Bitcoin, the leading cryptocurrency by market capitalization, has a price floor now of around $37,300, Chainalysis wrote Thursday in its latest market report. The blockchain data firm wrote that the market is holding the price floor well as demand from existing whale investors (large bitcoin holders) has returned.
“So demand is returning to the market,” the report concluded. “Supply, which has become more liquid since prices fell in May, is only as liquid as it was in December 2020. This all suggests the market is at least in a sideways state and is unlikely to enter an extreme price fall phase.”
Chainalysis estimates a temporary bitcoin price floor by calculating the average cost of bitcoin held by investors who entered the market in the past 12 months. Getting the data is possible because of blockchain’s transparency.
At press time, bitcoin was changing hands at 39,667.50, down 2.13% in the past 24 hours, according to CoinDesk’s Bitcoin Price Index.
Unlike the case in traditional markets, bitcoin’s price gains and losses have been concentrated in a short period of time, Philip Gradwell, chief economist at Chainalysis, wrote in the report. Data shows that since last year, 75% of bitcoin’s absolute price gains occurred in just 25% of the days when its price closed in green. A similar trend also occurs for bitcoin’s absolute losses.
That differs from traditional markets such as the S&P 500, where gains or losses are more equally distributed. For example, a little more than 75% of the S&P 500’s gains took place in more than 50% of the days.
Therefore, according to Gradwell, the so-called on-chain price floor is an essential metric for crypto traders and analysts to understand bitcoin’s market, which can be become extremely volatile in a short period of time.
“If an investor buys bitcoin at $40,000 and continues to hold, then we know that they value bitcoin at least at $40,000,” Gradwell wrote. “If the price were to go below $40,000, then it would be below their valuation and they may buy more.”
The chart below also shows that the on-chain price floor is a better indicator than the 200- and 50-day simple moving average (SMA) of the price to hint when a bull run may end.
Crypto traders and analysts have long been watching the “death cross” – the intersection of the 50-day moving average below the 200-day moving average – as a key technical indicator of a shift from a bull market to a bearish one.
But during the bull runs in late 2017 and this April, for example, the on-chain price floor flattened both times ahead of the appearance of a “death cross,” making it a “leading” indicator of a change in market trends.
“The on-chain price floor stops increasing the moment that investors stop buying in a price rally,” the report said, showing that a decline in bitcoin demand would soon lead to a bearish market trend.