It’s no surprise when you visit Pamplona in July, and bulls are running in the streets.

In markets, it’s not as obvious when bulls will run — and more importantly, when they will stop.

This is the follow-up to a piece last month where we shared a capital flows framework that drives the market cycle.

In this piece, we will unpack how on chain metrics help us make sense of Bitcoin’s price action.

On indicators:

The goal isn’t to find a single indicator (or even a dashboard) to make decisions for you. While indicators can provide guardrails and help mitigate emotions as the market does things you don’t expect, you have to stay willing to update your beliefs — even if, and particularly when, new information invalidates a system that worked well for you in the past.

Price Action

Starting from a blank slate, the first thing you might do to figure out where we are in the market cycle is zoom out (1-2+ years) and look at price action.

Is price trending up or down? How does recent price action compare to historical trend? How does this cycle compare to prior cycles?

Bitcoin is riding a 1.5 year uptrend since it bottomed in November 2022 in the wake of the FTX collapse (orange line is BTC, grey line is 10 day simple moving average, and blue line is 100 day).

Relative to historical trend, the 100 day moving average (blue line) changed trajectory last summer marking the cycle shift and the 10 day has been a key support level.

BItcoin magazine also posts a weekly BTC market dashboard. As of 6/13, 6 of 8 price indicators confirmed a bull phase of the market cycle.

This chart shows BTC during the 2.25 year phase from its cycle bottom in January 2019 to the first blow off top of that cycle in March 2021.

This one is the 2 year phase from Dec 2015 to Dec 2017.

So the bull market is here again. This cycle (black line) is tracking the two prior bull markets (blue and red lines) since last cycle ATH, it just hasn’t experienced a final euphoric phase yet.

This begs the questions, what’s next?

• Is the bull market over?

• How much gas is left in the tank?

• Has the market structure changed with investors front running the pattern from prior cycles resulting in a more gradual uptrend instead of a parabolic climax?

Fortunately price isn’t the only useful indicator as we try to answer these questions.

On Chain Metrics

Despite what you might’ve heard from misinformed pundits and politicians clamoring on about organized crime and crypto, the transparent nature of public blockchains make them less conducive than cash or even the traditional banking system for laundering money.

The transparent transaction history of Bitcoin’s public ledger also make on chain metrics* an integral part of crypto market cycle analysis.

*If you want to go deeper than I go in this post, the Glassnode Academy is a great resource.

At the highest level, we want to know whether people are more likely to buy or sell Bitcoin at a point in time — and by people, we mean long and short term holders.

• Long term hodlers haven’t moved their BTC in over a year and tend to be people with the highest conviction about Bitcoin who are willing to accumulate when it’s cheap (deep bowels of bear markets) and take profits during euphoric phases of bull markets.

• Short term holders tend to be more speculative traders who buy and sell momentum and cause price reflexivity, ie. price going up makes short term holders less likely to sell, which reduces circulating supply, causing price to go up more as sidelined speculators rush to buy the momentum, causing a supply x demand imbalance and parabolic price action.

This chart shows long term (blue, green, yellow) and short term (purple, red, orange) BTC holder cohorts going back to 2017.

The tendencies of these groups tell us a lot about where price is heading and the duration of bull and bear phases of the market cycle.

On return targets:

Capital flows where performance is likely to exceed return targets (and away when it’s not).

Every asset class has a return target — or a ‘hurdle rate’ — given the perceived amount of risk to achieve an expected return (probability distribution of a range of outcomes).

For example, venture capital is a risky asset class. This means investors have higher return targets (to compensate them for the additional risk) for the capital they allocate to venture capital than they might have for a ‘safer’ asset such as US treasuries.

So if treasuries yield 5% a year and are perceived to have little to no risk, venture capital might need to be expected to yield ~35% a year (5x in 5 years) to attract capital given the high failure rates of early stage deals.

*Enough on this for now, but if you want to go deeper on risk adjusted returns, the Sharpe ratio is a good place to start

MVRV

Return targets matter in the context of on chain metrics because the cost basis for every Bitcoin is recorded on a public ledger. This means we can figure out how close each Bitcoin holder is to a return target at any price level.

Now we obviously can’t know every holder’s exact return target. But we can observe profit taking levels during previous cycles and compare where we are in the current cycle to those levels.

In the following chart, the MVRV ratio (red line) is the current market value of Bitcoin (black line) relative to the aggregate last price each Bitcoin traded (orange line).

• Since 2017, MVRV has only been above 3.2 for 6% of trading days (shaded red), above 2.4 for 20% (shaded yellow), below 1.0 for 15% (shaded green), and below 0.8 for 5% (shaded blue).

Last cycle MVRV maxed out at 4.0, ie. Bitcoin holders had a return target of ~4x their cost basis. So the probability of a bull market sell off rises as the market price increases towards 4x the realized price. MVRV is 2.14 today, a level it’s been above for over 25% of trading days since 2017.

Long and Short Term Holders

We can also breakout MVRV for long and short term holder cohorts.

Long term holders tend to wait longer than short term holders to take profits: LTH MVRV >10x last cycle vs 4x for all holders.

So short term holders drive trading volume as price rises. Short term holder MVRV maxed out at 1.8 last cycle.

And short term holder cost basis tends to provide support during bull market drawdowns. You can see below, the Bitcoin price (black line) tends to bounce off the realized price of coins held less than 1 month (red line) during bull market drawdowns.

Ultimately the music stops for the cycle shortly after long term holders start selling. There are two ways we can identify this happening:

1/ the ratio of realized profits to realized market cap > 75% (which Glassnode calls the sell-side risk ratio)

2/ STH realized cap > 70%

At elevated levels, long term holders are selling coins that need to be absorbed by short term speculators. So during a long term holder sell off, we expect to see a corresponding rise in realized cap in short term holder wallets -- which the following chart confirms. Short term holders absorbed 85% and 74% of Bitcoin’s realized market cap once long term holders finished taking profits at the end of the 2018 and 2021 bull markets.

tldr; The Bulls have Room to Run

We are experiencing a multi-month consolidation phase in the eighteenth month of this bull market.

This sideways price action (’sideways summer’) reminds us of the six month consolidation from March to October ‘23 following Bitcoin’s 1.6x rise from $17k in Q1 ’23 and preceding Bitcoin’s next 2.6x pump from $27.5k to $71k.

This cycle has seen more gradual price appreciation, potentially evidence of an evolving market structure, as investors try to front run parabolic price action seen during late innings of prior cycles.

If holders have a similar 4x return target (MVRV) this cycle they had in prior cycles, Bitcoin would be $120k+ if today was the cycle top.

We have yet to see outlier distribution pressure from long term holders or the corresponding surge in realized cap held by short term wallets of a magnitude we would expect late in a cycle.

So assuming expected narrative tailwinds and macro catalysts remain on the horizon (that we’ll explore in a future post), on chain data suggests crypto will feel euphoric again before it tops for the cycle at which point long term holders start selling and main stream media pushes out a fresh batch of Bitcoin obituaries.