Glassnode Historic Compression of Volatility Continues Potential for Increased Fluctuations Ahead

Summary
Despite Bitcoin’s sideways or downward price movement, a significant portion of the market remains profitable, with short-term holders bearing most of the losses. By combining on-chain valuation models and technical indicators, we explore the future development of the market. Volatility continues to compress historically, indicating investor sentiment is muted but also suggesting the possibility of larger future fluctuations. The market’s profitability remains strong, as evidenced by the MVRV ratio, with an average profit of 2x per coin. This is typically an indicator or rule to distinguish between “enthusiastic” and “frenzied” bull market phases. By categorizing all held coins into unrealized profit or loss, we can evaluate the average cost basis for each group and the average magnitude of unrealized profit and loss per coin. The coins with average profit hold unrealized gains of $41.3k with a cost basis of approximately $19.4k. The coins with average loss hold unrealized losses of $5.3k with a cost basis of approximately $66.1k. These coins are mainly held by short-term holders, as few “top buyers” from the 2021 cycle are still holding. These two indicators help identify potential selling pressure points as investors want to hold onto their gains or avoid larger unrealized losses. By looking at the ratio of unrealized profit/loss per coin, we can see that the magnitude of unrealized gains is 8.2 times that of unrealized losses. Only 18% of trading days recorded larger relative values, all of which indicate that we are in a frenzied bull market phase. The ATH in March can be considered consistent with several characteristics and historical bull market peaks after the approval of ETFs. Bitcoin’s price has been consolidating in the range of $60k to $70k since the ATH in March, with investor sentiment becoming indifferent and bored. This has resulted in indecision among most investors, and the market has failed to establish a robust trend. To determine our position in the cycle, we refer to a simplified framework for thinking about historical Bitcoin market cycles: deep bear market, early bull market, enthusiastic bull market, and frenzied bull market. Currently, the price is still in the enthusiastic bull market phase, with only a few brief forays into the frenzied zone. The true market value is at $50k, representing the average cost basis for each active investor, and this level is a key pricing level for the market’s macro bull run. We then look at the short-term holder group and overlay their cost basis with their positive and negative 1 standard deviation levels. This provides areas where these price-sensitive holders may start to react: a significant signal of unrealized profit at a potential overheated market, currently valued at $92k; the breakeven level for the short-term holder group is $64k, with the spot price currently below this level but attempting to reclaim it; a significant signal of unrealized loss at a potential oversold market, currently valued at $50k, which aligns with the true market value as the boundary for the bull market. It is worth noting that only 7% of trading days recorded spot prices below the -1 standard deviation band, which is a relatively uncommon occurrence. With the price below the short-term holder’s cost basis, it is necessary to check the level of financial pressure within this group’s different subsets. By dividing according to age indicators, we can dissect and examine the cost basis of different age components within the short-term holder group. Currently, coins in the 1-day to 1-week, 1-week to 1-month, and 1-month to 3-month ranges are on average in an unrealized loss position. This indicates that this consolidation range has mostly been unproductive for traders and investors. The 3-month to 6-month group is the only subset still in an unrealized profit position, with an average cost basis of $58k. This aligns with the price low of this adjustment and marks it as a key area of interest once again. Turning to technical indicators, we can use the Mayer Multiple to assess the ratio of the price to the 200 DMA (200-day moving average). The 200 DMA is typically used as a simple indicator to evaluate bullish or bearish momentum, making any breakthrough above or below a key market pivot point. The current value of the 200 DMA is $58k, once again aligning with the on-chain valuation model. We can further evaluate the supply concentration around specific cost basis clusters using the URPD indicator. Currently, the spot price is near the lower bound of a major supply node between $60k and the ATH. This aligns with the short-term holders’ cost basis model. Currently, 2.63 million BTC (13.4% of the circulating supply) is in the $60k to $70k range, and small price fluctuations can significantly impact the profitability of coins and investor portfolios. Overall, this suggests that many investors may be sensitive to any price drops below $60k. After months of range-bound price volatility, we have noticed a significant decrease in volatility across various rolling time frames. To visualize this phenomenon, we introduce a simple tool to detect periods of realized volatility contraction, which typically signals an impending increase in volatility. The model evaluates the 30-day change in realized volatility within 1-week, 2-week, 1-month, 3-month, 6-month, and 1-year time frames. When all windows show a negative 30-day change, a signal is triggered, inferring that volatility is contracting and investors’ expectations of future volatility are decreasing. We can also assess market volatility by measuring the percentage range of the highest and lowest price fluctuations in the past 60 days. According to this indicator, volatility continues to compress to rare levels but typically precedes significant market movements after prolonged consolidation. Finally, we can enhance volatility assessment using the seller risk ratio. This tool evaluates the absolute sum of investors’ locked-in realized profits and losses relative to the asset’s scale (realized market capitalization). We can consider this indicator within the following framework: high values indicate investors spending coins with significant profit or loss relative to their cost basis, which suggests the market may need to find a new balance, usually after high volatility price movements; low values indicate that most coins are spent relative to their breakeven cost basis, indicating some level of equilibrium has been reached. This typically describes a low volatility environment within the current price range. It is worth noting that the short-term holder’s seller risk ratio has reached a historical low, with only 274 out of 5,083 trading days recording lower values (5%). This indicates a certain level of equilibrium has been established during this price consolidation period and implies expectations of high volatility in the near future. In summary, the Bitcoin market is in an interesting phase, with a dominant sentiment of indifference and boredom despite the price being 20% below the ATH. The average coin still holds 2x unrealized profit, but new buyers are in a loss position. We have also explored key factors that could lead to a shift in investor behavior. We seek a fusion of on-chain and technical indicators and have identified three key areas of focus. Breaking below $58k to $60k would put a significant number of short-term holders in a loss position and below the 200 DMA price level. Fluctuations between $60k and $64k continue the current sideways trend. Breaking above $64k would bring a significant number of short-term holders’ coins back into profit, potentially leading to a rise in investor sentiment. Volatility continues to compress across multiple time frames, both from a pricing and on-chain data perspective. Indicators such as the seller risk ratio and the 60-day price range have reached historical lows. This indicates that the current trading range is in the late stage of expanding into the next range.