The Breakdown - Glassnode's James Check on the Peak Capitulation Event That Flushed Out the Final Bitcoin Top Buyers

Episode Date: April 17, 2023

This episode is an excerpt from my recent interview with Glassnode's James Check. The full interview covers why the recent $30k run-up was spot not leverage driven, why BTC is shifting from whales to smaller holders, and why these markets are much healthier than when FTX was around.  Subscribe to Bitcoin Builders and get the full episode here: https://pod.link/1680067216/episode/5b15ff1cd80a9f799055323582dae4bc  

What's going on, guys. What you're about to hear is an excerpt from my recent interview with Glass Notes James Check. This was originally published on Bitcoin Builders, my new show about, well, Bitcoin Builders. In that conversation, we talk about everything that Bitcoin on-chain data is telling us, or at least everything but the price. We get into things like the shift away from Wales towards smaller holders, why the most recent run past 30K was driven by spot trading, not leverage, and why the markets are just a hell of a lot healthier now than before. for the FTX collapse. In the clip you're about to hear, James gets into how we've seen a major shift in the holder base over the last six months, with that late November period really representing

peak capitulation and helping get the cycle ready to renew. Again, to hear the rest of this interview, go subscribe to Bitcoin Builders, and let's listen in. So one of the things that we've been talking about a lot is something that it seems like you've been observing, which is the way that things shifted around the sort of inflection point moment of FTX. Obviously, everyone who lived through that, who was in the crypto industry, knew that it was significant. Obviously, it's been politically significant, among other implications. But the on-chain story is also significant. And so I want to dig into a little bit sort of, you know, what we've started to see sort of following FTX and what it suggests

about where we are in the overall cycle. Totally. And I think this kind of gets into the crux of what creates kind of Bitcoin flaws. And, you know, knock-up. Knock-up. on wood that we've got a Bitcoin floor behind us. You know, it kind of remains to be seen, but let's just take that as a given for now. So, you know, when we're looking at on-chain data, we tend to use cohorts. We call cohorts. And one of the more popular ones that Glass node came up with back, I think it was 2020, was this concept of long and short-term holders.

So what we're doing here is we're dividing because we can see when a coin was acquired, and that means we can see the price when it was acquired and how long the investor has held it. Now, if you look at a probability distribution of how often coins are spent, Basically, the longer that a coin remains in someone's wallet, the more likely it is to stay there. So the other way to think about that is Hodlers be Hodling. And people who are kind of buying and selling, what we call the short-term holders, these coins represent like 75 to 90% of on-chain volume, but only one day. So there's kind of the day-to-day trade that's churning and churning and churning.

And then there's the coins that kind of pass this age threshold, which is about five months, 155 days. A few other analysts have tested this. It's all within that kind of range, four or five. six months. Once it gets beyond that level, you have what we call long-term holders. And these are the least probable coins to spend. And it's a really nice way to just kind of look at the hodlers versus the day-to-day trade. Now, market cycles, when it's trading higher, what we see is that these longer-term holders distribute their coins. Typically, as we break all-time high, they start spending

and you get this kind of influx of old money selling and smart money leaving the building. And they're transferring their wealth to the guy who just saw Bitcoin on the news or his mate said, hey, look, I'm getting rich off this thing. You should come and buy some. This was me back in 2018, buying the exact top. So basically, you get this oversaturation with short-term holders, inexperienced investors, so on and so forth. Now, over the course of the bear market, and by the way, the chart that we're looking at here is what we call the realized price. This is the average price of every coin that's been moved broken into those cohorts.

In orange, we've got the all market, right? So every single investor, what is their current cost basis? We've got in the blue, which is those longer-term holders. people have held their coins for five months or so. And then in the red, which you can see tends to follow price much more closely. This one here is our short-term holders. That's kind of the day-to-day trade. Now, what you'll notice is that during the bull market, right?

We've got 2017 here as an example and during the bull market in 2021. Notice how they all separate. The logic here is you've got the short-term holders are kind of chasing price. These are the coins that are kind of following price that's being revalued alongside the market. In the blue where you've got your long-term holders, these are people who bought in the previous bear cycle. So they've essentially got a very, very low cost basis, and it only starts to climb once coins reach that age boundary.

