Bitcoin
Learn how to spot the next accident
How many times have you seen Bitcoin unexpectedly plummet, just an hour or a day after you bought a new stack? Everyone has faced that frustration, thinking, “If I had known, I would have bought it later at a cheaper price.” The good news is that some indicators can help predict these downturns.
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 price movements from 2018 to 2024. Each time Bitcoin’s price falls below the trader’s realized price on the network, it tends to fall further. On average, the price drops -27% in 43 days.
Additionally, the realized price often serves as a dynamic support or resistance level. When Bitcoin price approaches this upper line, it sometimes bounces back up, using it as support. Conversely, when the price crosses below the realized price, it usually fails to break through and falls further, using the line as resistance.
To understand why realized price is such a powerful indicator, it’s important to understand its underlying concept. Realized price represents the average price at which all current Bitcoin holders acquired their coins. When the market price drops below 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 potential downward movements. By closely monitoring when the Bitcoin price crosses the realized price, traders can anticipate periods of elevated selling pressure and prepare accordingly.
But the question may arise: if someone knows that Bitcoin is going to fall, when should they buy back?
First, it is important 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 get very rich very quickly. However, one can analyze the price structure on the on-chain price chart. When the price of Bitcoin stops falling and starts showing an upward trend, this indicates a potential buyback opportunity.
The Moving Average Convergence Divergence (MACD) can clearly reveal the 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 is below the signal line, it may be a good time to sell. The 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.