Bitcoin (BTC-USD) prices collapsed last week, arguably due to excessive leverage in the system. Since then, prices have been consolidating around the $47,000 range. Although we still don’t have conclusive evidence that this correction is over, the on-chain data may indicate that investors are still convinced of the cryptocurrency, and selling pressure may subside soon leading to higher prices.
This is an opportunity to buy a dip.
recent price action
First of all, it is important to understand that the recent corrective price movement may have been the result of excessive leverage in the system. Therefore, I see this as a necessary long-term bullish corrective move.
Source: author’s work
First, I’d like to review this graph that I shared in my last article. What I want to point out here are two variables; Equity holders are short term on a cost and open interest basis.
Open interest in Bitcoin futures, according to data from Coinglass, was at an all-time high at the beginning of December. This means that there was a lot of leverage in the market. What we saw was, therefore, a prolonged squeeze, which accelerated as the price fell below $52,000. Why this price? Because this is roughly the on-chain cost basis for the short term holders, who will also be the leveraged traders. Therefore, a price drop below this level caused stop losses and coverage.
Since Bitcoin dropped to nearly $42,000, the price has been trading in a range, with a slight downtrend in the past few days. There is scope for lower prices, but, overall, the on-chain data paints a bullish scenario for Bitcoin.
I’ll start this section by reviewing a simple on-chain metric: exchange flows/outflows
In the above chart, we can see bitcoin’s outflows in red and inflows in green. We continue to see more coins pouring in from the exchanges. This is seen as a bullish sign because it means that people are buying Bitcoin and taking it out of the exchange, indicating that they have no immediate plans to sell it.
Next, let’s take a look at a more complex metric: the realized gradient oscillator in the Bitcoin market.
This tool compares market value, which is determined by price, and realized market value, which is determined by capital flows across the chain. This tool measures momentum and overbought/oversold conditions. A higher gradient indicates overbought conditions, and a bearish MRG shows that the momentum is fading. Conversely, a lower MRG means that Bitcoin is oversold and bullish values indicate increased momentum.
As we can see, during the peak of bitcoin prices in 2021, the MRG exploded, then turned negative as the correction continued. We are currently approaching oversold levels near the June 2021 levels. If we see the MRG trend change in the coming weeks, this will be a very bullish sign. The price may continue to decline further, but this will show ideal conditions to support the bull market. A break above 0 would be a strong confirmation of this.
Despite this recent flash crash, I still support the hypothesis that we hit another high price in bitcoin before a real bear market starts. This depends on the ratio of the stock-to-flow model, and how it relates to the Bitcoin halving cycles.
As we can see, the Bitcoin stock flow model predicts a price close to $100,000 per Bitcoin. We also see that we are approaching the midpoint of the current Bitcoin cycle as we are about 833 days away from the next halving event. In the past, this was around the time when the bitcoin bull market peaked. Therefore, my primary expectation is that Bitcoin will rise above $100.00 in the next few months, and possibly consolidate for a long time after that.
With all that said, investors should be careful at this point. It is also possible that Bitcoin has already peaked. The best way to track this possibility is with on-chain metrics. A change in net inflows or acceleration in profit taking could be a sign that more selling is in the cards and investors are losing their faith in bitcoin. For now, evidence continues to show that the opposite is true, as investors use these dips to further accumulate bitcoin.