So during bull markets, they diverge, because the long-term holders are actually exiting their position. They've got a lower cost basis. They're lessening their load. Short-term holders are effectively buying the top. Now, what you'll also note is that during bear markets, note how they all actually coalesce and reach, they kind of all form a very, very similar level in and around price

shown by these purple zones. That's really reflecting a couple of things. So during the course of the bear market, there's guys who bought the top, right? They've got $60,000 Bitcoin, price goes to 40. Like, don't worry, it'll come back. Price goes to 30. I swear it's going to come back. Gets to 20. They go, like, I'm getting close. Finally, you get that capitulation event. That point in time when you get this is complete purging of wallets. So what I was saying before, long-term holders, we typically talk about hoddlers, short-term is typically traders. There's one point in time where that is actually the exact opposite. It's flipped around. And the reason is because whenever a coin is sold in on-chain analytics, we basically see a coin go from somebody's wallet to an exchange,

and then some other coin will come out when somebody else buys that. So when the coin comes out, we deem it to be a short-term holder, right? It's a recently moved coin. It's fairly young. It's only recently transacted. And typically at the late stage bear market, it's the people who bought the top. And they've passed that 155, they've been telling himself, no, this thing's coming back for 150. days or five months, six months, eight months, and they finally just puke. So what you end up having there at these bare market flaws is you've essentially reached a point of seller exhaustion, where everybody has just got so much red in their portfolio, they can't deal with it anymore, and they just get flushed. So who's on the other side of that trade? Well, these are the people

who have the very, very highest conviction where they understand why Bitcoin's here. They've got that long-term view. They're willing to step in when FTX blows up and the narrative is at Bitcoin and dead for 10 years, you kind of get this flushing out of coins from the long-term holders, which are actually top buyers, and transferring to those really hardcore folks who are willing to step in front of a train at the bottom. And what's interesting that this kind of congregation of these cost bases shows that the market is now homogenous. It doesn't matter whether you've been here for five months, six months, two years, five years, on average. Everybody's got a very, very similar cost bases. We've essentially returned to a state of hodlers. Is it only the hodlers

is it remain. So I think the, really, the key important point here is bear market flaws are both the point of seller exhaustion where you flushed out the final cell. The guy who's been hanging onto that coin for so long, believing it's coming back and he finally just takes the purge, but you also have a changing of hands. There's a new set of buyers with a much, much lower cost basis. And I think we'd all agree, if you're holding coins, you bought at 16,000, it's a hell of a lot easier to do that than a coin that was at 60,000. So now that the, the market's starts to respond, all of those investors are now back in profit. So essentially, they've been rewarded for stepping in front of the train and taking that risk. But it's kind of this interesting

dynamic where the holder base changes. It's not necessarily about where the coins are and which wallet they're in. It's about the fact that they changed. And now their cost basis is much, much, much more favorable. It sounds like another way to put it is this sort of a, there's a reset event that always happens at which everything compresses to the similar spot. And I feel like in some ways this is an area where the words that we use break down a little bit because long-term holder, we have this sort of envision of someone who's kept it forever, right? It has never going to sell. But we're talking about a technical definition.

And effectively, this is the point at which the short-termers have become long-termers by no conviction of their own necessarily, just sort of desperately hoping that things change. And this is the point at which they no longer can play the long-term holder game. And so a different set of potentially long-term holders comes in to become the short-term holders. So they almost just sort of reverse who they are. And the other way to think about is it's basically it's all about holding time. So think about short-term holders as people who recently acquired their coins. That's the correct way to think about it because at the bull market top,

if you recently acquired your coin, if the price drops like it did in May 2021 by 50%, suddenly you're underwater by 50%. So your behavioral model is now going to respond to, to that event. If on the other hand, you're stepping in front of the FTX train and buying it with Bitcoin's dead for another 10 years, right? The industry's going to zero. You've recently acquired your coin. You've got some real stones to have done that. So you're looking at people who stepped in front and, you know, we're still here after the pretty dramatic bear market that 2022 was.