Author: Murphy Source: X, @Murphychen888
Analyzing on-chain behavior to see how far BTC may drop in extreme conditions during a bull market
The overall logic is to evaluate from two perspectives based on on-chain behavior analysis and historical data.
Method 1: From the perspective of STH-MVRV (short-term holders)
Short-term holders are important participants in the bull-bear transition, so the performance of STH-MVRV has extremely important reference value during the bull market cycle. I have explained its principles and functions in detail in two previous tweets. Newcomers can refer to the following links for more information.
Detailed explanation of the role of STH-MVRV in the bull market: https://x.com/Murphychen888/status/1780825849962590374
Important performance of STH-MVRV in history: https://x.com/Murphychen888/status/1781342103639130544
As we all know, there were two terrifying black swan events in the previous cycle, which also caused a sharp drop in BTC prices. From the chart below, we can see that when the 3.12 event occurred, STH-MVRV dropped to a minimum of 0.59; when the 5.19 event occurred, STH-MVRV dropped to a minimum of 0.67. This means that during 3.12, STH (short-term holders) had an average unrealized loss of 41%, and during 5.19, STH had an average unrealized loss of 33%. It can be seen how brutal the market was at that time.
In this cycle, there have also been three impressive market surrender events:
1. On March 10, 2023, Silicon Valley Bank’s bankruptcy caused the BTC price to drop from $25,000 to $20,000, and during this period, STH-MVRV dropped to a minimum of 1.02.
2. On June 5, 2023, Binance was sued by the SEC, causing the BTC price to drop from $30,000 to $25,000, and during this period, STH-MVRV dropped to a minimum of 0.95.
3. On August 17, 2023, there were reports that SpaceX sold BTC worth $373 million, triggering long liquidations, and during this period, STH-MVRV dropped to a minimum of 0.91.
The corresponding STH-MVRV values to the current BTC prices under these special events are as follows:
STH-MVRV 0.59 = $37,979
STH-MVRV 0.67 = $43,129
STH-MVRV 1.02 = $65,659
STH-MVRV 0.95 = $61,153
STH-MVRV 0.91 = $58,579
As you can see, when the market emerges from the bottom range of the bear market, we can assess the fluctuation of market sentiment through the performance of STH-MVRV. The depth of the STH-MVRV retracement also reflects the magnitude of the impact that triggers the drop in BTC price events.
For example, in 2020, when the COVID-19 pandemic swept the world, it was a severe test of human life and health. In the face of a survival crisis, no one had the energy to consider anything other than life, including investments. The impact of the 3.12 event on the risk market was equivalent to a magnitude 9 earthquake. In my opinion, in this current bull market cycle, based on the foreseeable circumstances, the probability of another black swan event of the same magnitude (affecting human survival) is almost zero. Therefore, it can be inferred that STH-MVRV will not drop to 0.59, which means that the BTC price will not reach $37,979 (which can be ignored).
The cause of the 5.19 event was a panic event triggered by the Chinese government’s crackdown on mining companies. Although it was also a black swan event, it did not reach the level of “life-threatening.” Therefore, the lowest point of STH-MVRV was 0.67, which was obviously better than the situation on 3.12. Therefore, I believe that if there is a market shock caused by the U.S. economic recession, its maximum level will be similar to that of 5.19. If we use this as a benchmark, then the maximum retracement of BTC price in this bull market cycle will be around $43,129.
Considering the impact of the delayed Fed interest rate cuts and the expectation of only one interest rate cut this year on the current market, it should have a similar impact as the “Silicon Valley Bank bankruptcy” and “Binance FUD” events. Therefore, I still maintain the view in my previous long tweet, that the probability of BTC consolidating in the range of C1 and C2 (i.e., $60,000-64,000 and $66,000-70,000) is greater.
As of June 21, STH-MVRV was 0.99. In the bull market process, when STH-MVRV is below 1, it usually means that there are more opportunities than risks (only for BTC, not including ALT).
