Dilution-proof, June 1, 2021
Cycling On-Chain is a monthly series that uses on-chain and price-related data to estimate where we are in bitcoin’s market cycle. It originally started as a monthly Twitter thread that was later adopted by Bitcoin Magazine. In this first edition of Cycling On-Chain, we’ll look back at the first leg up in the 2020–2021 bull run and the circumstances that turned out to be fertile soil for a firm downward correction that brought fear into the market. The second part will attempt to look forward by building a case for why we may not have seen the top of this market cycle, as well as some of its vulnerabilities.
The January Turnaround
Just like the previous two versions, 2020’s halving created a supply shock that triggered an exponential price increase. However, in comparison to the previous (2016) halving cycle, this cycle heated up much faster (figure 1).
As you would expect during such a rapid price increase, market participants started taking profits when the bitcoin price broke its all-time high in December 2020 and the period after (figure 2). Since forming a local market top in January 2021, profit taking decreased — despite the price still grinding up further during that period.
What usually happens during these exponential price increases (figure 3), is that long-term bitcoin holders (green) start to gradually sell, while new market participants (purple) start building their positions — until the market cycle reaches a top and both parties switch roles.
If we zoom in on the net position change of the long-term bitcoin holders (figure 4), we see that long-term holders were mostly selling up to the January 2021 local top,…