Bitcoin: Glassnode’s magic formula for timing the market!

The on-chain analysis platform Glassnode has just unveiled a set of innovative indicators making it possible to precisely locate the points of capitulation and significant latent losses of Bitcoin investors. This unique framework provides a better understanding of supply-demand dynamics and helps spot potential market dips.

Bitcoin, a new framework for assessing seller burnout

Bitcoin bull markets are marked by high volatility, punctuated by correction phases. Glassnode notes that long-term investor losses (LTH) mainly occur during macro-cyclical downturns.

In contrast, short-term investor losses (STH) occur at all stages of the market cycle and represent the majority of bull market losses.

By specifically analyzing the STH cohort, which includes day traders and swing traders (weekly to monthly horizon), Glassnode seeks to identify periods of capitulation sellers. The objective is to detect inflection points during corrections within a dominant uptrend.

Seller capitulation is defined as a point of overselling where most potential sellers have already sold. This coincides with an influx of demand from the buy side, helping to form a local floor. Inflection points tend to propagate from short timeframes to longer timeframes.

Realized loss LTH/STH: analyzes losses according to the holding period.  (Glassnode)Realized loss LTH/STH: analyzes losses according to the holding period.  (Glassnode)
Losses made by LTH/STH depending on the holding period. (Source: Glassnode)

Three key indicators to assess the pressure on investors

Glassnode relies on three metrics to model the extreme financial pressure faced by investors:

  1. The MVRV ratio (Market Value to Realized Value) which evaluates unrealized capital gains and losses.
  2. The SOPR ratio (Spent Output Profit Ratio) which measures the average magnitude of profits/losses made.
  3. Losses realized in USD crystallized by the cohort.

For day traders, who are ultra-sensitive to price variations, the MVRV oscillates quickly between high and low values. Glassnode focuses on times when the MVRV Z-Score is below -1σ (sigma), revealing statistically significant selling pressure.

The SOPR makes it possible to confirm whether these losses have been recorded, by isolating Z-Scores lower than -1σ. Finally, the losses realized in USD, with a Z-Score greater than +2σ, validate the episodes of micro-capitulation.

Swing traders exhibit a more gradual evolution of indicators, generating fewer signals, but with a higher signal-to-noise ratio. The same methodology confirms the propagation of selling pressure towards longer horizons.

The transparency of on-chain data makes it possible to isolate the behavior of subsets of investors according to their holding time. By combining three profitability indicators, Glassnode identifies micro-capitulation points accompanying local market bottoms. This framework helps decipher the incentives and actions of actors during capitulation phases.

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