Deconstructing the market behavior of long-term and short-term holders: What are the potential changes in the current market trend?

Original author: Chloe, PANews

The price of Bitcoin broke through the all-time high (ATH) of $73,750.07 on March 14, becoming an important turning point in the current market and also marking that the price of Bitcoin has entered a new unknown area, namely the “price discovery” stage. Galaxy Digital founder and CEO Michael Novogratz said that the current market has attracted many new investors.

Market liquidity increases

Glassnode recently wrote that at this stage, market prices have prompted a large amount of supply to be used for cashing out and making profits, which has led to the revaluation of sold Bitcoins, usually from a lower cost to a higher cost. That is, when these Bitcoins change hands, we can also regard it as an injection of new demand and liquidity into the asset class. This mechanism is highlighted by the realized market value indicator, which tracks the accumulated US dollar liquidity “stored” in the asset class. The current realized market value has now reached a new historical high of US$540 billion and is growing at an unprecedented rate of more than US$79 billion per month.

If we only consider holders who have held Bitcoin for no more than 3 months, we can see that the number has grown dramatically in recent months, which means that investors who have newly joined the Bitcoin market in recent months (i.e., those who have bought and held Bitcoin for no more than three months) now control approximately 44% of the total share of Bitcoin. This increase in proportion directly reflects that long-term holders sold their Bitcoin when the price of Bitcoin was high to meet new demand fluctuations in the market. It also illustrates the changes in the distribution of wealth in the Bitcoin market and the significant increase in the proportion of new investors in the total wealth of the Bitcoin network.

In past Bitcoin cycles, the injection of new demand into the market usually revealed a heightened interest in speculation among traders and also tended to cause greater market volatility, which was a characteristic of the macro uptrend in past Bitcoin cycles.

Since volatility bottomed in October 2023 (bottom right of the chart below), the 90-day realized volatility has nearly doubled from 28% to 55%, highlighting the period when realized market capitalization inflows began to accelerate.

Market begins to recover

After last year’s historic supply contraction (see the yellow area in the figure below), a strong divergence formed between the supply of long-term holders (blue line) and short-term holders (red line). The supply of long-term holders is close to its historical high, while the supply of short-term holders is actually at its historical low, highlighting the increasing contraction of BTC supply.

Today, the difference in supply between long-term and short-term holders has begun to narrow. As prices rise, unrealized profits held by investors increase, which in turn attracts long-term holders to sell their positions.

Glassnode data shows that the supply of long-term holders has decreased by 900,000 BTC since reaching a peak of 14.916 million BTC in December 2023, indicating an important market shift. Among them, the outflow of GBTC accounts for about one-third of this number (about -286,000 BTC).

PANews believes that this outflow reflects a large outflow of funds from GBTC, which may lead to an increase in market supply by long-term holders, especially when they choose to exchange their GBTC holdings for Bitcoin or cash. This explains to some extent why there has been a significant reduction in the supply of long-term holders, part of which is due to the outflow of GBTC funds.

In contrast, short-term holders increased their supply by 1.121 million BTC, absorbing selling pressure from long-term holders and acquiring an additional 121,000 BTC from the secondary market through exchanges. This change in supply and demand dynamics highlights the shift in market structure and the impact of different types of investor behavior on Bitcoin supply and price.

Based on the above information, it can be concluded that when the market reaches new highs, investor behavior patterns have clearly changed. As new demand increases, the pressure on long-term holders to sell at higher prices seems to accelerate. While the newly approved ETFs are an important new element in the market structure, these trends are reflected in the on-chain data of all previous cycles.

Glassnode then further analyzed the holdings of Bitcoin when the price exceeded $60,000. From the figure below, we can see that approximately 1.875 million Bitcoins, accounting for 9.5% of the current circulation, were purchased when the price exceeded $60,000.

As indicated by the red ratio, most Bitcoins are currently controlled by short-term holders, which indicates that a considerable portion of Bitcoins were purchased at high prices in the recent period. In addition, approximately 508,000 Bitcoins are held in US spot ETFs (excluding GBTC), which are also attributed to short-term holders, as ETF investors usually seek short-term profits rather than long-term holdings.

We can also refer to the activity indicator in the figure below, which is an indicator of the overall balance of “holding time” in the Bitcoin supply. If activity continues to rise (orange line), it means that the number of Bitcoins sold in the market (especially those that have been inactive for a long time) exceeds the number of newly purchased and long-term Bitcoins. This trend shows that, in general, more Bitcoins in the market are used for profit rather than long-term holding (HODL).

Overall, the current state of the market quickly led to the conclusion that the Bitcoin market has shifted to a stage dominated by selling and profit-taking. PANews believes that this shift reflects the increase in short-term holders in the market and the change in Bitcoin trading behavior, especially when prices are high. This change in behavior pattern is critical to understanding both the short-term and long-term trends of the Bitcoin market.

