Analysts: Bitcoin short-term sell pressure is absorbed by long-term holders

The Bitcoin market fell below $39,000 after the Easter holidays as “weak hands” continued to sell, forcing prices down to a local low at $38,729 before bouncing back. This uptake is driven by persistent and robust undercurrent demand.

According to a blog post by on-chain data analysts Glassnode, the Bitcoin market remains strongly correlated with traditional markets that themselves are facing several macro headwinds. They wrote

“The current broader market environment is one of rapid change, with a wide array of commodity markets breaking to new highs, bond yields trading strongly higher, and a seemingly ever worsening supply chain disruptions and headline inflation. As a relatively new, globally traded, and persistently active market, it is unsurprising that the bitcoin price often reacts to a very wide scope of market forces,” 

In analyzing long- and short-term holders, Glassnode has drawn some interesting conclusions about the cohorts’ respective aggregate behavior, and the statistical probability of spending their bitcoins.

Significant investor demand inflows

Bitcoin (BTC) has seen fairly significant investor demand inflows in the $35,000 to $42,000 price zone, with a significant number of bitcoins changing hands in this price range, redistributing the coin supply between the $33,000 local low set on January 22nd, and today.

On the 22nd of January, the range of prices at which the bitcoin supply had last transacted was relatively well distributed between $35,000 and $63,000, which indicates a relatively consistent demand both on the way up between August and November 2021, and on the way down between November 2021 and January 2022.

According to Glassnode, a large amount of coin supply has been re-accumulated between $38,000 and $45,000, which is the primary price range of the current market consolidation, and despite an additional two and a half months of sideways consolidation, a large proportion of the market appears unwilling to spend or sell their bitcoins, even if their coins are held at a loss. This indicates that price-insensitive long-term holders are holding much of the supply bought above $40,000.

In addition, bitcoins that have been redistributed at a profit since the $33,000 low appear to come mainly from dip buyers, acquiring bitcoins in the price range between $32,000 and $36,000.

Most of the short-term holders have already capitulated

“The overall takeaway observation,” Glassnode writes, “is that the pattern of both profits and losses realized over the last two and a half months suggest that investors continue to see the $35,000 to $42,000 range as a value zone for accumulation.”

“Almost everyone who purchased after the all-time high in November 2021 is a short-term holder. This cohort is the most likely to spend their coins in reaction to market volatility, and almost everyone who purchased before the all-time high is a long-term holder. This cohort is the least likely to spend their coins, preferring to accumulate in anticipation of the next macro bull market,” Glassnode writes.

The key takeaway is that most of the short-term holders that bought the top have already capitulated selling their coins to new buyers who see value in the price range between $38,000 and $50,000. At the same time, long-term holders, who have endured significant volatility, hold 15.2% of the coin supply at a loss but are still reluctant to sell. This indicates that these investors are unlikely to give in to sell-side pressure.

But what is the risk of additional sell-side pressure from these two cohorts? According to Glassnode, the current market profitability is much better off than it was in the 2018 or 2020 bear markets when long-term holders alone held more than 35% of the coin supply at a loss. In the current situation, both long- and short-term holders together hold 30.2% of the coin supply at a loss, which, in turn, is quite evenly distributed between the two cohorts.

Long-term holders’ coins pushed into unrealized loss

On the other hand, compared to the May-July 2021 period, market profitability is in a worse position, with long-term holders, in particular, holding significantly more supply at a loss.

According to Glassnode, a historically significant volume of long-term holders’ coins was pushed into an unrealized loss by the correction seen since November, which means that the amount of bitcoin purchased between August and November 2021 is some of the most significant of all time.

In the past, such high purchasing volumes have usually been seen in late-stage bear markets, most of which foreshadowed a final capitulation shake-out event. Looking at short-term holders, a similar pattern can be observed – the high value reached in October is comparable with the 2019 rally when during a relatively short timespan, large portions of holders regained profitability. The blog post continued by stating

“The takeaway from this study is that a historically large volume of investors who were active between August 2021, and January 2022 have seen the market price plunge below their cost basis, which has catalyzed a large-scale redistribution of the Bitcoin supply to new hands,”

Look out for long-term holders capitulating

But what will it take to precipitate a final capitulation flush out, given that the market has already endured significant financial pain?

“The magnitude of short-term holders realized losses has only been at a similar magnitude twice in the past, both occurring in the worst phases of the 2018 bear market. By this metric, a short-term holder capitulation has already occurred, and it is twice as severe as, during the July 2021 bottom at $29,000”, Glasnode writes.

In addition, “the degree to which the Long-Term Holder realized price, currently trading at $14.600, has declined is the deepest in history, and is without an equal.”

Per Glassnode, the most likely mechanism by which the long-term holders realized capitalization can decline is if long-term held coins that were held at a cost basis much higher than the aggregate at $14.600 would capitulate. This would mean that long-term holders would leave the cohort redistributing their coins to new short-term buyers who see a value between $35,000 and $42,000.

“This effectively removes high-cost basis coins from the aggregate, giving coins with much cheaper cost bases, such as coins from previous cycles, more weight,” Glassnode wrote.

The ownership structure of bitcoin has been reshuffled

During the last 5 months since bitcoin’s all-time high, and the over 50% correction following, the ownership structure of bitcoin has apparently been reshuffled to a large extent with some long-term holders – with coins purchased above $50,000 – completely unscathed, whilst others have been totally shaken-out, at a historically significant rate.

Looking ahead, a complete and total capitulation of the market may come, as anticipated by many investors given the volume of coins held at a loss, and a weak price structure. But a big part of the market has already capitulated, selling off their bitcoins which quietly and entirely have been absorbed by a resilient inflow of demand in the $35,000 to $42,000 range.

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