Hello All!
Not much has been happening with Bitcoin’s price action since the FTX incident. There have been many claims that Bitcoin will catapult in the up or down direction. What’s more likely is that price continues to stagnate and make only marginal increases or decreases. During bear markets, the crypto space goes through capitulation phases and sideways price action. This is not only healthy, but often offers good buying opportunities.
Today BlockFi, a company that pays interest for people that hold crypto on their platform filed for chapter 11 bankruptcy. This brings awareness that now more than ever it is important to keep your investments safe and stay ahead in the market. While the crypto space is new, new companies will continue to develop, rise, and fall. Some will make it, some will not. There is no risk free place in crypto, as exchanges and online platforms are always susceptible to corruption. Bear markets will continue to bring these instances to light. So far this event has not seemed to affect the price of Bitcoin.
What causes capitulation and why are these times necessary for all markets? I will bring some data to explain:
Most of you have likely seen a diagram like this or something similar, and it remains relevant to Bitcoin. Sometimes, you can judge where we are in a cycle, or tell if it’s a good time to buy purely based on market sentiment and this chart.
This point in the cycle reflects both capitulation and anger most, as many lose tremendous amounts of money and either sell off their assets at a loss or hold and endure more paper losses. It is important during these times to remember, if you wait long enough, price will go back up.
When market sentiment rose in 2021, euphoria was in hyperdrive. Greed blinds people into thinking that anyone who sells is both wrong, and stupid. Eventually, many smart investors start to take profit and cause price to drop. Bitcoin makes an attempt to reclaim it’s previous high and fails, then causes a downwards spiral into capitulation. Bitcoin must then determine its new bottom point, as many people who speculated leave in heavy losses. As this continues, smart investors come back into the space and buy the coins back. This is the phase I believe we are beginning and can be supported by looking at the NUPL or Net Unrealized Profit/Loss:
According to this metric, right now on average people that are holding Bitcoin are down by 23%. These times are few and far in between and typically represent market cycle bottoms. They must be present in order for smart investors to come back in and charge up price in preparation for the next cycle. These phases take time, as even the smart investors want to watch price action develop before diving back in. This is what causes extended periods of “not much happening”.
The 1 year HODL wave is an excellent way to show this as it can tell us the amount of Bitcoin that has not moved in a year or more.
As Bitcoin capitulates, the HODL wave stagnates around an all time high of coins that have not moved in over a year (shown by the red circles). This means that longer term investors are buying and remaining confident that it is a good idea to hold the coin. When price gets overextended long term investors being to sell off their coins which you can see by looking at the dips in the HODL wave that correspond with market tops.
Lastly, it is also useful to look at what Bitcoin miners are doing with their coins, because it can help to determine market sentiment.
The Bitcoin miner hash ribbons use hash rate data to determine times when miners start to sell their coins to stay afloat. Ordinarily, Bitcoin mining rigs provide a stable source of income during bull markets, however when price dips too low miners have to sell off their Bitcoin to keep their farms running. This is balanced by drastically increased profits when Bitcoin is in stages of Euphoria. Bitcoin was designed this way so that the most efficient miners survive, and those that are not are shut down. This is also why the Bitcoin halving exists, to reduce the amount of reward miners receive, and cause those miners that cannot keep up to shut down their farms. This makes Bitcoin much more efficient.
While this is not a good time for miners, it is a good time for investors. Smart investors use these times to purchase coins at a great discount. This metric used to be an excellent bottom signal but had a recent failure in August of 2021 with a buy signal just under the all time high. While this indicator has been very reliable in the past, it shows why you must take information from many sources before making your decision.
IN CONCLUSION
When Bitcoin price action is boring, is often the time to get most excited about investing. Capitulation continues to be a healthy market dynamic and makes for a good time to buy in most cases.
If you are holding your coins in loss, the best idea is to wait until price returns to a greed phase. Just as capitulation is necessary for a healthy market, so is times of Euphoria, which allows smart investors to exit their positions in profit.
Be careful where you store your coins, and keep up to date with news surrounding different platforms, or you could be the next victim of a crypto catastrophe.
I am working on re-releasing my premium newsletter where I’ll make shorter term analysis as well as additional data charts, and more. I will post on twitter when it is available.
Thanks for Reading and HODL on!
CryptoCon