Bottom in? “All” on-chain metrics at all-time lows

18 Oct 2022

Bottom in? “All” on-chain metrics at all-time lows

It’s been 342 days since BTC reached its all-time high, with BTC having seen a drawdown of 70% from its peak, with a max drawdown of 74% amid the contagion collapse and most on-chain market indicators signal that the bottom is already in.

Source: Tradingview (Bitstamp)

It’s been 342 days since BTC reached its all-time high, with BTC having seen a drawdown of 70% from its peak, with a max drawdown of 74% amid the contagion collapse. While history is unlikely to repeat, the two previous major bear markets in BTC might provide some insights regarding the longevity of the current bear market. During the 2018 bear market, BTC saw a max drawdown from peak to trough of 84%, lasting 364 days, while the 2014 cycle lasted longer, bottoming after 407 days. Both bottoms were followed by unusually low volatility. Almost all on-chain indicators are at levels coinciding with levels only seen during the bottoms of the previous bear markets, and it’s far from given that BTC will experience new lows, despite a burdensome macro backdrop. Through both previous prolonged bear markets, we notice visibly flat markets for months after bottoming, analogous to how BTC has behaved since June. BTC has now traded in a tight range for 120 days since the June bottom. The 2018 low volatility bottoming range lasted for 130 days, while the 2014 low volatility range saw 280 days of very low volatility.

Most on-chain market indicators signal that the bottom is already in

While we hold a skeptical view towards basing investment decisions on on-chain data, as elaborated more thoroughly in this piece, we note that more or less all on-chain market indicators sit at, or near, all-time lows, and we’re not cherry-picking charts.

Puell Multiple

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Source: Glassnode

The Puell Multiple reached lows not seen since December 16th, 2018, on July 13th. This metric is calculated by dividing the daily issuance value of BTC by the 365-day moving average of daily issuance value. All previous occurrences of Puell Multiple values in the current ranges have occurred during bear market bottoms.

Realized HODL ratio

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Source: Glassnode

The Realized HODL ratio looks at BTC hodling patterns measured by coin age and economic weight. A low reading occurs when the value of the coins moved within the last week aligns with the value of coins moved within the last 1-2 years. Currently, the RHODL ratio sits at levels coinciding with those of the bear market bottom of 2019.

Reserve risk

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Source: Glassnode

The reserve risk examines long-term holder patterns. A low reading of the reserve risk metric indicates that coinage is increasing (holders are hodling) despite falling prices. As prices fall, incentives to sell from long-term holders decline. The reserve risk metric is currently at an all-time low, indicating that the demand by long-term holders to sell is currently low. Anyhow, a key weakness with this metric is related to the financialization of BTC. Flows and supply dynamics in structured BTC products, cash, stablecoin-collateralized derivatives, and ETFs obfuscate the quality of data interpretation from on-chain metrics looking at coin age.

Market Value to Realized Value

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Source: Glassnode

The market value to realized value (MVRV) metric shows the ratio between BTC’s market cap and the realized market cap. The realized market cap of BTC is found by calculating the value of each UTXO based on the price at which it was last moved. Currently, MVRV is below 1, meaning that the realized cap is higher than BTC’s market cap. Previous MVRV readings of below 1 have coincided with bear market bottoms in the last two bear markets.

MVRV-Z Score

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Source: Glassnode

The MVRV Z-Score is used to assess when bitcoin is undervalued relative to its “fair value”. When market value is significantly lower than realized value, it has historically indicated market bottoms. The MVRV-Z ratio sits in a range coinciding with the bottoming terrain from 2015 and 2019. Most other on-chain metrics are also at or near all-time lows, in levels coinciding with previous bear market bottoms, despite BTC having seen a less intensive drawdown of 74% compared to the 84% and 85% drawdowns from previous bear markets.

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Source: Tradingview (Bitstamp)

Wrapping it up

On-chain metrics are exposed to weaknesses related to the changing market structure in bitcoin trading and purely neglect external forces impacting investor confidence, such as the continuously pressuring macro conditions. Still, the fact that all metrics sit close to bottom levels indicates that from a pure BTC-centric valuation framework, current prices reflect a very attractive entry point for investors positioning for a new wave of BTC strength down the line.