Bitcoin Risks A Year-Long Bear Market If This Happens: On-Chain Data

Overview

Bitcoin’s recent price movements have raised concerns about a potential prolonged bear market, reminiscent of the events of 2022. Analysts are closely monitoring a profitability metric that could signal a significant shift in market dynamics, particularly if Bitcoin’s price falls below a crucial threshold.

Current Market Dynamics

Bitcoin’s price has recently stabilized in the range of $87,000 to $90,000 after experiencing a pullback from earlier highs. The “Supply in Profit” metric, which tracks the amount of Bitcoin held above its acquisition price, has seen a significant decline. This measure fell from over 19 million BTC in October to approximately 13.2 million BTC, indicating a notable gap between short- and medium-term moving averages.

Axel Adler Jr., an analyst, highlighted that the current configuration of the Supply in Profit trend is at a pivotal point. He noted that the spread between the 30-day and 90-day simple moving averages of Supply in Profit has become a critical focus. Following the correction from Bitcoin’s all-time high, the 30-day average dropped significantly below the 90-day average, creating a gap of around 1.75 million BTC.

However, Adler pointed out an important distinction from the situation in 2022: the 365-day moving average remains at historically elevated levels, suggesting that the long-term profit structure has not yet fully rolled over. The near-term outlook hinges on whether the 30-day trend has bottomed out. Adler identified December 18 as a local minimum for the 30-day average, which is now showing signs of turning around. For a bullish recovery to occur, the Supply in Profit must maintain levels above its 30-day average, necessitating Bitcoin to hold its current price levels or higher.

Adler’s analysis suggests that the gap between the 30-day and 90-day averages is narrowing at a rate of approximately 28,000 BTC per day. This phenomenon is largely due to the mechanical effects of the moving average as the high values from October drop out of the 90-day window. Adler anticipates that this trend could continue into late January, potentially allowing the 30-day line to reclaim the 90-day line even without a significant increase in Supply in Profit.

The Critical Price Point

The analysis is highly sensitive to Bitcoin’s price movements. Adler estimated that the Supply in Profit has an elasticity to price of 1.3x, meaning that a 10% decline in Bitcoin’s price could lead to a 13% decrease in the supply held in profit. According to Adler, the critical price level to watch is the $70,000 mark. Should the price fall below this threshold, the Supply in Profit would drop to around 10 million BTC, causing the 30-day average to decline more rapidly than the 90-day average. This scenario would halt the narrowing gap and potentially lead to an expanded spread, mirroring the bearish conditions of 2022.

Conversely, Adler suggests that maintaining a price range of $75,000 to $80,000 throughout January would support Supply in Profit and facilitate the convergence of the moving averages. As of the latest update, Bitcoin was trading around $88,102.

From author

The current analysis presents a critical juncture for Bitcoin, with its future trajectory deeply tied to market sentiment and price stability. The interplay between short-term and long-term moving averages could either signal a recovery or a prolonged downturn, depending on how Bitcoin’s price behaves in the coming weeks.

Impact on the crypto market

• The discussion surrounding Bitcoin’s profitability metrics highlights the potential for significant market shifts based on price movements.
• A sustained drop below $70,000 could trigger bearish conditions similar to those experienced in 2022, affecting investor sentiment.
• The focus on the $75,000 to $80,000 range indicates the importance of price stability for maintaining bullish momentum.
• Analysts are closely watching the convergence of moving averages, which could signal market trends and influence trading strategies.
• The ongoing analysis emphasizes the volatility in the crypto market and the need for investors to remain vigilant regarding price movements.