Profit and Loss Supply Measures Predict Bitcoin Price

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On November 10, 2021, bitcoin hit its all-time high of $ 69,000, according to the Bitstamp exchange rate.

It is truly an incredible event that BTC was able to climb so high, increasing the total market capitalization of the asset to $ 3 trillion, according to CoinGecko. But not so long ago, in June and July of this year, things didn’t look so rosy. BTC was relatively low, at least such an impression could have formed for many, and at one point it even looked like BTC could test the lower levels of $ 12,000 to $ 16,000.

And there were other developments that may have made investors nervous at this time, such as the claims of Chinese regulators, the special attention of US regulators, the propensity of retail investors to continue panicking, etc. .

But what the first cryptocurrency taught us for sure is that the price is hard to predict. So, by what should we guide ourselves? There are many great trading strategies out there, but today I propose to analyze bitcoin using chain supply metrics.

In my opinion, the supply metrics have worked well in the current rally, and I believe they will continue to generate valuable signals for us, which lend themselves to analysis.

Let’s take a look at two approaches to analyze BTC using measures of supply in profit / loss. But first, let me remind you of the meaning of the terms.

Percentage of BTC supply in profit: This is the percentage of the circulating supply in profit, or in other words, the percentage of existing bitcoin for which the price in their last move was lower than the price Current BTC. Usually, when an overwhelming percentage of the total BTC supply is profitable, it means the market is in a bullish cycle or is on the verge of a bullish rally. The period during which coins can profit can range from several weeks to several months before a noticeable bearish correction occurs in the market. The indicator is based on the UTXO value.

Percentage of losing BTC supply: This represents the absolute amount of bitcoin in a given network that is currently losing (that is, on their last move, their price was higher than the current BTC price). This metric helps highlight market lows by suggesting when investors might be ready to re-enter the market. The percentage of the losing BTC supply does not take into account the amount of the loss. This metric is also based on the UTXO value.

Analyze BTC supply in profit using technical trend lines

As the basis for this method, I took the net BTC supply percentage in the profit / loss measures. I applied an additional parameter in the form of a 21 day simple moving average to avoid the sawtooth effect of the display and analyze it more easily. Anyone can set identical data settings in an account of a blockchain data provider like Glassnode, CryptoQuant, etc.

After setting up the indicator, it is necessary to apply the method of technical analysis, especially the trend lines. By the way, I hardly ever saw traders start using trend lines on on-chain data. In my opinion, this is a big oversight because we can get some very effective signals by doing it.

Interpreting Bitcoin’s Offer as Profit

When the profitable supply is consistently in the 90% to 99% range, it means that BTC tends to start parabolic growth. When a profitable supply curve breaks its trend lines (marked with light gray circles), it suggests that bitcoin has completed its global or local growth and will soon experience a decline.

Most often, the maximum price of bitcoin and when the supply curve crosses its support differ by several days. There are also times when the profitable supply curve reaches levels close to 90-99% and does not stay there for long, after which the trendline is broken and the price of BTC begins to fall.

You can consult the table below:

Source: CryptoQuant

Interpretation of the losing Bitcoin supply

On the example of the unprofitable offer, we see that the significant level of losses is 50%. The supply curve is hardly ever higher and has no periods of bright consolidation.

The losing supply metric (on a 21-day moving average) allows us to indicate the redemption areas in which BTC buy signals are generated (light gray circles). The method of using trend lines is the same as the example above with a profitable bid. This should be noted in an example dated July 29, 2021, where the value of the metric did not reach the required level of around 50%. There occurred what I call the “intersection” of profitable and unprofitable supply curves, which gave the signal to buy due to the capitulation of traders.

Source: CryptoQuant

Applying this method seems to be useful not only for long term analysis, but is also excellent for short and medium term analysis.

Evaluate the net percentage of BTC supply in profit

Every now and then, in the vastness of the cryptocurrency community, I come across the opinion that the BTC supply percentage in profits exceeding 90% is a bearish factor. I understand why some people may have such an opinion, but it is not entirely true.

To find out if a profitable offer is bullish, you need to compare it to BTC foreign exchange reserves, as well as I / O (NetFlow). This method is more suited to understanding the medium to long term price action of bitcoin.

The conditions of the bullish pattern are as follows:

Significant BTC exit from crypto exchanges Declining BTC reserves; Profitable offer greater than 80% to 90% on average

The graphic below shows some examples (areas of white rectangles), where all the conditions for a bull run are met.

Source: CryptoQuant

In all other cases, when there is no significant outflow of BTC, or even if there is an influx of different forces, and the growing reserves of BTC on the cryptocurrency exchange see a Simultaneous increase in unprofitable supply, this indicates a bearish mood of traders. After that, traders’ surrender often occurs (indicated by light yellow circles below), demonstrating that a local or global bottom has been reached.

Source: CryptoQuant

In conclusion, I would like to say that so far, many professional and newbie traders in the cryptocurrency world continue to ignore the value of blockchain (on-chain) data. It seems that on-chain data (mostly related to supply metrics) deserves more attention and further study as this data has performed well in the current bullish rally. I think these measures will continue to prove useful in this way.

This is a guest article by Baro Virtual. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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