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bitcoin fundamentals hint correction
Nexo Logo

Even Bitcoin Fundamentals Are Hinting At a Significant Correction Ahead

Tony Spilotro by Tony Spilotro
2 years ago
in Bitcoin, Cryptocurrency news, Technical analysis
Reading Time: 4 mins read
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Bitcoin just had its largest 48-hour pullback since May 2020, back when the asset’s halving took place. The drop in price has the cryptocurrency now trading below a key fundamental level. A deeper dive into other Bitcoin fundamentals may be hinting that a more severe correction that may have only just started.

Here’s what the cryptocurrency’s underlying network metrics are saying about what’s about to come in terms of price action across the crypto market.

Bitcoin Energy Value, Production Costs, and Hash Ribbons Potentially Signal Deep Downside

Technical analysis across any and all assets is exactly the same: open up a chart, check out the candle structure, and look for any patterns or signals. But when it comes to cryptocurrencies, fundamental analysis is dramatically different.

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Fundamental analysis is based on two main concepts: qualitative analysis and quantitative analysis. Qualitative analysis comes down more to if you like a coin’s ticker, or if you prefer a Justin Sun against a Vitalik Buterin, for example.

In terms of quantitative analysis, rather than reviewing company revenue reports for tips on stock valuation changes, crypto analysts look at on-chain data and other barometers that measure the health of the underlying blockchain network.

In Bitcoin, this includes how much BTC is held in wallets or on exchanges, metrics like energy value and production costs, hash rate, difficulty, and network-to-transaction ratios.

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These fundamentals unique to Bitcoin and crypto make things a bit more tricky, but thanks to contributions from the likes of Willy Woo and Charles Edwards, these metrics have been turned into TA tools.

bitcoin btcusd energy value

BTCUSD Daily Energy Value 2016 - 2020 Comparison | Source: TradingView

By adding these metrics to Bitcoin price charts, it can reveal some compelling signals. The chart above depicting Bitcoin’s energy value shows the first major weekly close below the indicator after quickly poking above it. The last time the cryptocurrency peeked its head above this level then abruptly fell below, was in June 2019, and it signaled a top.

Comparing the past bear market turned bull with whatever is currently going on in crypto, shows a similar initial pump from the bottom that got overheated too soon. The next time Bitcoin went slightly above this metric on weekly timeframes, the cryptocurrency had a 40% post-halving selloff.

This year’s halving came and went, but no death spiral ever arrived. However, energy value is just one signal that is suggesting it could still be coming.

Related Reading | Why Are Bitcoin Miners Moving An “Unusually” Large Amount of BTC?

The cost of producing each BTC is now above the market price the cryptocurrency is trading at. When this happens, miners are better off buying – so instead, they sell.

The post-halving death spiral last time around was due to capitulating miners. Rising fees may have staved this off for some time, but miners have begun moving an “usually” large sum of BTC to exchanges.

The Hash Ribbons have started turning down once again, and when they do, it signals that such a capitulation event is taking place. Past instances of this, line up with the recent Black Thursday bottom, and the 2018 bear market bottom. It also matches the last post-halving death spiral, and it looks a lot like what’s about to happen next.

bitcoin btcusd hash ribbons cost of production

BTCUSD Daily Production Cost & Hash Ribbons 2016 - 2020 Comparison | Source: TradingView

NVT Ratio Demonstrates How Far A Drop In The Cryptocurrency Could Go

Finally, the last fundamental signal in Bitcoin that things aren’t looking so hot in the short-term, is the NVT ratio. NVT stands for network-to-transactions. This ratio compares Bitcoin’s price in relation to the total value being transacted across its network.

NVT recently got hot, similarly to the February 2020 peak, the June 2019 top, right before the drop to Bitcoin’s bottom, and before that when the asset hit $20,000. Now, it is back, and it’s no longer red.

bitcoin btcusd fundamentals nvt

BTCUSD Daily NVT Ratio Past Top Comparisons | Source: TradingView

When prices drop and NVT ratio turns back to black, some type of drop has followed. The furthest back was a 70% collapse from $20,000 to $5800 in February 2018. Bitcoin is currently showing a correlation to that particular bottom when compared to the DXY Dollar Currency Index.

The next time this tool triggered, Bitcoin fell over 50% to $3,200 and met what is hopefully the bottom. Next, was in June 2019, and although it took until December to get there, Bitcoin once again bottomed after a 53% drop.

2020 kickstarted a fast recovery to $10,000, but even quicker the cryptocurrency plummeted 62% to $3,800 on Black Thursday. Now, Bitcoin went back above $12,400 where it may have topped again according to the NVT ratio. But the question is – how deep does this drop go?

Related Reading | This Monthly MACD Bearish Divergence Warns Of Imminent Bitcoin Crash

Taking the four catastrophic collapses, and averaging them out comes to a 58% fall. A dump of that magnitude would take the cryptocurrency back to roughly $5,200. However, given the pandemic, the risk of the coming election, and the aforementioned ominous comparison to the DXY index, there is one more important thing to pay attention to.

According to the NVT ratio, Bitcoin tops out when the indicator turns red. It bottoms when it turns green. The only time the cryptocurrency has turned green since the $20,000 peak was when the crypto asset plunged from $20,000 to $5,800.

Could the latest sighting of red, give us the first glimpse of green before things move up again? And it could it all be due to the comeback of the greenback?

Tags: btcusdBTCUSDTCharles Edwardshash ribbonsminersNVTwilly wooxbtusd
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Tony Spilotro

Tony Spilotro

I'm Tony Spilotro. Behind the pseudonym, I'm a global remote work leader with a decade of award-winning content experience and excellence. Here, I explore my newfound passions pertaining to privacy, finance, economics, politics, cryptography, property rights, and other libertarian-esque views. I am a Bitcoin evangelist, maximalist, and educator whenever I can be, helping to spread its message of freedom from government control, monetary policy mismanagement, and passing the buck - literally – to future generations. My journey from a curious retail crypto investor to a serious Bitcoin advocate, trader, and technical analyst is an unusual one, but life-changing nonetheless and has become less about money and more about a long-overdue revolution. While a firm believer in the laws governing math and science, I am profoundly fascinated by the impact of astrology and astronomy including moon and solar cycles and planetary alignment and their ability to influence and potentially predict markets. It hasn't yet clicked for me as to how to put anything to use, but I consider it my current rabbit hole I can't yet dig out of. My perspective of growing up alongside the internet, the dot com era, the Great Recession, and roots in video games collecting coins and rare items caused Bitcoin to immediately make sense to me. Through all of these lenses, I seek to produce content that is educational and entertaining, and I thank you sincerely for taking the time to read what I have to say. Please follow me on Twitter at @tonyspilotroBTC and feel free to drop me a line if you would like to work together.

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