Author: Murphy, Crypto KOL (X: @Murphychen888)
Analyzing on-chain behavior to determine how low BTC could potentially drop in extreme conditions during a bull market.
The general logic is to evaluate from two perspectives based on on-chain behavior analysis and historical data.
Method 1: From the perspective of STH-MVRV (short-term holders)
Short-term holders are important participants in the transition between bull and bear markets, so the performance of STH-MVRV has significant reference value in the bull market cycle. I have explained its principles and functions in detail in two previous tweets, and new readers can refer to the following links for more information.
Detailed explanation of the role of STH-MVRV in the bull market: [link]
Historical performance of STH-MVRV: [link]
It is well known that two terrifying black swan events occurred in the previous cycle, causing a sharp drop in BTC prices. From the chart below, we can see that during the 3.12 event, STH-MVRV reached a minimum of 0.59, and during the 5.19 event, STH-MVRV reached a minimum of 0.67. This means that during 3.12, short-term holders had an average unrealized loss of 41%, and during 5.19, they had an average unrealized loss of 33%. This shows how severe the market was at that time.
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In this current cycle, there have also been three impressive market surrender events:
1. On March 10, 2023, Silicon Valley Bank collapsed, causing BTC prices to drop from $25,000 to $20,000, with STH-MVRV reaching a minimum of 1.02.
2. On June 5, 2023, Binance was sued by the SEC, causing BTC prices to drop from $30,000 to $25,000, with STH-MVRV reaching a minimum of 0.95.
3. On August 17, 2023, there were reports of SpaceX selling $373 million worth of BTC, triggering long liquidations, with STH-MVRV reaching a minimum of 0.91.
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The corresponding STH-MVRV values for these special events in relation to the current BTC price are as follows:
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 bottom range of the bear market, we can evaluate market sentiment fluctuations based on the performance of STH-MVRV. The depth of the STH-MVRV retracement also reflects the magnitude of the impact that caused the BTC price to drop.
For example, in 2020, when the COVID-19 pandemic swept the world, it was a severe test for human life and health. In the face of a survival crisis, no one had the mental capacity to consider anything other than life, including investments. The impact of the 3.12 event on the risk market was equivalent to a magnitude 9 earthquake. In this bull market cycle, based on the current foreseeable conditions, the probability of another black swan event of the same magnitude (affecting human survival) is almost zero. Therefore, it can be inferred that STH-MVRV will not reach 0.59, meaning that BTC’s price will not reach $37,979 (which can be ignored).
The cause of the 5.19 event was a panic event triggered by the Chinese government’s crackdown on mining companies. Although it was also a black swan event, it did not reach the level of “life or death”. Therefore, STH-MVRV reached a minimum of 0.67, which was significantly better than the situation on 3.12. Therefore, I believe that if there is a market shock caused by the economic recession in the United States, its maximum impact will be similar to the level of 5.19. If we use this as a benchmark, then the maximum retracement of BTC’s price in this bull market cycle would be around $43,129.
Considering the impact on the crypto market caused by the delay in the Fed’s interest rate cut and the expectation of only one interest rate cut this year, it should be at a similar level to events like “Silicon Valley Bank collapse” and “Binance FUD.” Therefore, I still maintain the view from my previous tweet that BTC is more likely to consolidate in the range of C1 and C2 (i.e., $60,000-$64,000 and $66,000-$70,000).
As of June 21, STH-MVRV is 0.99. In the bull market process, when STH-MVRV is below 1, it usually means that opportunities outweigh risks (only for BTC, not including ALT).
Method 2: From the perspective of the fair market price algorithm
First, we need to introduce a new concept called “True Market Fair Price (TMMP),” and its algorithm and principles are as follows:
TMMP = (Realized Cap – Thermocap) / (Liveliness x Circulating Supply)
In this formula, there are three basic concepts that need to be understood:
1. Realized Cap: It values each UTXO based on the price when it was last moved. It accumulates the value of all unspent UTXOs in the network, reflecting the total capital input into the BTC market more accurately because it considers the last movement time and price of each bitcoin, thus reflecting the real capital inflow into the BTC market.
2. Thermocap: Also known as the total security expenditure, it is the sum of the USD 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) are calculated by multiplying the number of bitcoins held by the number of days. One bitcoin held for one day equals one Coin Day.
Coin Days Destroyed (CDD) is the total number of Coin Days destroyed when bitcoins are spent. In other words, Coin Days Destroyed is the sum of the Coin Days of all spent bitcoins.
The numerator of the TMMP algorithm subtracts Thermocap from Realized Cap, which represents deducting the part of the total capital inflow into the BTC market paid to miners from the general cost basis of the market. The denominator multiplies Liveliness by the circulating supply, representing the number of current active BTCs (spent). It covers all active chips on the chain, including ETFs, whales, exchange inflows and outflows, etc., and excludes the miner portion, as well as long-term dormant or lost chips. Therefore, using TMMP as the on-chain cost basis to evaluate the average regression model of active investors purchasing BTC in the secondary market is one of the most accurate models sought by analysts.
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As shown in the above chart, the blue line represents TMMP, and the gray line represents BTC price. Whenever the BTC price surpasses the blue line, it means that the market has emerged from the bear market and entered the bull market cycle. Although there may be false breakouts before this, once an effective breakout is formed, the BTC price will hardly drop below TMMP, even during the 5.19 black swan event. However, 3.12 is the only exception, as it made the BTC price drop below TMMP again after entering the bull market cycle.
At the end of the bull market, once the BTC price falls below TMMP, it means that the bull market is over. In other words, as long as we are still in the bull market cycle, the price of BTC will not be lower than TMMP, unless a super black swan event occurs (at the level of affecting human survival).
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As of June 21, the TMMP model evaluates the “true market fair price” as $44,940. This means that even if a black swan event of a similar level to 5.19 occurs, 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, so I believe it is a referenceable number.
In conclusion, we can draw some conclusions:
1. In the absence of a super black swan event, the maximum retracement of BTC due to other macro factors will not be lower than $43,000-$44,000.
2. The so-called super black swan event must reach a significant level that challenges human life (such as a nuclear war between Russia and Ukraine). Clearly, “US economic recession” is not at that level.
3. Since it is the maximum value, it means “it is highly unlikely to reach,” not “it might reach.”
4. The analysis above is based on the bull market cycle. If it enters a bear market, the maximum standards of STH-MVRV and TMMP will become invalid.
Furthermore, I can confidently make a longer-term prediction: even at the bottom of the next bear market cycle, the price of #BTC will not drop below $22,500. Although it may not have much significance at the moment, it tells us that as time passes, the lower limit of BTC will continue to increase. If your cost of holding #BTC is below this, please cherish it.
The basis is the CVDD algorithm:
CVDD (USD) = ∑(CDD × price) / (days × 6,000,000)
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As shown in the above chart, CVDD accurately depicts the historical bottom of BTC prices in each cycle. When BTC is transferred from one investor to another, the transaction not only has a USD value but also destroys the time value associated with the holding time of the original investor. Its unique algorithm makes the value trend of CVDD continually 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 limit in a bear market where prices are falling!
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