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Find out how to spot the next incident
How many times have you seen Bitcoin plummet unexpectedly, just an hour or a day after purchasing a new stack? Everyone has faced this frustration, wondering, “If only I had known, I would have bought it later at a lower price.” The good news is that some indicators can help predict these declines.
While some indicators, such as the MVRV Z-score and Pi Cycle Top, help identify market highs, they do not provide information about short-term downside movements. This is where the on-chain trader’s realized price comes in.
The chain trader realized the price graphic highlights a clear pattern in Bitcoin price movements from 2018 to 2024. Whenever the price of Bitcoin falls below the price realized by the on-chain trader, 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 the price of Bitcoin approaches this line from above, it sometimes bounces up, using it as support. Conversely, when the price falls below 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 the 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 on unrealized losses, which can create selling pressure and lead to further price declines.
Traders can use the realized price as a reference point to predict potential downward movements. By closely monitoring when the price of Bitcoin crosses the realized price, traders can anticipate periods of increased selling pressure and prepare accordingly.
But the question may arise: if you know that Bitcoin will fall, when should you buy back?
First of all, it is important to understand that consistently selling at the high or consistently buying at the low is almost impossible. A trader might get lucky once, but repeating this feat consistently is unlikely; otherwise many would become very rich very quickly. However, it is possible to analyze the price structure on the on-chain realized price chart. When the price of Bitcoin stops declining and starts to show an upward trend, it indicates a potential buyback opportunity.
The moving average convergence divergence (MACD) can clearly reveal both the downtrend and the uptrend. The MACD is a tool that helps traders understand whether the price of an asset is likely to rise or fall. 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. The MACD also has red and green bars, known as a histogram, which represent the difference between the MACD line and the signal line. Green bars indicate growing bullish momentum, while red bars indicate growing bearish momentum.
By using the price realized by the on-chain trader and the MACD in tandem, traders can gain valuable insights into Bitcoin’s price movements. The combination allows traders to identify potential downtrends with high probability and anticipate the best times to re-enter the market.