How to Identify the Bottom of Bitcoin
This article is sourced from a piece by Michael Nadeau, organized, translated, and written by the Blockchain Simplified.
(Background: Bitcoin surged 14% in April; Bitfinex: If it holds above $95,000, BTC is expected to “set new highs” this summer.)
(Background Supplement: MicroStrategy spends another $180 million to “increase its holdings by 1,895 bitcoins,” BTC consolidates at $95,000, and U.S. stocks end a nine-day rally.)
Momentum and On-Chain Data
200-Week Moving Average
As shown in the chart below, Bitcoin typically bottoms out in a bear market when its price reaches (or falls below) the critical 200-week moving average (200 WMA), which currently stands at $43,617. At the end of 2022, when Bitcoin hit its bottom, the 200 WMA was $23,757. In the bear market bottom of 2018, the 200 WMA was $3,158.
Where will the 200 WMA be in the next round of the bear market? This depends on future price trends, but we anticipate it will eventually settle in the range of $60,000 to $70,000.
Source: The DeFi Report, Investing.com
Realized Price
The realized price is a proxy indicator of the average cost of each bitcoin currently in circulation. It is derived by calculating the total market price of each bitcoin (technically each UTXO) at its last on-chain movement.
Limitations: This indicator does not account for bitcoins held in ETFs or centralized exchanges (which account for 18.7% of the circulating supply). Nevertheless, this indicator has proven reliable in identifying Bitcoin bottoms, as prices tend to gravitate toward the realized price during bear markets and often fall below it under extreme conditions. As shown in the chart below, this pattern has been consistent across each cycle. The current realized price is $44,576 and is still rising.
We expect the realized price to continue rising.
Reason: When long-term held bitcoins are sold, the realized price increases significantly. For example, if someone transfers bitcoins that last moved at $20,000 to a buyer today, it will increase the realized market value by $77,000, thus pushing up the realized price.
Where will the realized price rise to? This depends on price trends and the behavior of long-term holders, but we estimate it will rise to about $60,000 by the end of the year.
Source: Glassnode, The DeFi Report
Cost of Mining One Bitcoin
Bitcoin is a digital commodity, but its trading cycle is akin to physical commodities like oil. Therefore, in a bear market, when the production cost exceeds the price of newly issued bitcoins, market prices often bottom out.
Reason: When prices fall below production costs, many miners are forced to shut down machines or sell their stock of bitcoins to cover operational expenses. This situation typically occurs after a significant drop in Bitcoin prices, making “miner capitulation” a common marker of the bottom. As shown in the chart below, the average cost of mining one bitcoin is currently about $90,000 (according to Blockware), while the estimate from Macro Micro is $91,700.
Source: Blockware Solutions
Why is the Cost So High?
Hashrate Surge: Over the past year, the hashrate has nearly doubled, leading to increased competition and rising costs for mining rewards.
Source: Glassnode, DeFi Report
Bitcoin Halving: The halving in April last year halved the number of newly issued bitcoins, doubling the resources (energy costs) required for miners to mine one bitcoin. We also calculated the direct energy costs of the top ten publicly listed Bitcoin miners:
Conclusion:
The largest and most scalable miners have a weighted average cost of mining one bitcoin that is significantly lower than the overall network average due to their lower energy costs. When market prices approach the production costs of these companies, we believe Bitcoin will bottom out, and we expect prices at that time to align roughly with the realized price and the 200-week moving average.
Relative Strength Index (RSI)
The RSI is a momentum oscillator that measures the speed and change of price movements in the market.
RSI > 70: The asset may be overbought.
RSI < 30: The asset may be oversold.
As shown in the chart (blue arrows), Bitcoin’s RSI fell below 30 four times in the past year, each time marking a price trend reversal. When market prices converge with the 200 WMA, realized price, and production costs, we look for RSI below 30 as confirmation of oversold conditions and an opportunity to buy Bitcoin at fair value.
Qualitative Signals
In addition to the four main data points mentioned above, we also monitor the following qualitative signals to identify the Bitcoin bottom:
- Hidden leverage exposure: In the previous cycle, the GBTC premium, Terra/Luna collapse, and FTX fraud exposed leverage issues.
- Protocol hacks / centralized exchange failures.
- “Non-holders” becoming active again: Voices of critics become louder.
- Crypto Twitter becoming quiet: Visitors leave, and community activity declines.
- Decreased viewership of crypto podcasts and media.
- Reduced advertising and overspending on crypto conferences.
- Significant decline in new and active users on Coinbase.
Given the relationship between the Trump administration and the crypto industry during this cycle, more negative news/headlines are expected in the bear market as political opponents seize the opportunity to speak out.
