If there is one thing that virtually every cryptocurrency holder or speculator has attempted to do, it is to predict or identify the bottom of a bear market for the price of bitcoin.
Since the delta between a subsequent all-time low and high price can be in the range of tens to hundreds of percentage points for popular cryptocurrencies, the potential benefits of building an accurate model to identify peaks and troughs are enormous.
Until recently, most models could only identify the top or bottom of a market with reasonable accuracy. But Glassnode, a leading on-chain research and analytics firm, recently introduced a novel model to accurately identify both, with a 100% hit rate compared to the tested data.
The new model, known simply as the drilling method, leverages multiple new and existing data points to help accurately identify market extremes, providing an additional source of data for traders and speculators.
Is that how it works.
Bitcoin price and Mayer multiples of 2.4
Created by prominent investor Trace Mayer, the Mayer Multiple is defined as the multiple of Bitcoin price over its 200-day moving average (MA), such that a current price of $50,000 and a 200-day MA of $25,000 would produce a Mayer Multiple of 2
The Mayer multiple has been used to indicate whether Bitcoin is in a bubble or not. Backtesting the data, Trace Mayer found that a Mayer multiple of 2.4 could accurately predict the high point of a bull market, while a number below 1 indicates a bear market.
As such, many traders believe that a Mayer multiple of 2.4+ indicates that the Bitcoin price is overvalued or that buyer exhaustion is near.
Going a step further, Glassnode created a construct that tests whether the Mayer Multiple is above 2.4, in addition to various other parameters to determine the condition of the Bitcoin market.
By taking the Mayer multiple, the current price, and the percentage of Bitcoin’s supply in profit, Glassnode was able to accurately identify whether Bitcoin is currently at the high or low point of a market cycle.
What is the drilling method?
As an incredibly volatile asset class, cryptocurrencies like Bitcoin have been known to regularly shake down over-leveraged speculators and fair-time holders. But until now, there was no indicator that could measure the incumbent’s resistance to price volatility, a good measure of market resilience.
As part of The reportGlassnode made the unusual connection between Bitcoin price volatility resistance and the measurement-while-drilling (MWD) technique, which describes how rock hardness/strength varies at different drilling depths.
Where MWD records parameters such as depth, penetration rate, rock density, porosity, and more to determine drilling resistance, Glassnode’s new drilling method tracks the correlation between Bitcoin price change and percentage change from supply to profit to help identify extremes in the cycle.
Using this method on tested data, Glassnode identified tops (red columns) and bottoms (green columns) between 2010 and 2022.
Glassnode did this by looking at the points where the Mayer multiple was above 2.4 and then looking at the correlation between price and bid-to-profit percentage.
Based on the Mayer Multiple and whether the realized price (price the last time BTC moved) was higher or lower than the market price, Glassnode found the following:
When the correlation was below 0.75 while the Mayer multiple was above 2.4, this indicates that the market is near the top of a cycle.
When the correlation was below 0.75 and the current price is below the realized price, this indicates that the market is near the bottom of a cycle.
After applying this to Bitcoin market data over the last decade, the columns detected by the drilling method clearly overlap the peaks (green columns) and troughs (red columns) of each cycle with great accuracy.
In a nutshell, the new technique provides an accurate indicator of the extremes of the market cycle, with the potential to help traders better manage their risk.
What this means for the price of Bitcoin
As we have seen time and time again, Bitcoin (and most other cryptocurrencies) are highly cyclical assets, with their values forming a new absolute high and relative low roughly every three to four years.
This is confirmed by Glassnode’s drilling method, which correctly identified the peaks of the previous four bull markets.
It also pinpointed the bottoms of the interdigitated bear markets seen between 2011-2012, 2014-2015, 2018-2019, and most recently 2021-2022.
As the chart above shows, the Bitcoin market is now squarely in bear territory. As shown in previous cycles, this period usually lasts between 6 and 12 months.
But according to the new preset workbenchBitcoin now appears to be at or near the bottom of this cycle as the bear market appears to have started in mid-June 2022. Some whales have already started hoarding BTC.
Since these conditions tend to last 3-12 months, this would mean that the bottom could be found in June 2023, after which the market usually starts to rally towards a new price high.
This estimate is in line with insights provided by several other lower indicators, including the Bitcoin Rainbow chart, the weekly RSI, and the cross between the 50- and 100-week moving averages, all of which indicate that the bottom is already in or near.
Despite this pattern, it is not an exact science and it remains difficult to accurately model when the bottom is likely to occur.
Various methods have been proposed in recent years, including the popular stock-to-flow (S2F) model and Colin Talks Crypto Bitcoin Bull Run Index (CBBI). Still, the search for an even better predictor of the bottom continues.
Given the current adverse macroeconomic climate, with the Fed repeatedly raising interest rates, DXY breaking records, a global stock market crashing, the war in Ukraine, and many countries seeing their GDP shrink, there is little reason to believe that a bull run is near.
Nonetheless, the price of Bitcoin is known to trade flat for months before a new bullish wave begins. Glassnode’s new indicator postulates that this will happen sooner rather than later.