Analysis by the Boss Crypto team using data provided by Diar.co and Delphi Insights.
Required Reading:
“UTXO stands for the unspent output from bitcoin transactions. Every transaction creates a new UTXO, and the age of the UTXO indicates the block that it was first included in. “In other words, the UTXO age indicates the last time bitcoin was moved”.
Using UTXO’s to analyze Bitcoin long term price cycles
Analyzing Bitcoin’s aggregate UTXO age distribution over time provides insight into the buying and selling patterns of previous market cycles. This allows us to forecast where we are in relation to prior cycles and what we canlikely expect going forward.
A low number of 1+ year UTXO’s means that a lot of Bitcoin has been moving within the last 12 months. There aren’t many addresses that have been holding for 12+ months. If you look towards the end of the first quarter 2018 you can see we made a low in UTXO’s just like we did near the beginning of 2014/2015 bear market.
The reason for this is that long term holders are smart.
As you can see a lot of people that had been holding for over 1+ years started selling Bitcoin from when BTC broke above 10k and continued selling all the way through to the end of the first quarter 2018.
At the same time traders that recently started investing in Bitcoin between October 2017 — January 2018 only really started selling after the price started going down, with a big surge in selling around the 6k level and then again on the drop between 6k and 3k incurring large losses.
What does this cycle mean for the future?
Looking forward it seems as if the cycle will begin to top by the end of Q1 2019, which is good news. When this cycle gets high, it means that a lot of long term investors have now been holding Bitcoin for 12+ months.
It means that long term buyers started buying from Q2 2018 after selling out between October 2017 — March 2018.
“For some additional context, the price bottom from the previous cycle occurred 68% of the way up from the 1-year holder bottom to the holder top. We’re currently 62% of the way to the forecasted holder top”. — Delphi Digital
A natural consequence of the number of 1+year UTXO’s rising is a drop in selling pressure (more holders, less sellers). Therefore the aggregate demand for Bitcoin can lower without creating adverse price drops. When demand hits the bottom and begins to increase there will be fewer sellers, making a gain in price possible and creating the price bottom.
There are a number of factors that are also contributing to the likelihood of a Q1 Bitcoin price bottom.
Introducing the NVT Signal (NVTS)
Standard NVT Ratio is simply the Network Valuation divided by the Transaction Value flowing through the blockchain and then smoothed using a moving average.
In traditional stock markets, price-earnings ratio (PE Ratio) has been a long standing tool for valuing companies. It’s simply the ratio of a company’s share price to its equivalent earnings per share. A high ratio describes either overvaluation or a company in high growth.
What would be the equivalent in Bitcoin-land? We have a price per token, but it’s not a company so there are no earnings to do a ratio. However since Bitcoin at its essence is a payments and store of value network, we can look to the money flowing through its network as a proxy to “company earnings”.
You can view the live NVTS chart here
There are also a number of fundamental indicators that we can speculate may have a positive impact on price such as:
- Bakkt and Fidelity’s institutional custody solution
- The upcoming halvening expecting in May 2020. For reference, prices stabilized and began rising ~18 months before the halvening in 2016.
The Current Supply Demand Landscape
While institutions may still remain on the sidelines, for now, on-chain data for Bitcoin addresses shows that retail investor attitudes remains strong and in fact a key growing group in supply holdings. Addresses holding 1 to 10 Bitcoins have been showing a sharp uptick in growth compared to the third and fourth quarters of 2018 where growth was slowing.
This comes at the same time that the selling pressure from “old hands” 1–5 (years) is abating as the number of UTXO’s is now increasing (less selling more hodling).
Conclusion
The fact that the majority of selling pressures are slowing down and even reversing, means that there is room for buyers to start coming back into the picture and for price to start stabilising. It is an objective signal to the end of the bear market.
This doesn’t mean that price cannot drop further, all it means is that we are currently near the optimal point in time to be getting into cryptocurrency, rather than getting out.
The irony is that over the last few months we have also seen the majority of investors repeat the same mistake that has played out since the beginning of time and the invention of markets. Buy the top, sell the bottom. Boss Crypto students won’t make that mistake.
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