The Daily Dive #070 - Short-Term:Long-Term Cost Basis Ratio
In today’s Daily Dive we will dig into a new metric for timing bitcoin bottoms. This metric will use the realized price of two separate cohorts of bitcoin investors; long-term holders and short-term holders.
First, before digging into the metric, let’s define some of the terms:
Realized Price: Realized price is the average price that every coin (technically: UTXO) was moved on the network. For some, realized market capitalization is an easier metric to understand. Realized market capitalization, which is nearly an identical metric as realized price, takes the aggregate of every bitcoin on the network at the price it last moved. Realized price is currently $21,100, while realized capitalization is $397.4 billion. Realized price can otherwise be thought of as the cost basis for everyone across the network on average.
Long-Term Holder: A long-term holder is defined as someone whose bitcoin has not moved wallet addresses in 155 days. While 155 days may seem like somewhat of an arbitrary threshold, the time was chosen because the statistical probability of a UTXO being spent decreases the longer it is held. The chart below shows the probability that a UTXO is spent within the specified time in days as a function of its coin age.
With long-term holders defined, anyone whose coin has been dormant for less than 155 days is classified as a short-term holder.
Using Glassnode’s suite of data, we can construct a realized price for both long and short-term holders. While Glassnode does not provide the realized price for these two groups of investors, it is easily calculated using data that is provided. Using the market-value-to-realized-value ratio (MVRV) for the two seperate groups, you simply divide price by the MVRV ratio of the two groups to backwards-calculate the realized price.
Below is the history of MVRV for long-term holders (LTHs) and short-term holders (STHs):
*Note that LTH MVRV is in log scale, while STH MVRV is in linear scale.*
Calculating LTH & STH Realized Price
So how can the realized price rice of LTHs and STHs help us to identify bitcoin bottoms, and *potentially* help to identify bitcoin tops? Let’s dive in.
Using LTH & STH Realized Price to Identify Bitcoin Bottoms
When examining the chart above, some interesting trends emerge (Note: LTH realized price = blue, STH realized price = purple). Specifically, when the price that short-term holders paid for their coins crosses below that of long-term holders, who subsequently have been in the market for longer and thus would usually have much earlier entry points into the market and have obtained more attractive returns.
Highlighting these periods shows that this occurred during the three bear markets, and marked generational buying opportunities for bitcoin investors.
Taking this a step further, let’s introduce the STH:LTH realized price ratio.
STH:LTH Realized Price Ratio
Dividing the cost basis of short-term holders by the cost basis of long-term holders gives a deadly accurate signal of the state of the market. As covered above, when the cost basis (realized price) of STHs falls below that of LTHs, that is the market’s way of screaming:
“FIRE SALE!”
This can be seen with the ratio whenever the orange line dips below the black dotted line. But, can anything else be derived from this ratio? Yes:
When the STH:LTH realized price ratio is increasing, it means that the cost basis of STHs is increasing relative to LTHs, and conversely, when STH:LTH realized price ratio is decreasing, the cost basis of LTHs is increasing relative to the cost basis of STHs.
This is extremely insightful, as the price of bitcoin rises when the marginal seller is exhausted. This is why you see the cost basis of LTHs stay somewhat stagnant during explosive bull markets, while the cost basis of STHs (many of whom are new market participants) explode upwards - there are simply not enough coins to go around to meet newfound demand. Thus “number go up.”
During bear markets, what we have seen is that due to both capitulation as well as the maturation of coins (after the 155 day threshold STHs age into LTHs), the LTHs cost basis rises while the STHs cost basis trends lower, due to the pullback in price from the blow-off top highs.
Where Is Bitcoin Today?
During the later months of 2020 all the way through May of 2021 as the price of bitcoin was running up, the cost basis of STHs exploded, while LTHs remained dormant, but following a correction of over 50% and a consolidation around $40,000, the cost basis of STHs has begun to slowly decline, currently at $42,000, while the cost basis of long-term holders has begun to steadily climb, now at approximately $16,000. This steady increase is due to coins aging in to the LTH classification, but this is extremely telling for one main reason:
155 days ago was April 27, 2021, which means that any bitcoin that is aging in the long-term holder cohort today didn’t budge even with an over 50% drawdown in price. Bitcoin supply held by LTHs has been in a straight line up and to the right since April.
So if we revisit the STH:LTH realized price ratio once again, is it necessarily a bad thing that the metric is trending downwards like it has in bear markets previously? No, but rather the opposite. Think of this trend as a spring coiling ever more tightly - that is what is happening with the bitcoin supply currently. Does this mean that further downside price action is to come? It is possible, but certainly not an inevitability. In fact, bitcoin seems to be holding up extremely well in the face of increasing macroeconomic uncertainty.
In summary, using the realized price/cost basis of long-term and short-term bitcoin holders, we can help to identify what phase of the market cycle we are in, and despite hovering above $40,000 at the time being, this market looks nowhere near overheated, with the price looking increasingly like more of a bargain every passing day. As long-term holders continue to soak up the free float of available supply, the proverbial spring of the bitcoin price will eventually explode upwards, and the reflexive bull market cycle will be born again.
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