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Padajoče domine: kapitulacije na vseh ravneh

The Bitcoin market has reeled from a massive deleveraging event this week, both in on-chain DeFi markets and off-chain as exchanges, lenders and hedge skladi being rendered insolvent, illiquid or liquidated. The market sold off below 2017 $20k ATH on 18-June, reaching a truly remarkable low of $17,708. Prices did, however, recover the $20k level on Sunday.

With Bitcoin and digital assets being the only tradeable instruments over the weekend, macro fears and demand for dollar liquidity appear to have been taken out of the space. As a result of this extreme deleveraging event, we have started to see signals of capitulation across a number of entities, including miners, Long-term holders, and the aggregate market.

In this edition, we will explore these various sectors to assess whether maximum pain has been reached or not.

Padajoče domine: kapitulacije na vseh ravneh

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Rock Bottom Profitability

With the market trading below the $20k 2017 ATH, investor conviction and market profitability have been put to an extreme test.

The Realized Loss metric measures the total value delta between coins that were acquired at higher prices and the price when they were subsequently spent on-chain. Realized losses reached a new all-time-high, punctuated by three consecutive days with market-wide realized losses above $2.4B/day, totalling $7.325B. The profitability stress noted above appears to be playing out in investors actualizing the losses.

We can also investigate the profitability of specific investor cohorts relative to their realized price, which is the average price of all coins based on when they last moved on-chain. The chart below presents the MVRV Ratios for three Bitcoin cohorts (whole market, STHs and LTHs) which shows that all of them are now at a loss and holding coins below their cost basis on average.

Previous instances where all three cohorts are at an unrealized loss have coincided only with late stage bear market capitulations, providing confluence with the above profitability metrics.

Kot smo zajeli Teden 23, a powerful tool for tracking bear market extension is the diminishing profitability across supply and wallet-based metrics. What we are seeking are the thresholds of ultimate investor financial pain which exhausted sellers in previous cycles.

These maximum pain thresholds in supply can be investigated from different dimensions:

Supply in Profit 🔵 dropped to just 49.0% as the market traded down to $17.6k, putting more than half of the supply into an unrealized loss. Historical bear market floors have bottomed between 40% and 45% of supply in profit.
Addresses in Profit 🟠 assesses the profitability among individual wallets and returns similar results to supply in profit. This metric is now just 10% higher than its lowest level in the 2018-2019 bear market and COVID crash, indicating just marginally less pain than at those bottoms.
UTXOs in Profit 🟢 enables us to gauge the market profitability based on all unspent outputs. This metric shows that 26.7% of all unspent transaction outputs (UTXO) are in loss. Historically at the bottom of the bear markets, 50.2% – 81.1% of all UTXOs were in loss.
LTH-Supply in Profit 🔴 monitors the profitability of long-term holders as a gauge of the severity of stress on Bitcoin's strongest-handed investors. At the moment, 35% of LTH-Supply is at a loss. This means this cohort is still shouldering less pain compared to past bear markets where LTHs held 42% to 51% of their supply in the loss.

There is an expected natural drift in the floor of these metrics as coins are lost and deep-HODLed over time. As such, the sell-off over the weekend can be considered to have plunged profitability and investors into a historically meaningful degree of financial pain.

Miner Capitulation Happening in Real-Time

A strong case can be made for Bitcoin to be considered a digital commodity, and like many commodities, it tends to have a relationship with its cost of production. By running a log-log regression model between Difficulty and Market Cap, we can estimate an all-in-sustaining cost for mined BTC.

This cost of the production model is currently trading at $17,600, which interestingly was the price low over the weekend.

Our investigation in Week On-Chain 23 uncovered the stress on miners' incomes due to falling revenues and rising production costs. Miner behaviours now confirm that an ongoing miner capitulation phase is underway. The first piece of evidence is the hash-ribbons, which have now inverted, as hashrate falls 10% off the ATH and signifies mining ASIC rigs are coming offline.

We can further validate that miner stress is in play using two tools:

Večkratnik Puell is an oscillator tracking miner USD denominated income and currently indicates that aggregate revenues are 61% lower than their yearly average. From declining miner revenues, we can imply that miner stress is likely.
The Difficulty Ribbon Compression (normalized) then provides an explicit miner stress model, which like the hash-ribbons, monitors whether rigs are actually coming offline. Given we saw a recent uptrend in difficulty, we can also ascertain that the cost of production for BTC has increased.

Based on these two models, the ongoing miner income contraction is worse than the Great Migration in May-July 2021. However, miners have faced worse days in 2018-2019 and 2014-2015 bear markets, where the Puell Multiple reached 0.31 (69% revenue decline vs yearly average).

To assess the probability of miner capitulation, we can combine these two metrics, seeking confluence between a Puell Multiple < 0.6 and Difficult Ribbon Compression < 0.06, distilled into the Miner Capitulation Tool (shown in yellow zones below).

Further bolstering this argument, we can also estimate the Realized Price for Miners (excluding the Patoshi coins) as a gauge for their mined balance cost basis, currently at $26,170.

