Bitcoin has experienced a significant trend change; the market sentiment has also changed in 2023. Since breaking from consolidation, Bitcoin’s momentum has shifted to the upside, transitioning from a bear market to potentially the early stages of a new bull market.
In a monthly newsletter, veteran quant investor and the inventor of the Hash Ribbon indicator, Charles Edwards, share essential industry updates, significant trends, and technical and fundamental analysis related to Bitcoin.
A Momentum-Driven Shift, A New Regime For Bitcoin
According to Edwards, as prices become more attractive, the market becomes saturated with long-term holders, those who do not intend to sell until prices are significantly higher.
For the analyst, long-term holders recognize the value of the cryptocurrency and are “price insensitive;” when the market reaches this stage, exchange/broker order books become more illiquid as there are fewer marginal sellers. As prices become more and more attractive, the market becomes saturated with long-term holders, those who no longer intend to sell until prices are substantially higher.
In the chart above, Edwards points out that bitcoin is becoming increasingly illiquid, with an exponential increase in long-term holders, who now represent 49% of the network, a new all-time high.
For Edwards, once a whiff of demand hits an illiquid order book, deeply undervalued assets rocket up in a short-squeezed fashion. The reason is that there are very few active sellers in the market; buyers have no sellers to buy from. This results in bullish momentum as the closest available sellers place orders.
The Market Leverage Ratio, a Capriole Investment measure of aggregate leverage and positioning in the market used by Charles Edwards, suggests an almost identical pattern occurred in January 2023 as in mid-2021 when Bitcoin entered a price discovery phase. The analyst wrote:
(…) “We saw the same long liquidation, capitulation and short squeeze structure in mid-2021 as in January 2023. Both lasted 9.5 weeks. In crypto, we call this a “sell side liquidity crisis”.
According to Charles Edwards and Capriole Investment, this phase is a significant turning point, the “beginning of a new regime.” It is expected to have a positive 2023, with more significant returns coming in 2024.
Bitcoin Bear Market Bottom Confirmed?
Bitcoin’s Percent Addresses in Profit metric has bounced from a typical bear market low of 50% to 70% to this date. The typical bear market pattern shows a performance grind down in addresses in profit as long-term holders see the value of their Bitcoin plummet.
(…) “Percent addresses in profit have bounced significantly from 50-70%, a structure which usually sees some profit taking, but also marks a regime change”.
In brief, Edwards and Capriole Investments have identified confluences and several factors for Bitcoin’s recent breakout and further upside price action in the coming months:
- Optimal halving cycle timing where Bitcoin typically bottoms (Q4 2022 and Q1 2023).
- Bitcoin cycle drawdown has hit typical -80% levels.
- In November/December, Sentiment was at its worst, and market hedging was at its highest on record.
- Gold strength in November/December as a lead for Bitcoin in January onward. More in our December Newsletter.
- A likely Fed rate pause and change of policy in 2023.
All of the above suggests that the market is at the early stages of a new Bitcoin bull market regime.
Bitcoin is currently trading at $23.450. It’s 2.1% down in the last 24 hours despite the favorable news after the Federal Reserve (Fed) raised the basis points by 0.25%. Bitcoin still has managed to profit in the seven days, up 1.8%. Bitcoin’s price action suggests a pullback to the support line for a further counterattack to regain the $24.500 level.
Featured Image from Unsplash, chart From TradingView.