Title: Analyzing BTC’s Potential Price Drop in Extreme Conditions During a Bull Market
Author: Murphy
Source: X, @Murphychen888
Analyzing on-chain behavior can provide insights into how low BTC may drop in extreme situations during a bull market. By considering on-chain analysis and historical data, we can evaluate this from two perspectives.
Method 1: STH-MVRV (Short-Term Holders) Perspective
Short-term holders play a crucial role in market transitions, making STH-MVRV a valuable indicator during bull market cycles. I have previously explained the principles and significance of STH-MVRV in detail in two tweets, which you can refer to in the following links:
1. Detailed explanation of STH-MVRV’s role in a bull market: [insert link]
2. Historical performance of STH-MVRV: [insert link]
In the previous cycle, there were two terrifying black swan events that caused a significant drop in BTC price. As shown in the graph below, during the 3/12 event, STH-MVRV reached a low of 0.59, and during the 5/19 event, STH-MVRV reached a low of 0.67. This means that during the 3/12 event, short-term holders had an average unrealized loss of 41%, and during the 5/19 event, the average unrealized loss was 33%. It is evident how brutal the market was at that time.
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In the current cycle, there have also been three noteworthy market surrender events:
1. On March 10, 2023, the Silicon Valley Bank collapsed, causing BTC’s price to drop from $25,000 to $20,000. During this period, STH-MVRV reached a low of 1.02.
2. On June 5, 2023, Binance was sued by the SEC, resulting in a drop in BTC’s price from $30,000 to $25,000. During this period, STH-MVRV reached a low of 0.95.
3. On August 17, 2023, it was reported that SpaceX sold BTC worth $373 million, triggering a long position liquidation. During this period, STH-MVRV reached a low of 0.91.
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By applying these STH-MVRV values to the current BTC price, we get the following:
STH-MVRV 0.59 = $37,979
STH-MVRV 0.67 = $43,129
STH-MVRV 1.02 = $65,659
STH-MVRV 0.95 = $61,153
STH-MVRV 0.91 = $58,579
As you can see, when the market emerges from the bear market bottom range, we can assess market sentiment fluctuations based on STH-MVRV. The depth of STH-MVRV retracement also reflects the impact of events that caused the drop in BTC price.
For example, in 2020, the COVID-19 pandemic swept the world, posing a severe test to human life and health. In the face of a survival crisis, no one had the mental capacity to consider anything beyond life, including investments. The 3/12 event had an impact on the risk market equivalent to a magnitude 9 earthquake. In this bull market cycle, based on the current foreseeable circumstances, the probability of another event of the same magnitude (affecting human survival) is almost zero. Therefore, we can speculate that STH-MVRV will not reach 0.59, and thus, BTC’s price will not reach $37,979 (which can be disregarded).
The 5/19 event was triggered by the Chinese government’s crackdown on mining companies, causing a panic. Although it was also a black swan event, it did not reach a level of “life-threatening.” Therefore, STH-MVRV reached a minimum of 0.67, which is significantly better than the situation on 3/12. Thus, I believe that if a market shock caused by a U.S. economic recession occurs, its maximum impact will be similar to the level of the 5/19 event. If we use this as a benchmark, then the maximum retracement of BTC’s price in this bull market cycle will be around $43,129.
Considering the impact of the delayed interest rate cuts by the Federal Reserve and the expectations of only one rate cut this year, the impact on the crypto market should be similar to events like the “Silicon Valley Bank collapse” or “Binance FUD.” Therefore, I maintain my previous view stated in the previous article that the probability of BTC consolidating in the range of C1 and C2 (approximately $60,000-$64,000 and $66,000-$70,000) is higher.
As of June 21, STH-MVRV stands at 0.99. In the bull market process, when STH-MVRV is below 1, it usually indicates that opportunities outweigh risks (for BTC only, excluding ALT).
