On-chain indicators may signal a bear market reversal

Fair value is a metric commonly used to determine market movement during bear and bull markets. Defined as the value of all bitcoins at the time of purchase divided by the number of coins in circulation, fair value effectively indicates the cost basis of the network.

At the same time, dividing the network into pools can help reflect the total cost basis of each group that owns Bitcoin. Long-term holders (LTH) and short-term holders (STH) are the two main groups driving the market. LTH are all addresses holding BTC for more than 155 days, while STH are addresses holding BTC for less than 155 days.

The LTH-STH cost basis ratio is the ratio between the fair value of long-term holders and short-term holders. Given the different behaviors LTH and STH have exhibited historically, their fair value ratios can illustrate how market dynamics may change.

For example, the LTH-STH cost basis ratio tends to increase when STH has more actual losses than LTH. This suggests that short-term holders are selling BTC for LTH, implying that LTH accumulates during bear markets.

Conversely, a falling interest rate indicates that LTH is spending coins faster than STH. In other words, during the distribution phase of the bull market, LTH sold their BTC for a profit, and STH bought it back.

An LTH-STH cost basis ratio above 1 indicates that LTH has a higher cost basis than STH. This has historically been associated with capitulation at the end of bear markets and the beginning of bull markets.

muscle Cost basis of Bitcoin mining pools from 2010 to 2023 | Source: Glassnode

year 2011

During Bitcoin’s first bear market in 2011, the fair value of STH was lower than that of LTH. This trend reversal marked the start of a bear market that began on November 22, 2011 and lasted until July 17, 2012.

Long-term holders have been accumulating BTC during bear markets, dollar cost averaging (DCA) and maintaining a low cost base. Buying during periods of price restraint creates an influx of new short-term holders, pushing up the price of Bitcoin. The cumulative upward movement of STH results in an increase in its fair value, increasing the overall cost base for the group of networks.

oldCost Basis for Bitcoin Mining Pools During the 2011/2012 Bear Market | Source: Glassnode

Year 2015

The 2015 bear market followed a similar pattern. On January 8, 2015, the fair value of STH fell below the fair value of LTH, triggering a bear market that lasted until December 8, 2015.

Although the price of Bitcoin began to recover in early November 2015, the fair value of STH did not exceed that of LTH until early December. At the time, the network’s overall cost base increased slightly, leading to a bear market reversal that pushed bitcoin prices above $400.


oldCost Basis for Bitcoin Mining Pools During the 2015 Bear Market | Source: Glassnode

Year 2018

Bitcoin’s rally to $20,000 in late 2018 came to an end as the fair value of STH fell. It fell below LTH levels on December 20, 2018, pushing the spot price below fair value.

The bear market ended on May 13, 2019, and the fair value of STH rebounded on LTH.


oldcost basis group Bitcoin in the 2018-2019 bear market | Source: Glassnode

Year 2022

The fair value of STH starts to decline from the beginning of September 2022, lower than that of LTH on September 22, 2022. It continued to fall until January 10, 2023, and then began a slow, steady recovery, almost back to Bitcoin’s fair value.

STH fair value is currently $19,671, while LTH is $22,228. The fair value of Bitcoin is $19,876.


Cost basis of Bitcoin mining pools from September 2022 to February 2023 | Source: Glassnode

Analytic data shows that the 4-year cycle in the Bitcoin market ends when the fair value of STH exceeds the fair value of Bitcoin and LTH. This created apparent FOMO in the market, triggering a parabolic run.

This reversal occurred 9 months later in 2011, 11 months later in 2015 and 6 months later in 2019. In 2022, five months have passed since the fair value of STH fell below LTH.

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