Recent events surrounding the rapid spread of COVID-19 to nearly every country on Earth and major markets reaction to the phenomena have crypto investors scratching their heads in bewilderment as the sector has never endured a global financial markets meltdown.
These fears are clearly weighing on investor sentiment and with the May 2020 halving event fast approaching many are wondering if the long-expected bull market, supposedly a byproduct of the Bitcoin halving, will be negatively impacted by the current downturn in traditional markets.
Crypto market monthly price chart. Source: Coin360
Bullish investors relying on traditional technical analysis to assess Bitcoin’s price action will find the asset’s current performance less than satisfactory and the digital asset’s constant struggle to reach $10,000 is leading some to question whether or not the cryptocurrency will meet investors high expectations with the halving event just 64 days away.
Since 2018 crypto traders looking for an edge have become increasingly interested in how the activity within the Bitcoin network can be analyzed to provide insight into its price action on spot and derivatives markets.
Blockchain analytics firm glassnode recently published a thorough analysis examining how on-chain data allows one to categorize market participants into distinct “meaningful actor groups.”
According to glassnode co-founder Rafael Schultze-Kraft:
“Bitcoin’s UTXO–based system allows for analyses of on-chain data based on the ‘age’ of Bitcoins in the network, i.e. the categorization of Bitcoins depending on the last time they moved.”
Schultze-Kraft further explained that taking a closer look at coin age data allows one to categorize market participants into “meaningful actor groups” and:
“This allows us to obtain a refined understanding of on-chain activity that can be associated to investors that are characterized by different hodling behaviors. In particular, our approach is to break up on-chain activity according to two major industry stakeholders.”
To gain a more detailed understanding of how on-chain data can be valuable to investors, Cointelegraph recently met with glassnode co-founders Rafael Schultze-Kraft and Jan Happel to discuss how on-chain metrics can benefit short and long-term Bitcoin holders.
Cointelegraph: In your recent analysis you said that analyzing Bitcoin’s UTXO data allows one “to assess information on investors’ hodling behavior, and to gauge whether coins that have been dormant for a long time are currently being moved.”
You also mention that close analysis of this data supports the categorization of Short Term Holders (STH) and Long Term Holders (LTC) as two investor types based on coin age.
Furthermore, according to the chart below, on-chain data about the coin age allows researchers to estimate the probability of a UTXO being spent within the next 14 days.
Probability that a UTXO is spent within 14 days based on coin age. Source: glassnode
While this is interesting, we are curious to know what is the value of “knowing” whether or not a Bitcoin will be moved within a certain number of days?
Rafael Schultze-Kraft: The value of knowing is that on-chain movement represents economic activity so if we know the probability of coins moving can be placed within a certain window then one can make some inferences into how this may impact on-chain volume and this represents economic activity within the network.
Jan Happel: From our research, we’ve found that generally the crypto market remains heavily driven by retail investors. Everyone is waiting for the institutions but we don’t believe they are in yet. I don’t expect that to happen within the next 24 months either.
CT: It seems that using the 155 day metric of determining the difference between long and short term holders uncovers the percentage of coins either in the total supply or in the current circulating supply that is held by short term holders and long-term holders. Is this correct?
RSK: Yes, once a UTXO is created, the probability that they will move is very high but older coins have a much lower probability of moving. Now, we can look at UTXO’s younger than 155 days and what the volume is of the circulating supply to determine what percentage is held by short term holders and long term holders.
CT: How does the growth of derivatives markets like Bitcoin futures and high leverage trading offered at major crypto exchanges, Bakkt and CME impact the signal captured by any glassnode metrics?
RSK: It has no impact on on-chain data but what can have an impact on derivatives trading and spot trading is prior on-chain data, which is happening on-chain and entering into an exchange.
Meaning, the flow of funds moving into an exchange can provide a signal on what may happen in the derivative and spot markets. They are two different hemispheres from a data point of view so what is happening in the derivatives market is not influencing the raw data, which comprises our metrics. But what is happening on-chain does provide some insight into what might happen in spot and derivatives markets.
I’ll let my colleague and co-founder Jan speak to this with more clarity.
JH: You can think about the exchanges from an on-chain perspective as a black box, we can see what goes into the box, like the order book, transactions, fund transfers.
We can see that there is a big “readiness” to trade because normally people don’t leave their Bitcoin on exchanges so when we see abnormal transaction activity we can infer that something significant is about to happen in the market.
Derivative data may not be as predictive when it comes to tracking trends but it is complementary and provides important signals for those using on-chain data and those who do not.
CT: Popular trading indicators like the Relative Strength Index, Moving Average Convergence Divergence, and moving averages are lagging indicators that do not reflect the status of an asset in real-time. Are the LTH-SOPR, LTH-MVRV, STH-SOPR, and STH-MVRV active or lagging indicators?
RSK: You can see instances where the indicator functions in both ways, so this is a very complex inquiry. Sometimes the LTH-SOPR, LTH-MVRV, STH-SOPR and STH-MVRV precede price action, and sometimes these metrics function as lagging indicators.
MVRV (blue) and LTH-MVRV (orange). Source: glassnode
Each can react based on investors’ reaction to price in the market and this would be an instance where the indicators lagged price action. Sometimes each can also provide insight into what might happen in the market when on-chain activity precedes what is yet to happen in the market.
CT: The majority of the metrics on glassnode.com have adjustable timeframes, moving averages, and a zoom option for each indicator. Is there a particular default setting that best captures the signal provided by on-chain metrics?
RSK: Not necessarily. We recognize that traders and researchers come from varying backgrounds, so we want as much flexibility and interactivity as possible.
For example, there is a new feature called the compare tool, which allows users to plot various metrics against each other. We encourage users to experiment with each metric in order to develop processes and systems that work best for them.
CT: Exactly how does the STH-MVRV determine when Bitcoin is over and undervalued for short-term periods?
RSK: I wouldn’t always refer to valuation, the STH-MVRV is a signal that allows you to see how MVRV works on short time periods. The MVRV basically shows how the coins are valued today based on today's (realized) price.
The realized price of Bitcoin’s price is its true value. In very simple terms, it tells us that if STH-MVRV is above 1, Bitcoin is overvalued and investors may consider taking profits or selling.
Short term holder (STH) MVRV. Source: glassnode
The nice thing is that it very very nicely shows how the line at 1, which represents equilibrium and the true underlying value of Bitcoin at that time can be used as an indicator. It really highlights short-term local cycles well and this info can be useful to those interacting with Bitcoin on a shorter time frame.
CT: When evaluating on-chain data provided by the MVRV are the terms overvaluation and undervaluation interpreted in the same way that traders understand the terms overbought and oversold?
RSK: We can use MVRV as a price valuation model, which shows the current market value and realized value. If the current market value is higher than realized value then the asset is overvalued.
Bitcoin MVRV Ratio. Source: glassnode
However, if we look at MVRV over a longer timeframe, we see that 90% of the time Bitcoin price was overvalued. Interestingly, this doesn’t mean that it was overvalued and the value of following the metric over time allows the user to determine on their own whether or not a value of over or under 1 means Bitocin is over or undervalued.
Alternatively, we can see that MVRV, when overvalued, can still be quite far away from a global top so this indicates that there is room for Bitcoin’s price to grow.
It is only overvalued with regard to realized price and investors can evaluate what actions they can take by looking at Bitcoin’s price history to see at what levels did the trend change depending on activity within the spot market.