On-chain analysis fascinates me. Because it is tied exclusively to blockchains, this type of analysis exists only within the crypto industry. Yet when we examine on-chain metrics, we can often gain meaningful insight into market sentiment, and certain indicators have even foreshadowed future price movements.
Of course, Bitcoin’s history spans just over a decade, so it remains uncertain which metrics are merely coincidental and which carry real predictive value. That uncertainty is part of the appeal.
Percentage of Supply in Profit
This week I came across an interesting indicator on Twitter from @OnChainCollege—someone worth following if you’re into on-chain analysis. He examined the percentage of Bitcoin supply that is in profit as a way to gauge how hot (or cold) the market is. Historically, this metric has signaled the start and end of Bitcoin bear markets reasonably well.
Right now, those bands are very close to crossing.
To explain the metric for those unfamiliar: the percentage of supply in profit refers to the share of existing Bitcoin for which the current price exceeds the purchase price. When the percentage in profit rises above 50%, it is considered a bullish sign. When it falls below 50%, it is considered bearish—at least in theory.
The chart below traces this metric back to 2011. Note that @OnChainCollege displays both the percentage of supply in loss (red) and the percentage in profit (green). The crossover between these two lines is the signal.
Historical Accuracy
As you can see, these lines have crossed only four times prior to now. The most recent crossover occurred in March 2020, when the emergence of COVID-19 shocked markets. In my view that was one of the most frightening moments in crypto history—an existential event that, frankly, felt like a crisis for the world at large.
You might argue that the 2020 event was an unexpected shock and dismiss the impressive rally that followed the crossover. That’s fair. But looking at the other instances—in 2019, 2014 and 2011—the indicator proved predictive in each case.
That is encouraging, but what does the market say today? The percentage of supply in loss has not yet exceeded the percentage in profit. If the current pattern holds, it suggests there may be additional downside to come before a market bottom is reached.
Warnings for On-Chain Analysis
On-Chain
It’s important to emphasize the caveats that come with any on-chain analysis. The sample size is small, and the data’s structure can change materially as the ecosystem evolves. Today’s macro environment—widespread inflation, an aggressive Federal Reserve, and unsettling geopolitical conditions—differs substantially from prior cycles. Those forces contributed to the worst start to a year for equities since 1939.
Macro headwinds mean that, for the first time in Bitcoin’s history, the asset has been moving higher despite sustained and serious bearish sentiment in broader markets—April was the worst month for stocks since October 2008. Moreover, Bitcoin today bears little resemblance to the internet money of 2011 or even 2014. It has matured into a full asset class, with institutional capital flowing in and taking positions at the macro level.
All of this implies there is no guarantee history will repeat if these bands cross again. Still, it’s a compelling trend to watch, and an excellent example of focused on-chain analysis from an analyst I follow. It will be interesting to see how the signal plays out in the months ahead.