Bitcoin Market at Decision Point: Will This On-Chain Retest Succeed?

On-chain data suggests that one bitcoin metric is nearing a key retest that could make or break a rally. Will the bulls come out on top?

The profit/loss ratio for bitcoin short-term holders is nearing the 1 level

According to data from on-chain analytics firm glassnodeA successful retest here would be constructive for the asset price. The indicator of interest here is the “realized profit/loss ratio,” which measures the ratio between profit and loss that bitcoin investors across the network are currently feeling.

The metric works through the on-chain history of each coin sold to see what price it was bought at. If this previous price for a coin was less than the BTC price it is now being sold/transferred, then the sale of the coin is said to have made some profit.

Naturally, the opposite situation would mean that the loss is accruing along with the movement of the coin. The metric takes the sum of all such profits and losses being reaped in the market and finds the ratio between them.

When the value of this ratio is greater than 1, it means that the market as a whole is currently making some amount of profit. On the other hand, values ​​below this threshold mean that damage is more dominant in this region right now.

In the context of the current discussion, the true profit/loss ratio for the market as a whole is not really the metric of focus, but rather the version specifically for “short-term holders” (STH).

STH are one of the two major groups in the bitcoin market and include all investors who have been holding their coins for less than 155 days.

Here is a chart showing the trend of the profit/loss ratio of the 7-day exponential moving average (EMA) BTC STH over the past few years:

The value of the metric seems to have been going down in recent days | Source: Glassnode on Twitter

As shown in the above graph, the 7-day EMA Bitcoin STH P/L ratio has been above 1 during the past few months, indicating that profit booking has been the dominant force.

This naturally makes sense, since the rally took place during this period, which would have made these investors quite profitable. Lately, however, the metric has been trending down as price declines have been observed.

From the chart, it is visible that the indicator is now closing towards the 1 mark. The 1 line has historically been of great importance to the market, as it serves as the point where STH is breaking even on its sales.

This line has usually provided resistance for the price of bitcoin during bearish periods, while it has become a support point during bullish regimes. The reason behind this interesting pattern is that investors view their break-even mark very differently between the two types of markets.

In a bearish environment, investors look to the break-even mark as an ideal exit point, that way, they can at least avoid going into losses. Thus, there is a lot of selling at the level, from which price resistance is felt. Similarly, investors see this level as a profitable buying opportunity during rallies, so they participate in some buying in it.

Obviously, this retest of level 1 has to be successful if the current rally is to have any chance of going. However, if there is a breakdown here, then the bearish trend could return for bitcoin.

btc price

At the time of writing, bitcoin is trading around $26,000, up 1% over the past week.

BTC has been moving sideways | Source: BTCUSD on TradingView

Featured images from iStock.com, Charts from TradingView.com, Glassnode.com