A pullback in the price of Bitcoin (BTC) is likely, based on several on-chain data points, namely the Spent Output Profit Ratio (SOPR) indicator, stablecoin inflows, stacked sell orders at $19,000, and the Crypto and Fear Index. However, the question remains when that correction would occur.
Profit-taking pullback possible with lower buy pressure
The SOPR indicator essentially gauges how profitable Bitcoin holders are at the moment. When the SOPR is high, BTC is at risk of a profit-taking pullback since traders tend to sell when they are in profit.
Meanwhile, stablecoin inflows show how many stablecoins, such as USDT Tether, are flowing into exchanges. When stablecoin inflows increase, this typically means buyer demand is rising. On the other hand, selling pressure tends to rise when BTC reserves outpace the inflow of stablecoins.
In the past several days, the SOPR indicator has reached a level that previously led the price of Bitcoin to correct such as in late 2018 and summer 2019.
On Nov. 20, Rafael Schultz-Kraft, the chief technical officer at Glassnode, noted:
“Adjusted SOPR (hourly, 7d MA) as high as it hasn't been since July 2019. Correction incoming?”
This trend can become concerning if the momentum of Bitcoin slows. Renato Shirakashi, the creator of the SOPR indicator, said Nobel prize laureate Daniel Kahneman’s work shows investors are comfortable selling when in profit.
Hence, if Bitcoin gets stagnant or consolidates in the near term below the $19,000 resistance, a minor pullback could emerge. Shirakashi wrote:
“People, in general, are much more comfortable selling when they are in profit. In a bull market, when SOPR falls below 1, people would sell at a loss, and thus be reluctant to do so. This pushes the supply down significantly, which in turn puts an upward pressure on the price, which increases.”
The rise in the Exchange Stablecoins Ratio from CryptoQuant coincides with the rising SOPR. The Stablecoins Ratio is the Bitcoin exchange reserves divided by stablecoin reserves. When it increases, it shows that potential selling pressure is rising.
As such, CryptoQuant CEO, Ki Young Ju, expects a short-term, albeit not a big correction, in the short term. He noted:
“BTC potential selling pressure is going upwards, but still low. We'll see some correction in a few days but it won't be big. Long-term bullish.”
$19,000 stands in the way of a new all-time high
Exchange order books also show that the $19,000 level has become an important resistance area. There are significant sell orders across Bitfinex, Bitstamp, Binance, and Coinbase near $19,000, which might prevent the continuation of a rally.
Ok 19000 is kinda stacked @CryptoCobain is gonna have to pull out the big bucks. pic.twitter.com/KnNSzYYRnL
— Byzantine General (@ByzGeneral) November 21, 2020
Another possible factor that could trigger a short-term pullback is the Crypto Fear and Greed index. The index is still at dangerously high levels, which raises the probability of a correction.
The correction might come later
However, over the past several months that exchanges' Bitcoin reserves have been in a continuous downtrend as Cointelegraph reported. This could offset a major market-wide correction, particularly if the BTC bull run accelerates triggering FOMO, which means a large influx of new buyers.
Year-to-date, Glassnode found that the balance of Bitcoin on exchanges declined by 18%. The continuous drop in exchange reserves reduces the probability of deep pullbacks, which analysts, like Ki, have consistently emphasized in November.
Moreover, there are other factors that could delay the correction until after Bitcoin breaks $19,000 or potentially even $20,000.
CoinMetrics network data analyst Lucas Nuzzi found that the MVRV ratio, which tracks the realized cap of Bitcoin, is not near the level that marked previous tops.
The term realized cap refers to the Bitcoin market cap at the time investors bought BTC. If the realized cap is high, it means many investors bought BTC at a higher price.
Hence, there is a strong argument for a delayed pullback, potentially after the ongoing rally gets overextended. On Nov. 20, Cole Garner, an on-chain analyst, wrote:
“Bitcoin exchange liquidity is melting down. Institutions aren't prepared for scarcity like this.”