The Must-Know Signals Every Bitcoin Investor Needs To Follow

The Must-Know Signals Every Bitcoin Investor Needs To Follow
Stéphane Renevier, CFA

about 2 years ago6 mins

  • On-chain indicators can reveal interesting insights into the behaviour of crypto investors, and could provide you with a serious edge.

  • MVRV can be used to identify tops and bottoms, HODL waves to assess the dynamics between smart and weak money, and HODLer position changes to identify insider buying and selling patterns.

  • And while those three indicators are not yet screaming buy, they are improving and suggest we could be close to a bottom in prices.

On-chain indicators can reveal interesting insights into the behaviour of crypto investors, and could provide you with a serious edge.

MVRV can be used to identify tops and bottoms, HODL waves to assess the dynamics between smart and weak money, and HODLer position changes to identify insider buying and selling patterns.

And while those three indicators are not yet screaming buy, they are improving and suggest we could be close to a bottom in prices.

If you invest in stocks, you’re probably very familiar with price indicators – P/E ratio, simple moving average, insider buying – that tell you when to buy into a market or when to get out of dodge. But bitcoin investors have hundreds to choose from too – some of which can give you a real edge in the market. There are three I think that are particularly useful: let’s take a look at how they work, and see what they’re telling us about the market right now.

Indicator #1: Market value to realized value (MVRV)

How is MVRV calculated?

MVRV is calculated by dividing bitcoin’s total market capitalization (total supply x market price) by its realized capitalization (the price at which the coins were last transacted on-chain).

The market capitalization represents the current market value of bitcoins, and realized capitalization represents an estimate of bitcoin’s aggregate “stored value” (or “cost basis”). Positive values generally mean investors are sitting on unrealized profits, while negative values mean they’re sitting on unrealized losses.

Why is MVRV useful?

MVRV has historically been one of the most reliable on-chain indicators of bitcoin market tops and bottoms. Here’s why: extreme deviations between bitcoin’s price and its stored value indicate periods when investors have large unrealized gains or losses, raising the probability that they’ll cut and run. Historically, any value higher than 3 has tended to come before a market top, while anything closer to 1 has tended to precede market bottoms. It’s important to note that MVRV seems to work best when it reaches extreme values, though carefully assessing short-term changes can also yield interesting insights.

What does MVRV currently tell us?

The MVRV currently sits at 1.7, putting the indicator above the key “strong buy” level of 1. This isn’t exactly bullish for bitcoin, and suggests further price falls could be in store before we see a market bottom. Still, the indicator value is relatively low and falling, and could suggest we’re getting closer to that point.

Bitcoin MVRV ratio not yet at strong-buy levels. Source: Woobull.com
Bitcoin MVRV ratio not yet at strong-buy levels. Source: Woobull.com

Indicator #2: HODL waves

How are HODL waves calculated?

HODL waves reflect the percentage of circulating cryptocurrency supply that hasn’t moved over a certain period of time. Put differently, it highlights the proportion of coins of a specific “age group” (i.e. the time between when it’s stored in a wallet and when it’s spent) by a specific colour. Colder-colored bands represent older coins, while warmer-colored ones represent younger ones. The thickness of the bands is also revealing: the thicker the band, the higher the proportion of coins of that specific age in the market.

Why are HODL waves useful?

HODL waves are a nice way of visualizing whether we’re seeing a higher proportion of older or younger coins in the market, as well as whether long-term investors are selling their coins to short-term traders. In other words, HODL waves are useful to assess the dynamic between long-term HODLers and shorter-term speculators (“smart money” versus “weak money” respectively).

If younger coins are being accumulated (warmer bars get thicker) at the same time as the proportion of the oldest coins declines, it could be seen as a bearish signal, indicating that HODLers are taking the profits on their long-term investments and passing their positions to short-term speculators. That’s why it’s key to analyze the behavior of a specific age group versus others: it not only gives a pretty good indication of which type of investor has the upper hand, but also which groups are accumulating or selling.

What do HODL waves currently tell us?

Looking at the thickness of the latest bars, we can see that long-term coins (those older than five years) represent a significant proportion of the total supply. We also see that short-term coins (up to three months old) represent less than 20% of the total supply, near the bottom of their historical range. That suggests long-term HODLers still have confidence in the market and that they aren’t selling their positions to shorter-term speculators.

HODL waves suggest healthy market dynamics. Source: Glassnode
HODL waves suggest healthy market dynamics. Source: Glassnode

Looking at the changes in the bars, we can see that while the proportion of long-term coins (colder bars) is pretty stable, the proportion of short-term coins (warmer bars) is falling. That suggests a low appetite from speculators to enter the market at these levels. A bigger fall in the proportion of short-term coins could be positive for markets, as it could indicate that speculators are either accumulating coins or that HODLers are gaining market share. Keep an eye on the dynamics between short-term and medium-term coins in the next few weeks: it could be key to assessing how robust – or how fragile – the market is.

Indicator #3: HODLer position changes

How are HODLer position changes calculated?

HODLer position changes are represented by the rolling 30-day change in coin ages. Positive values indicate that coins are ageing faster than they’re being spent, meaning investors are in an accumulation mindset rather than selling mode. Negative values, then, indicate HODLers are spending the coins they’ve accumulated.

Why are HODLer position changes useful?

These position changes show when investors – particularly long-term HODLers – are spending and when they’re accumulating, which provides a good indication of insider buying or selling behavior.

See, HODLers are assumed to be “smart money” who reduce their positions when they believe market dynamics are turning bearish. On the other hand, they tend to buy – or… hold – when their outlook is more constructive. Following their actions could provide useful clues as to what the pros are really thinking (and not necessarily saying publicly) about the outlook for bitcoin.

What do position changes currently tell us?

HODLer position changes have remained net positive since last summer, suggesting they are – true to form – sticking with their positions. That could be seen as a positive sign, as HODLers tend to spend when the market is near a top and accumulate when they think prices are attractive.

HODLers are HODLing, which is constructive. Source: Glassnode
HODLers are HODLing, which is constructive. Source: Glassnode

Of course, they don’t always get it right: just look at bitcoin HODLers’ net spending behaviour in January 2019, when they started selling their bitcoin in response to its falling price, only to see that price decline then reverse.

How can you use these indicators?

These three on-chain indicators indicate a mixed but improving outlook for bitcoin prices: the MVRV indicator shows that further losses could be in store before a strong buy signal is reached, while HODL waves and HODLer position changes suggest that long-term bitcoin investors are still confident and continuing to accumulate coins. That could mean we’re getting closer to the bottom.

Now it’s important to note we’ve only covered three of the hundreds of existing on-chain indicators, so we shouldn’t overinterpret the results. And keep in mind that these indicators are a start rather than an end point, and you should aim to keep developing your theoretical and practical knowledge of how they work. Still, understanding them in more detail and tracking them closely should provide you with a significant edge over investors who don’t.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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