Bitcoin is down 15% from its August highs, trading below the $22K mark. The market celebrated a much-needed relief rally. Altcoins reacted well to the merge and rejoiced in double-digit movements (to the upside), and for a moment, we all thought the good old days were back (finally). But are they? Onchain data suggest something extraordinary!
The Final Test Awaits
Onchain data has been largely accurate in timing the bear market falls. Today, let’s discuss LTH-STH SOPR. LTH, or Long Term Holders, are wallets that hold Bitcoin for more than 155 days (roughly five months). On the other hand, STH (Short Term Holders) are wallets that store Bitcoin for less than 155 days. The ratio of these two numbers gives us the LTH-STH ratio.
To clarify, the ratio is not truly representing the number of wallets. But it gives out the profitability estimate (using onchain analysis). In other words, the Spent Output Profit Ratio (SOPR).
A SOPR value greater than 1 implies that the investors are selling at a profit. However, a value less than 1 signals that investors are selling at a loss. But what happens when SOPR is exactly 1? You guessed it right, the investors might be selling at break even.
Let’s discuss the investment psychology of the masses (uninformed investors aka FOMO investors). When the market is moving up after a bearish wave, the uninformed investor is in disbelief. He thinks the relief rally will end at any time and there are more downsides.
Say the market continues to go up, he changes the strategy and buys the local top. Effectively, he is buying the exit liquidity of early investors. The market undergoes a correction, and the FOMO investor panics and exits his position at a loss.
Let’s consider another scenario. The market goes down. However, the FOMO investor does not buy the red candles but rather waits for more lows. It doesn’t happen, and this cycle continues.
So, how can we apply this logic to SOPR-based investment? When SOPR moves to 1+, the market is overvalued and it is time to exit (DCA exit is best in this case). Alternatively, when SOPR goes under 1, the market is relatively undervalued. This is the best chance to ladder entries or DCA. Thus, this onchain indicator is a powerful tool when it comes to long-term investments.
What Is the Data Telling Us?
LTH-STH ratio – 155-day Moving Average (red line) – is entering the green box. It happened in 2016 and 2018 before. In 2018, the 155 MA’s entry into the green box is followed by a market correction. In August 2022, the same event is repeating. 155 MA enters the green region, and if we compare the current flow with 2018, the similarities are massive.
At the same time, when the 155-day MA bounced from the bottom part of the green box, that acted as a strong buy indicator.
Long story short, onchain data says the market can see a swift correction. The good news is that this correction could be the last one in this bear market. Let’s not count surprise macro events for this, but strictly following the on-chain data, the market is due for a swift correction. Surprisingly, this coincides with Mt. Gox’s unlock of 137K Bitcoins. Fasten your seatbelts, we might get juicy investment opportunities at the end of August and in September.
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