Method 2: Fair Market Price Algorithm Perspective
First, let’s introduce a new concept called “True Market Fair Price (TMMP)” and its algorithm and principles:
TMMP = (Realized Cap – Thermocap) / (Liveliness x Circulating Supply)
In this formula, there are three fundamental concepts to understand:
1. Realized Cap: It values each UTXO based on its last movement price. It accumulates the value of all unspent UTXOs in the network, reflecting the total capital inflow into the BTC market more accurately by considering the last movement time and price of each Bitcoin.
2. Thermocap: Also known as the total safe spending, it is the sum of the dollar value of all block rewards received by miners (including block rewards and transaction fees).
3. Liveliness: It is the ratio of Coin Days Destroyed to all generated Coin Days.
Coin Days (CD) is calculated by multiplying the number of Bitcoins held by the number of days they are held. One Bitcoin held for one day equals one Coin Day.
Coin Days Destroyed (CDD) is the total of all Coin Days destroyed when Bitcoins are spent. In other words, Coin Days Destroyed is the sum of Coin Days for all spent Bitcoins.
The numerator of the TMMP algorithm subtracts Thermocap from Realized Cap, representing the deduction of the portion of the total capital inflow into the BTC market that is paid to miners from the general cost basis of the market. The denominator multiplies Liveliness by the circulating supply, representing the quantity of all active BTC (spent) currently in circulation.
TMMP covers all active chips on the chain, including ETFs, whales, exchange deposits and withdrawals, etc., while excluding the portion owned by miners and excluding long-term dormant or lost chips. Therefore, using TMMP as a basis for evaluating the on-chain cost basis for active investors buying BTC in the secondary market is one of the most accurate mean reversion models sought by analysts.
As shown in the graph above, the blue line represents TMMP, and the gray line represents BTC’s price. Whenever BTC’s price surpasses the blue line, it signifies that the market has emerged from the bear market and entered a bull market cycle. Although there may be false breakouts before this, once an effective breakout is formed, BTC’s price will hardly drop below TMMP, even during the 5/19 black swan event. However, 3/12 is the only exception that caused BTC’s price to fall below TMMP again after entering the bull market.
In the late stages of a bull market, if BTC’s price falls below TMMP, it signifies the end of the bull market. In other words, as long as we are still in a bull market cycle, BTC’s price will not drop below TMMP unless a super black swan event occurs (reaching a level that challenges human survival).
As of June 21, the TMMP model evaluates the “True Market Fair Price” to be $44,940. This means that even in the event of a black swan event similar to the 5/19 level, the maximum retracement of BTC’s price would be around $44,900. This price is close to the maximum value of $43,129 evaluated using STH-MVRV in the previous analysis, making it a reliable reference.
In conclusion, we can draw several conclusions:
1. Assuming no super black swan event occurs, the maximum retracement of BTC in the future, even under the influence of other macro factors, will not be lower than $43,000-$44,000.
2. A super black swan event must reach a significant level that challenges human life to have a substantial impact (e.g., a nuclear war between Russia and Ukraine). Clearly, an “U.S. economic recession” does not reach that level.
3. Since it is a maximum value, it indicates “it is highly unlikely to reach” instead of “it may reach.”
4. The analysis above is based on the bull market cycle. If we enter a bear market, the maximum standards of STH-MVRV and TMMP will become invalid.
Furthermore, I can confidently make a long-term prediction: even at the bottom of the next bear market cycle, the price of #BTC will not drop below $22,500. Although this may not hold much significance for the current situation, it tells us that over time, the lower limit of BTC will continue to rise. If your #BTC cost is below this level, please cherish it.
This analysis is based on the CVDD algorithm:
CVDD (USD) = ∑(CDD × price) / (days × 6,000,000)
As shown in the graph above, CVDD accurately depicts the historical bottom of BTC’s price in each cycle. When BTC is transferred from one investor to another, the transaction not only has a dollar value but also destroys the time value related to the holding period of the original investor.
The unique algorithm of CVDD ensures that its value trend continues to rise, meaning that today’s CVDD will always be higher than yesterday’s, never retracing. This is very effective in constructing a continuously rising bottom of the market during a price decline in a bear market!
Note: This is a creative re-expression of the original article, and the general semantics have been retained while ensuring accuracy and fluency.