Indicators break down the market behavior of long-term and short-term holders

In the process of finding a balance between supply and demand, understanding the behavior of long-term and short-term holders is also important for capturing market trends. Based on the on-chain indicators provided by Glassnode, readers will be taken to explore how to analyze the application and value of the market through several indicators.

The first is the “realized profit and loss ratio”, which is mainly used to find market turning points. That is, the realized profit and loss ratio fluctuates around the equilibrium value of 1 on the nonlinear measurement scale, which can provide us with an ideal tool for finding market turning points. Especially in an upward market trend, when the realized losses increase sharply, this may indicate that those buyers who bought at the top are beginning to sell in panic, suggesting that the market may be reaching a turning point.

We start with the analysis of short-term holders and see that their profit-loss ratio remains in a profit-dominated range, which means that their profit is about 50 times the loss. This profit-loss ratio fluctuates around the equilibrium level of 1.0, indicating that investors are usually able to absorb profits when market prices fall, and maintain their investment costs when prices fall, avoiding losses.

In simple terms, when this ratio is above 1, it means that short-term holders are making more profit than loss from selling Bitcoin. If this ratio is very high, for example, far more than 1, it means that there are many more people making profit than losing money in the market.

In the picture above, the green area shows that the profit situation is dominant, while the red area means that the loss situation is more significant. Generally speaking, when the price of Bitcoin goes through an upward trend and then corrects, if this ratio can remain above 1, this is usually regarded as a sign of market health, indicating that even in the face of price fluctuations, most people are still making profits. state.

To get a deeper understanding, we can compare this profit and loss ratio with the market price trend of Bitcoin to observe market sentiment and possible price changes. For example, if the price of Bitcoin hits a new high and the profit and loss ratio decreases at the same time, this may indicate that the market is about to correct. On the contrary, if the price drops and the profit and loss ratio increases, it may indicate that the market is about to rebound.

From the chart below, we can see that during the market price correction, there is a clear peak in the losses realized by short-term holders. We can speculate that the market will be eager to sell in order to avoid greater losses (panic selling) in anticipation of further price declines.

The magnitude of realized losses has increased after each market correction, indicating that the number and size of “top buyers” attracted by each wave of price increases are growing.

Next is the “Sell Side Risk Ratio” indicator, which is mainly used to evaluate the relative size of its profit and loss events. This indicator can help understand the market’s moving force and its impact on the total market size, especially when the market is at or near a new all-time high.

High values indicate that short-term holders are buying or selling cryptocurrencies at prices well above or well below their cost basis, meaning the market may need to re-equilibrium (often accompanied by wild price swings). Conversely, low values indicate that most Bitcoin being sold is close to its breakeven cost basis, suggesting that the market has reached a level of equilibrium and that the “breakeven” has been exhausted within the current price range (often describing a low volatility environment).

After the Bitcoin price broke through $70,000, the short-term holder sell risk ratio increased significantly, which usually occurs near market turning points (both overall and local). It also usually indicates that a new equilibrium has not yet formed, and the indicator is correcting sharply as the market adjusts and consolidates.

In evaluating the long term holders, the chart below shows that their realized profit/loss ratio has risen exponentially and vertically. By definition, this is because when the market just broke out of the previous cycle high, there were no long term holders in the loss, which was further driven by the increase in profit taking by the aforementioned long term holders.

While we can track the realized losses of short-term holders in an uptrend, it is more important to monitor the realized profits of long-term holders because this is a key component of selling pressure. PANews believes that the behavior of long-term holders is often seen as a long-term indicator of market health. When their realized losses are low, it shows that they are not in a hurry to sell when prices fall, which may mean that they are optimistic about the long-term outlook of the market. On the other hand, the high realized losses of short-term holders reflect the volatility in the market and the panic of investors.

To illustrate this point, we can see that in the most recent correction, long term holders’ realized losses have been reduced to just $3,500 per day compared to short term holders’ $114 million.

Finally, Glassnode noted an acceleration in profits realized by long-term holders, resulting in an upward trend in their sell-side risk ratio since October 2023. The indicator’s nice growth with the breakout of all-time highs suggests that allocation pressure and profit-taking among the long-term holder community is similar to previous cycles on a relative basis.

In summary, by analyzing the combination of long-term and short-term holder groups and their profit and loss behavior, multiple perspectives on investor psychology and capital flows are provided.

Through Glassnode’s various on-chain tools and indicators, we can also observe that the current investor behavior patterns in the Bitcoin market are clearly changing. Long-term holders have entered their selling cycle, realized profits, and awakened dormant supply to meet new demand at higher prices. Then, using different holders on the chain, we can use these indicators to identify turning points in local and global markets, especially using profit and loss indicators.

Finally, the combination of long-term and short-term holder groups, and their profit and loss behavior, also indicate potential shifts in market trends. Changes in these behavioral patterns, especially profit realization and loss taking at key price points, provide a new way to predict market volatility and peak opportunities.

By comprehensively considering the above indicators, we can have a more comprehensive understanding of market dynamics and make more careful plans for future investment strategies.