Bitcoin price could be nearing bottom if these drilling analogy calculations are correct

If there is one thing virtually every cryptocurrency holder or speculator has attempted to do, it is to predict or identify the bottom of a bear market for the bitcoin price.

Given that the delta between a trough and a subsequent record high price can range from tens to hundreds of percentage points for popular cryptocurrencies, the potential benefits of building an accurate model to identify peaks and troughs are enormous.

Until recently, most models were only able to identify either the top or bottom of a market with reasonable accuracy. But Glassnode, a prominent analytics and analytics company in the chain, recently unveiled a new model to accurately identify both — with a 100% hit rate against back-tested data.

The new model, known simply as the drill method, leverages several new and existing data points to help accurately identify market extremes – providing an additional source of data for traders and speculators.

This is how it works.

Bitcoin price and Mayer multiples of 2.4

Created by prominent investor Trace Mayer, the Mayer Multiple is defined as the multiple of Bitcoin’s price over its 200-day moving average (MA) – so a current price of $50,000 and a 200-day MA of $25,000 would yield a Mayer Multiple of 2.

The Mayer Multiple has been used to indicate whether Bitcoin is in a bubble or not. By backtesting data, Trace Mayer found that a Mayer multiple of 2.4 could accurately predict the top of a bull market, while a number less than 1 indicates a bear market.

As such, many traders believe that a Mayer multiple of 2.4+ indicates that the Bitcoin price is overvalued or that buyer exhaustion is near.

Going one step further, Glassnode created a construct that tests whether the Mayer Multiple is above 2.4, in addition to several other parameters to determine the state of the Bitcoin market.

By taking the Mayer Multiple, the current price and the percentage of Bitcoin supply in profit, Glassnode was able to accurately identify whether Bitcoin is currently at the top or bottom of a market cycle.

What is the drilling method?

As an incredibly volatile asset class, cryptocurrencies like Bitcoin are known to regularly shake out speculators with survival and fair weather. But until now, there was no indicator that could measure the holder’s resistance to price volatility – a good measure of market resilience.

As part of the reportmade Glassnode the unusual connection between the resistance to Bitcoin price volatility and the measurement-while-drilling (MWD) technique – which describes how rock hardness/strength varies at different drilling depths.

Where MWD records parameters such as depth, penetration rate, rock density, porosity and more to determine drilling resistance, Glassnode’s new drilling method instead tracks the correlation between Bitcoin’s price change and the change in the percentage of supply in profit to help identify cycle extremes.

Using this method on backtested data, Glassnode identified peak (red columns) and floor points (green columns) between 2010 and 2022.

Glassnode did this by looking at points where the Mayer multiple was above 2.4 and then looking at the correlation between price and percentage of the offer in profit.

Based on the Mayer Multiple and whether the realized price (the price last time BTC was moved) was higher or lower than the market price, Glassnode found the following:

When the correlation was below 0.75 while the Mayer Multiple was above 2.4, this indicates that the market is near the top of a cycle.

When the correlation was below 0.75 and the current price is below the realized price, this indicates that the market is near the bottom of a cycle.

After applying this to Bitcoin’s market data for the last decade, the columns detected by the drilling method clearly overlap with the peaks (green columns) and troughs (red columns) of each cycle with high accuracy.

Simply put, the new technique provides an accurate measurement of market cycle extremes – with the potential to help traders better manage their risk.

What this means for the Bitcoin price

As we’ve seen time and time again, Bitcoin (and most other cryptocurrencies) are highly cyclical assets – with values ​​making new absolute highs and relative lows about every three to four years.

This is confirmed by Glassnode’s drilling method, which correctly identified the peaks in the previous four bull markets.

It also accurately identified the bottom of the interdigitating bear markets seen between 2011-2012, 2014-2015, 2018-2019 and most recently 2021-2022.

As shown in the chart above, the Bitcoin market is now squarely in bear territory. As shown in previous cycles, this period usually lasts 6-12 months.

But according to the new one preset workbenchBitcoin now appears to be at or near the bottom of this cycle — as the bear market appears to have started in mid-June 2022. Some whales have already started accumulating BTC.

Given that these conditions tend to last for 3-12 months, this would mean that the bottom could be found by June 2023, after which the market usually starts to rally towards a new price high.

This estimate is consistent with insights provided by several other bottom indicators, including the Bitcoin Rainbow Chart, the weekly RSI, and the crossover between the 50-week and 100-week moving averages – all of which indicate that the bottom is either already in or near.

Despite this pattern, it is not an exact science and it remains difficult to model exactly when the bottom is likely to occur.

Several methods have been proposed in recent years, including the popular stock-to-flow (S2F) model and Colin Talk’s Crypto Bitcoin Bull Run Index (CBBI). Nevertheless, the search for an even better predictor of the bottom continues.

Given the current unfavorable macroeconomic climate, with the FED repeatedly raising interest rates, DXY breaking records, a collapsing global stock market, the war in Ukraine and many countries seeing their GDP shrink, there is little reason to believe a bull run is imminent.

Nevertheless, the Bitcoin price is well known to trade horizontally for potentially months on end before a new bullish wave begins. Glassnode’s new indicator suggests that this will happen sooner rather than later.