Undervalued but structurally weak: Bitcoin’s current cycle paradox

Bitcoin [BTC] has witnessed significant short-term volatility since Monday, the 24th of February. During the past five days, it fell from $66.6k to $62.5k and rallied to $70k on the 25th of February.

At the time of writing, this rally was being retraced, with BTC trading at $66k, down 3.25% in 24 hours.

The crypto market participants were quick to attribute the volatility to Jane Street, Wintermute, and other unnamed macro hedge funds. But AMBCrypto pointed out that the current long-term sell-off did not begin in February.

It traced back to the events of 10/10, and the losses since then were part of a cyclical reset. The selling pressure is easing, but the transition to a market-wide reaccumulation appears far away.

Source: CryptoQuant

The negative funding rates in February reinforced the idea that bears retained control of the market. Market sentiment was weak, and price bounces have been sold off.

Solving the diverging Bitcoin cycle indicators

Crypto analyst Axel Adler Jr pointed out the anomalous MVRV-Z score. This metric measures the normalized deviation of market capitalization from realized capitalization. Negative values signal the market price was under the on-chain “fair value price”.

Source: Axel Adler Jr Insights

At the time of writing, the MVRV Z-score was at -2.28, having dropped to a local minimum of -3.38 on the 5th of February. For context, the December 2018 bottom saw scores of around -1.6. It was -1.4 in November 2022.

The analyst concluded that the market is in a statistically unusual compression zone relative to realized capitalization. The reason behind this could be the advent of ETFs. This has raised the network’s cost basis, helping explain the Z-score extremes.

Source: Axel Adler Jr Insights

At the same time that the MVRV Z-score made historic lows, the Bitcoin NUPL was at 0.197. It was in the market sentiment zone labeled “hope”. A drop below 0 is generally needed to mark cycle bottoms.

AMBCrypto had warned of the same thing in an earlier report. The market capitulation was not yet in sight, and could take months to materialize.

Source: Glassnode

Another metric to keep an eye on is the long-term holder MVRV. It takes into account only the BTC that is older (specifically, UTXO lifespan) than 155 days. A reading of under 1 implies even this cohort is, on average, underwater.

At press time, the LTH MVRV is 1.61. Combined with the short-term bearish pressure, there is a genuine threat of a BTC price move to $60k. A drop below these lows could lead to an intense wave of selling, or capitulation.

Final Summary

• The MVRV Z-score mathematically underscored that BTC was historically undervalued, but other onchain metrics hinted at further downside.
• Bitcoin long-term investors can aim to remain sidelined for a capitulation event before looking to slowly re-enter.