on-chain data

While demand for Bitcoin remains high, current profit-taking behavior suggests that the market may be on the verge of turning bearish.

After weeks of Bitcoin (BTC) sell-offs, high-net worth Bitcoin holders, or whales, are finally back to buying.

Their buying activity not only picked up when BTC's price broke out of the two-months ascending triangle to new all-time highs, but it has also stayed intact since the price crash on April 18.

Whales have come back to accumulate Bitcoin

Whales' continuous buying activity comes at a time when the number of addresses holding more than 1,000 Bitcoin has reached its four-month support line.

This is probably not a coincidence, as the turnaround takes place at a time when profit-taking in the market is close to its support line too.

Current profit-taking behavior has followed a seven-month trend

The level at which profit-taking takes place can be derived from the adjusted spent output profit ratio (aSOPR), which measures the ratio between the price sold and the price paid for a coin while disregarding temporary coin movements (movements within less than one hour).

In other words, aSOPR measures how much profit holders were sitting on (in U.S. dollars) at the time they sold their coins.

Since September 2020, profit-taking has continuously found positive support at higher levels. This suggests that whenever sell-offs have happened in the past seven months, sellers have been comfortable not selling at a higher profit level each time, compared with the previous sell-offs. However, this trend might eventually come to an end.

Profit-taking activity suggests the market is at a pivotal moment

When zooming out and looking at profit-taking behavior in all prior bull markets, it becomes apparent that this is not only a one-time or a short-term trend but rather a longer-term pattern in Bitcoin bull markets.

These support lines tend to hold for three to 18 months. The chart below shows that a break of the second support line in each bull market hahistorically confirmed that the bull market top was in.

Not only is the aSOPR close to breaking the seven-month support, but there is also one major difference in the latest pattern of this metric that could be a cause of concern.

Usually, the short-term tops of the aSOPR come in at higher levels each time, as the price increases further and rising confidence leads people to hold on to higher profits after each sell-off.

However, in the latest pattern, profits have been realized earlier in every sell-off wave for the last three months (see the red arrow), a pattern usually common after a bull market top was already in.

Short-term sellers are in the driver’s seat

The latest pattern could be explained by a slower price increase in recent months and a higher number of short-term holders realizing profits. This assumption is confirmed by looking at HODL waves, which visualize for how long Bitcoin is held.

The redder the color, the shorter the holding period. It becomes visible that it is short-term holders, who have held Bitcoin for between one week and three months, who have been primarily selling into the market as of late.

When looking at the profit-taking behavior of short-term holders only, one could infer that this cohort of traders might almost be done selling. The latest dip below the value of 1 shows that short-term holders have even started realizing losses.

In a bull market run-up, this is usually where a bottom in price can be expected, as selling activity tends to decrease significantly.

However, as bull market tops are not formed by a lack of sellers but rather by a lack of buyers, it is highly important to also look at the trend of the current demand side.

Current on-chain volume activity suggests that the capital inflow trend is still intact. A high number of coins are still changing hands, suggesting that buying activity is still ongoing. The realized price, which expresses this buying activity by valuing all Bitcoin based on when it last moved on a daily basis, gives a good idea of how much capital has moved in and out of Bitcoin.

A steep curve suggests high on-chain transaction volumes. If it is followed by a flat trend, it usually indicates the beginning of the bear market, as not enough buyers are coming into the market and willing to pay higher prices anymore. As long as this steep curve does not flatten, there should be no concern about a dwindling number of buyers.

Although this evidence suggests that the bull market top is likely not in yet, there is also no clear confirmation that sellers are done selling just yet.

A break of the aSOPR 10-day moving average support line could be confirmed in the next few days. This may signal a trend shift in sellers’ behavior from bullish to bearish. Therefore, a negative short- to mid-term scenario should be considered if this occurs.

Support levels in a bearish case

There are two major price support levels to look out for. The first one is around $51,325, which could be a support level where whales most recently acquired a high volume of Bitcoin.

The second price support level is the network-value-to-transactions (NVT) ratio price, which is currently at $47,679 and is a major price support level in Bitcoin bull markets.

If the market price were to fall significantly below the NVT price without a quick recovery within a few days, a detailed analysis of the demand side would be needed to judge if the market’s bullish structure has broken.

Market at a critical level, with strong support between $47,000 and $51,000

The supply side suggests that sellers are currently in the driver's seat, even selling Bitcoin at a loss in the past few days. However, their selling activity is expected to significantly reduce over the next few days if current behavior stays in line with prior bull market sell-offs.

If that is not the case, the breakdown of the aSOPR seven-month support line is likely and could signal a trend shift from bullish to bearish selling. Further downside should be expected, with the next major support in the range of $47,000 to $51,000.

On the demand side, the capital flow still looks healthy. Enough volume is still willing to pay current prices, while whales have ramped up their buying again. Current price action is still above the NVT price, which suggests that current price fluctuations are still within the expected bullish territory.

Nevertheless, the demand side should be watched closely for a potential dry-up in on-chain volume over the next few days if the price comes close to the NTV price.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Nothing here should be considered investment or trading advice. Past performance is not a guarantee of future results. Every investment and trading move involves risk. The author owns Bitcoin. You should conduct your own research when making a decision and/or consult with a financial advisor.