On-Chain Indicators Suggest Bitcoin (BTC) Has Reached a Market Bottom

Be[In]Crypto takes a look at various on-chain indicators in order to determine if Bitcoin (BTC) has reached a bottom. The indicators analyzed will be: Hash Ribbons, Adjusted Dormancy Flow, Puell Multiple and Realized Losses. 

Hash Ribbons

Hash Ribbons are indicators based on the hash rate of BTC. They operate on the assumption that BTC reaches a bottom when miners capitulate. This means that their mining costs are higher than the rewards they receive from mining.  

Hash Ribbons are created by the ratio between two simple moving averages (SMAs) of the hash rate: the 30-day SMA and the 60-day SMA. A bullish cross between these two MAs is considered a buy signal. The longer the time in which the 60-day SMA was below the 30-day SMA prior to the bullish cross (red), the stronger the buy signal. 

Historically, the indicator has been extremely accurate in predicting market bottoms. Excluding the current cross, there have been 13 previous bullish crosses, and they all have led to at least a short-term upward movement. Moreover, the Jan 2012, Jan 2015, Jan 2019 and March 2020 crosses (black circles) led to absolute bottoms.

The current bullish cross occurred on Aug 21. So far, the BTC price has only decreased after the cross has been made. If an upward movement does not occur soon, it would mark the first time in history that such a cross is not followed by a significant increase.

Adjusted Dormancy Flow

The Entity-Adjusted Dormancy Flow is the ratio between the market capitalization and the annualized dormancy value, which in turn measures the number of coin days destroyed and the volume with which they are destroyed. 

Historically, values below 250,000 have been considered oversold and marked market cycle bottoms. Such readings indicate that the market capitalization is low relative to the number of old coins that are being spent.

So far, BTC has reached bottoms inside this five times (black and red circles). The first four marked absolute bottoms, after which a very significant price rally occurred. However, the fifth one (red circle), which occurred in the beginning of 2022 only led to a small upward movement. Afterward, this was followed by a very sharp drop. 

Afterward, Adjusted Dormancy flow reached an all-time low value of 126,000 in June. So, even though this is an extremely oversold value, the fact that it has never been reached before and is below the supposed 200,000 lower limit (green box) puts the indicator into an unprecedented state.

Puell Multiple 

Puell Multiple is an indicator that measures the health of Bitcoin miners. It is created by dividing the daily issuance value of bitcoins (in USD) by the 365-day moving average of daily issuance value. By doing so, it provides a visualization of the market cycle from the perspective of miners’ profitability.

Historically, values between 0.3-0.5 (green) have marked market cycle bottoms, while those between 4-10 (red) have been associated with tops. 

So far, the indicator has reached five lows inside this area. The first four (black circles) were all market cycle bottoms. It remains to be seen if the fifth one (red circle) will also mark a bottom. In this perspective, this indicator is very similar to Entity-adjusted dormancy flow.

However, the caveat is that the fifth signal has not been invalidated yet, allowing for the possibility that the indicator will preserve its 100% success rate.

Realized Losses

Finally, well-known cryptocurrency analyst @TheRealPlanC tweeted a chart of the BTC Denominated Realized Losses indicator. 

In its history, the indicator had twice moved above four Z scores, doing so on Dec 2018 and March 2020. Both these periods market BTC price bottoms. 

Afterward, the indicator reached a high of five Z-scores above the mean in June. The indicator has now reversed to the mean, but an upward movement has yet to follow.

Interestingly, this value was reached at the same time in which Puell Multiple and Entity-Adjusted Dormancy Flow reached their respective bottoms and Hash Ribbons gave a buy signal. So, these four indicators are mostly in agreement, the exception being the potential invalidation of the Entity-Adjusted Dormancy Flow. 

If a sharp upward movement were to follow the June bottoms, it would confirm the validity of these indicators and the possibility that an absolute bottom has been reached.

For Be[in]Crypto’s latest Bitcoin (BTC) analysis, click here