How often have you experienced Bitcoin’s sudden drop, just hours or days after you’ve made a purchase? Many have felt this frustration, thinking, “If only I had known, I could have bought it for less later.” The good news is that some indicators can help foresee these downturns.
Certain indicators, like the MVRV Z-score and the Pi Cycle Top, are useful for spotting market peaks but don’t offer insights into short-term price drops. This is where the on-chain trader realized price becomes valuable.
The on-chain trader realized price graph shows a distinct pattern in Bitcoin’s price movements from 2018 to 2024. Whenever Bitcoin’s price dips below the on-chain trader realized price, it usually falls further. On average, the price decreases by 27% within 43 days.
Moreover, the realized price often acts as a dynamic support or resistance level. When Bitcoin’s price nears this line from above, it sometimes rebounds, using it as support. Conversely, when the price falls below the realized price, it frequently struggles to break through and declines further, using the line as resistance.
Understanding the power of the realized price requires knowing its core concept. The realized price represents the average price at which all current Bitcoin holders acquired their coins. When the market price drops below the realized price, it indicates many holders are facing unrealized losses, which can lead to selling pressure and further price declines.
Traders can use the realized price as a benchmark to predict potential downward movements. By closely monitoring when Bitcoin’s price crosses the realized price, traders can anticipate periods of increased selling pressure and prepare accordingly.
But this raises the question: If one knows Bitcoin will fall, when should one buy back in?
First, it’s crucial to recognize that consistently selling at the top or buying at the bottom is nearly impossible. A trader might get lucky occasionally, but repeating this success consistently is improbable; otherwise, many would quickly become very wealthy. However, one can analyze the price structure on the on-chain realized price graph. When Bitcoin’s price stops declining and starts to trend upward, it signals a potential buy-back opportunity.
The Moving Average Convergence Divergence (MACD) can clearly show both downward and upward trends. MACD is a tool that helps traders determine if an asset’s price is likely to rise or fall. It uses two lines: the MACD line and the signal line. When the MACD line crosses above the signal line, it might be a good time to buy. When it crosses below the signal line, it might be a good time to sell. MACD also has red and green bars, known as the histogram, representing the difference between the MACD line and the signal line. Green bars indicate increasing bullish momentum, while red bars indicate increasing bearish momentum.
By combining the on-chain trader realized price and MACD, traders can gain valuable insights into Bitcoin’s price movements. This combination allows traders to identify potential downward trends with high probability and determine the best times to re-enter the market.
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