Interestingly, on multiple occasions, the highlighted capitulation zones overlapped with the periods when the market price has been traded below the estimated Realized Price for Miners. Over the recent market crash to $17.6k, this overlapping structure is noticed for the first time since the COVID crash.

With this extensive financial pressure on miners, outflow volumes from their treasuries reached rates of between 5k to 8k BTC per month. This is now comparable with the 2018-2019 bear market capitulation event. Remarkably, after Bitcoin failed to hold its ongoing consolidation’s low band ($28k), miners stopped spending and actually saw balances increase at a rate of 2.2k BTC per month.

New Glassnode Research: Velika razdolžitev DeFi

The Ethereum DeFi market is undergoing a dramatic deleveraging, with over $124B in capital flushed out in just six weeks. The Ethereum investor base is now heavily underwater on spot positions, and is locking in historically large realized losses.

Read our latest research piece here.

Long-Term Holders: On The Verge Capitulation

The falling dominoes of the current bear market are advancing to a new phase. Alongside miners, Long-Term Holders are now beginning to feel the pressure, forcing many of them to sell at an accelerating rate. Long-Term Holder Supply has declined by 178k BTC over the last week, equivalent to 1.31% of their total holdings.

Revived supply 1yr+ confirms that spending by older coins it taking place, accelerating to rates of 20k to 36k BTC per day. This reflects an influx of fear and panic within even Bitcoins' stronger hand cohort.

We can map the motivating financial stress on Long-Term Holders using LTH-MVRV, a ratio between Market price and the LTH-Realized price. The recent market crash to $17.6k pushed this metric to 0.85, meaning LTHs, on average, are holding a 15% unrealized loss. This is a deeper low than was set during the COVID crash and just slightly above the 2018-2019 bear market capitulation bottom.

As Long-Term Holders, unrealized losses amplify, and the intensity of this selling-in-loss can be monitored by LTH-SOPR. This metric compares the market price with the cost basis of the LTHs spending coins each day.

Past capitulations of LTHs have occurred when this metric trades below 1, signifying that LTHs are taking losses after long holding periods. At bear market lows, this metric has previously fallen into the 0.4 to 0.6 range, indicating 40% to 60% losses.

Thus, the current spending behaviour by LTHs taking losses coincides with March 2020 but is not quite as severe as the 2015 or 2018 bear market lows.

We can also track the net coin distribution of LTHs over a 30-day period to assess relative sell-side activity. Here we normalize values by total LTH supply to gain a comparative overview of these investors' behaviour across previous bear markets.

During the recent sharp drop, LTH investors have spent slightly more than 1% of their supply per month, a rate that coincident with the COVID crash and the post-ATH correction in December 2021. This level is almost two times higher than the 2018-2019 bear market maximum outflow.

Note that maximum LTH outflows are actually associated with bull markets (taking profits) rather than bear markets (experienced investors panicking and taking losses).

Tracing Pain Into The Exchange

Exchanges remain the primary trading venue for Bitcoin and thus, characterizing the incoming coin flows can refine our observations of the market response to volatility and drawdowns. The following figure shows only instances where the weekly netflow to (red) or from (green) exchanges surpasses 1% of the Total Exchange Balances.

Reviewing the recent notable incidents:

The 2018-2019 bear market saw a regime of weekly inflows > +1% of total exchange balance persist for over one month.
The LUNA crash reached +4% of the total exchange balance in net inflows.
Trenutni trg has this metric returning a -2.8% net outflow which is similar to the post-COVID crash outflows.

As such, despite heavy downside price action, exchange balances saw a net balance depletion at a rate of 2.8% of the total this week.

Next, we can characterize the profitability of inflows to exchanges by the degree of profit and loss realized. Exchange Inflows over the last month have been dominated by realized losses, with the total magnitude surpassing 1.5% of the market cap.

This exceeds the May-July 2021 sell-off, however, is around half as severe as the extreme lows in the 2018-2019 bear market and COVID crash.

Povzetek in sklep

The Bitcoin market has now experienced two distinct capitulation phases since the ATH in November 2021. The first phase was triggered by the Luna Foundation Guard force selling its 80k+ BTC, and the second this week via a massive industry-wide deleveraging, both on and off-chain.

Miners are now under significant financial stress, with BTC trading near the estimated cost of production, incomes well below their yearly average, and hash-rate noticeably coming off ATHs. The aggregate market has realized over $7 Billion in losses this week, with Long-term Holders contributing some 178k BTC in additional sell-side.

As we have discussed in recent weeks (23 in 24), Bitcoin market participants across the board are at or very near historically high financial pain thresholds. With forced sellers appearing to drive much of the recent sell-side, the market might begin to eye whether signals of seller exhaustion are emerging over the coming weeks and months.

Predstavitev novega izdelka: nadzorne plošče vadnic

We are pleased to release four new pre-set dashboards, video guides, and Written notes designed to help Glassnode users explore and up-skill in on-chain concepts, starting with Bitcoin.

Posodobitve izdelka

Vse posodobitve izdelkov, izboljšave in ročne posodobitve meritev in podatkov so zabeležene v naš dnevnik sprememb za vaše reference.

Improvements to Dashboards: Video module, textbox scroll feature, reformatted sizing

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