CryptoQuant's head of research explained that bitcoin's on-chain data was already showing signs of overheating some time before the crash.
bitcoin Short-Term Holder Profit/Loss Margin Soared Before Crash
Not even a couple of days after bitcoin recorded its strong rally above the $45,000 mark, the coin has already plummeted and retraced the gains made during the move.
There has been a lot of speculation in the market as to why the cryptocurrency has witnessed this sudden drop. Some believe the reason is the rumor that the US SEC is going to reject all btc ETFs.
However, the head of research at analytics firm CryptoQuant, Julio Moreno, has hinted at a different possibility. “People will search everything for an explanation instead of just looking at the on-chain data,” Moreno said in a mail in X.
Last month, when bitcoin surpassed the $40,000 barrier, the analyst noted how the profit level of short-term holders had skyrocketed to high values.
Below is the chart that the CryptoQuant director had shared back then.
<img decoding="async" class="alignnone aligncenter" src="https://technicalterrence.com/wp-content/uploads/2024/01/CryptoQuant-Director-Reveals-the-Real-Reason-Behind-Bitcoin39s-Crash.jpeg" alt="bitcoin Short-Term Holder Profit/Loss Margin” width=”4096″ height=”2580″/>
The data for the short-term holder profit/loss margin over the last few years | Source: @jjcmoreno on X
“Short-term holders” (STH) refer to bitcoin investors who purchased their coins in the last 155 days. Members of this cohort are generally fickle and sell easily at the first sight of any major FUD or profit opportunity.
The profit and loss margin data for these weak hands is shown in the chart above. The profit/loss margin here is the gap between the spot price of bitcoin and the realized price for this cohort (i.e. the group average cost basis).
From the chart, you can see that as bitcoin rallied last month, it moved away from the realized price of STHs, leading them to make a large amount of unrealized gains.
Interestingly, the level that this group's profit/loss margin had reached back then was the same as when the cryptocurrency had reached some notable local highs in the past.
In this post from last month, Moreno also noted that such a pattern had been especially true for the pre-bull cycle phase that btc is potentially in right now.
The explanation behind this pattern could be the fact that as these investors' profits increase, they are more likely to give in to the temptation of taking profits. When these sell-offs end up taking place, they naturally cause price hindrance.
“There were signs that the price was overheating since it first hit $40,000,” the analyst notes. As such, it is possible that the cryptocurrency's latest cooldown was inevitable and something that had already been brewing from an on-chain perspective.
As to why the correction only occurred now and not when the market started to overheat, the CryptoQuant director says: “sometimes it just takes time to develop.”
btc Price
bitcoin has recovered somewhat since its crash, as the asset's price now floats around the $43,400 level.
<img loading="lazy" decoding="async" class="alignnone size-medium aligncenter" src="https://technicalterrence.com/wp-content/uploads/2024/01/CryptoQuant-Director-Reveals-the-Real-Reason-Behind-Bitcoin39s-Crash" alt="bitcoin price chart” width=”1534″ height=”868″/>
Looks like the price of the coin has been gradually making its way back up | Source: BTCUSD on TradingView
Featured image from Shutterstock.com, Charts from TradingView.com, CryptoQuant.com