Method 2: From the perspective of the fair market price algorithm
First, we need to introduce a new concept, the “True Market Fair Price (TMMP),” and its algorithm and principles are as follows:
TMMP = (Realized Cap – Thermocap) / (Liveliness x Circulating Supply)
There are three basic concepts in this formula that need to be understood:
1. Realized Cap: It values each UTXO based on the price at the last movement, accumulates the value of all unspent UTXOs in the network, and obtains the Realized Cap. Because it considers the last movement time and price of each Bitcoin, it more accurately reflects the total capital investment flowing into the BTC market.
2. Thermocap: Also known as the total safe expenditure, it is the total value of all block rewards (including block rewards and transaction fees) received by miners in USD.
3. Liveliness: It is the ratio of Coin Days Destroyed to all generated Coin Days.
Coin Days (CD) is calculated by multiplying the number of days a Bitcoin is held by its quantity. One Bitcoin held for one day equals one Coin Day.
Coin Days Destroyed (CDD) is the total Coin Days destroyed when a Bitcoin is spent. In other words, Coin Days Destroyed is the sum of the Coin Days of all spent Bitcoins.
The numerator of the TMMP algorithm subtracts Thermocap from Realized Cap, which represents deducting the portion of the total capital flowing into the BTC market paid to miners from the general cost basis of the market. The denominator multiplies Liveliness by the circulating supply, which represents the quantity of all active BTC (spent) at the current time.
It covers all active chips on the chain, including ETFs, whales, exchange inflows and outflows, etc., and excludes the portion owned by miners, as well as long-term dormant or lost chips. Therefore, using TMMP as the on-chain cost basis for evaluating the average regression model of active investors buying BTC on the secondary market is one of the most accurate models analysts seek.
As shown in the above chart, the blue line represents TMMP, and the gray line represents the BTC price. Whenever the BTC price surpasses the blue line, it means that the market has emerged from the bear market and entered the bull market cycle. Although there may be false breakouts before this, once an effective breakout is formed, the BTC price will hardly be lower than TMMP, even during the 5.19 black swan event. However, 3.12 is the only exception, as it caused the BTC price to fall below TMMP again after entering the bull market cycle.
At the end of the bull market, once the BTC price falls below TMMP, it means the end of the bull market. In other words, as long as it is still within the bull market cycle, the BTC price will not be lower than TMMP, unless a super black swan event (affecting human survival) occurs.
As of June 21, the TMMP model assessed the “True Market Fair Price” to be $44,940. This means that even if a black swan event similar to the level of 5.19 occurs, the maximum retracement of the BTC price will be around $44,900. This price is close to the maximum value of $43,129 evaluated using STH-MVRV, so I believe it is a valuable reference number.
In summary, we can draw some conclusions:
1. Assuming no super black swan event occurs, the maximum retracement of BTC in the future, even if affected by other macro factors, will not be lower than $43,000-44,000.
2. A super black swan event will inevitably reach a major level that challenges human life (such as a nuclear war between Russia and Ukraine); obviously, an “U.S. economic recession” is not at that level.
3. Since it is a maximum value, it means “probably will not reach,” rather than “may reach.”
4. The time period analyzed above is within the bull market cycle; the criteria for the maximum standards of STH-MVRV and TMMP will become ineffective in a bear market.
In addition, I can also boldly make a long-term prediction: even at the bottom of the next bear market cycle, the price of #BTC will not be lower than $22,500. Although it may not be significant for the current situation, it tells us that the lower limit of BTC will increase over time. If your #BTC cost is below this level, please cherish it.
Based on the CVDD algorithm:
CVDD (USD) = ∑(CDD × price) / (days × 6,000,000)
As shown in the above chart, CVDD accurately portrays the historical lows of BTC prices in each cycle. When BTC is transferred from one investor to another, the transaction not only has a dollar value but also destroys the time value associated with the holding time of the original investor.
Its unique algorithm makes the value trend of CVDD continuously rise, which means that today’s CVDD will always be higher than yesterday’s, and it will never retrace. This is very effective in constructing the bottom of the market that continuously rises in a bear market with falling prices!