Bitcoin
Learn how to spot the next accident
How many times have you seen Bitcoin unexpectedly plummet, just an hour or a day after buying a new stack? Everyone has faced this frustration, thinking, “If I had known, I would have bought it later for a cheaper price.” The good news is that some indicators can help predict these recessions.
While some indicators such as the MVRV Z-score and Pi Cycle Top help identify market tops, they do not provide information about short-term downward movements. This is where the price realized by the trader on the network comes into play.
The network marketer realized the price graphic highlights a clear pattern in Bitcoin’s price movements from 2018 to 2024. Every time the price of Bitcoin drops below the on-chain merchant realized price, it tends to drop further. On average, the price drops -27% in 43 days.
Additionally, the realized price often serves as a dynamic support or resistance level. When the price of Bitcoin approaches this upper line, it sometimes moves back up, using it as support. On the other hand, when the price surpasses the realized price, it often fails to break through and falls further, using the line as resistance.
To understand why realized price is such a powerful indicator, it is important to understand its underlying concept. The realized price represents the average price at which all current Bitcoin holders purchased their coins. When the market price falls below the realized price, it indicates that many holders are subject to unrealized losses, which can create selling pressure and lead to further price declines.
Traders can use the realized price as a reference to predict possible downward movements. By closely monitoring when the Bitcoin price exceeds the realized price, traders can anticipate periods of increased selling pressure and prepare accordingly.
But the question may arise: if someone knows that Bitcoin is going to fall, when should they buy back?
Firstly, you need to understand that consistently selling at the top or buying at the bottom is almost impossible. A trader may get lucky once, but repeating this feat consistently is unlikely; otherwise, many would become very rich very quickly. However, you can analyze the price structure in the chart of prices realized on the network. When the price of Bitcoin stops falling and starts showing an upward trend, it indicates a potential buyback opportunity.
Moving Average Convergence Divergence (MACD) can clearly reveal both downward and upward trends. MACD is a tool that helps traders understand whether an asset’s price is trending up or down. It uses two lines: the MACD line and the signal line. When the MACD line crosses the signal line, it may be a good time to buy. When it falls below the signal line, it may be a good time to sell. MACD also features red and green bars, known as a histogram, which represent the difference between the MACD line and the signal line. Green bars indicate increasing bullish momentum, while red bars indicate increasing bearish momentum.
By using the on-chain trader realized price and MACD together, traders can gain valuable insights into Bitcoin price movements. The combination allows traders to identify potential downward trends with high probability and anticipate the best times to re-enter the market.