, the net balance burn rate on exchange balances this week was only 2.8%, despite severe downward price action.
Next, we can express the profitability of exchange inflows by the extent of realized profits and losses. Inflows to exchanges over the past month were dominated by realized losses, totaling more than 1.5% of market cap.
However, this is more than the May-July 2021 sell-off, which was about half as severe as the extreme lows in the 2018-2019 bear market and COVID crash.
Summary and Conclusion
Since its all-time high in November 2021, the BTC market is now going through two distinct phases of capitulation. The first phase was triggered by the forced sale of over 80,000 BTC by the Luna Foundation Guard, and the second phase was triggered this week through a massive industry-wide deleveraging both on-chain and off-chain.
Miners are now under enormous financial pressure, with BTC transactions close to estimated production costs, revenue well below the annual average, and hash rates significantly below all-time highs. The overall market has realized losses of more than $7 billion this week, with long-term holders contributing around 178,000 BTC as additional sellers.
As we have discussed in our recent installments, BTC market participants are across the board at or very close to the all-time highs of the financial pain threshold. With forced sellers seemingly driving most of the near-term sellers, the market may start to watch for signs of seller exhaustion in the weeks and months ahead.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/glassnode-fallen-domino-miners-hodlers-exchanges-surrender/
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