Bitcoin has pulled back 22% from its all-time high in March. Now, on-chain intelligence company Glassnode suggests the market could be “hammering out a local bottom formation.”
In a new report, the firm suggests that the market is currently still in a “euphoria” phase—a period in a bull market where unrealized profits surpass more than half of the market capitalization of Bitcoin. When investors are in this state, the market should expect a correction.
With Bitcoin crashing to $57,000 at the time of writing, many investors believe we’re currently experiencing such a correction. But how much further will this drawback go?
Glassnode said that a good way to identify whether we’ve reached the local bottom is when short-term investors realize losses. Its historical data shows numerous examples from 2020 until now that show when one-week to one-month-old entities realize losses, Bitcoin’s price often begins to climb shortly after.
Carlos Mercado, data scientist at analytics company Flipside Crypto, told Decrypt, “I’m inclined to believe Glassnode is correctly identifying the ‘paper hands’ phenomenon within a specific cohort.”
“Paper hand” investors leave the market at the highest rate when the market is reaching its bottom. As long as the market-value-to-realized-value (MVRV) ratio—a measure of an asset’s market cap versus the value stored in the asset—remains between 1.0 and 0.9, it has a chance to bounce back.
Fortunately, the market is within this band, providing hope that it can rebound.
“It could be argued that the market is hammering out a local bottom formation,” the report explained. “That said, a sustained break below that MVRV level could create a cascade of panic and force a new equilibrium to be found and established.”
Since the publication of this report, the price of BTC has continued to slide from $66,700 down to $57,000. Is this the beginning of the paper-hands sell-off that the report predicts? Or will it go lower?
“Judging by the market dynamics on Wednesday, the closest consolidation to the current price level was in the $50,000 to $52,000 area,” senior market analyst at FxPro Alex Kuptsikevich explained to Decrypt.
“A more dramatic scenario suggests a pullback to the $40,000 to $44,000 area, which would shake the weak hands out of the market before we get sustained interest from new buyers,” Kuptsikevich added.
Edited by Ryan Ozawa.