Did Bitcoin Bottom in November? These Metrics Suggest So.

Certain on-chain metrics show signs of a macro bottom in November 2022 for digital assets based on historical precedents


Source: Shutterstock / Chanyanuch Wannasinlapin, modified by Blockworks


Hopeful signs are emerging for the crypto industry mid-term as on-chain metrics for bitcoin suggest the world’s largest digital asset by market value may have hit its bottom in late 2022.

Those include the Market Value to Realized Value Ratio (MVRV) and the Net Unrealized Profit and Loss metric (NUPL), both of which flashed a trend reversal following FTX’s collapse in November.

The rally in digital assets, represented by the price increase in bitcoin (BTC), as well as ether (ETH) this year, is reinforcing that play. Both assets are up 35% and 30% on a year-to-date basis trading at $22,450 and $1,550 respectively, Blockworks Research data shows.

Data provided by CryptoQuant shows MVRV hit its lowest point on Nov. 9, right around the time revelations came to light that FTX had allegedly misappropriated user funds, at a reading of 0.75.

The MVRV ratio is a metric used to determine whether an asset, in this case, bitcoin, is undervalued or overvalued. 

When the ratio is above 3.7, bitcoin is said to be overvalued and may be at a market top. Conversely, when the reading is below 1, the asset is considered undervalued and may be at a market bottom. 

The last time the MVRV ratio was around as its November print was way back on Dec. 15, 2018, when the price of one bitcoin traded at $3,200. Despite a relatively uneventful year for price action in 2019, bitcoin never dipped below its 2018 lows.

NUPL, a metric used to measure the average profit margin of all bitcoin holders, began to flash similar signs around the same time.

Like the MVRV ratio, the NUPL can indicate whether bitcoin is undervalued or overvalued. Historically, NUPL levels above 0.7 (70% average profit margin) have signaled market tops, while levels below -0.4 (-40% profit margin) have signaled market bottoms.

The NUPL reading for bitcoin reached a low of -0.3 in November at a price of $15,800 and has held a positive reading since the middle of January. The NUPL is currently trending at 0.1 after crossing a 365-day moving average threshold, signaling bitcoin may have commenced a new upward cycle.

It’s important to note that although there are indications of a potential “crypto spring,” analysts cautioned at the end of February that it is still premature to declare at this point.

They warned against the lingering presence of ongoing inflation, the possibility of future rate hikes and wider macroeconomic uncertainty which may cause further downward momentum.

Previous price history is also telling. While it’s entirely plausible a mean reversion following the November drawdown is well underway, a daily close below about $21,400 — the most recent nadir on Feb. 13, could hint at further pain.

Cryptoassets can fall considerably further and still maintain the current uptrend on macro timeframes, even if the late November low holds. But the total drawdown in the bitcoin price from its November 2021 peak to November 2022 trough, of about 77% is broadly similar to prior cycles in Bitcoin’s history.

L2’s a better indicator than the majors?

Some like Rich Falk-Wallace, CEO of crypto data analytics platform Arcana suggest that on-chain activity is a better indicator of price for less utilized blockchains than for those fully utilized like bitcoin and ether.

“For alternative coins and layer-2s, we’ve seen 90%+ mid-term correlations between daily active users and prices,” he said. “But for bitcoin and ether, both chains hit full capacity around 2018, which means user numbers have essentially been static since that time.”

Hitting capacity for bitcoin and ether refers to the point where they reached their effective block capacity limits, beyond which the fees grow exponentially to restrict further demand for block space. 

This results in a gradual increase in daily active addresses since there are restrictions on address growth. Falk-Wallace further explained that the incremental increase in value for these chains must come from a rise in value per active address instead of an increase in users.

That means there exists a “strong relationship” between daily active users and prices for alternative coins and layer-2s, where an increase in daily active users on those chains is highly correlated with an increase in bitcoin’s price, over a medium-term period.

“If you look at dollar value transferred on-chain, the metric is well correlated to BTC’s price historically. And that bottomed — and has languished — since November,” Falk-Wallace said.

That means, even if the bottom is in, investors may be in for a period of relative boredom.

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