A Glassnode on-chain indicator of Bitcoin HODLer conviction called “Reserve Risk” recently fell to its lowest-ever level, indicating that HODLer conviction is at record highs. In wake of the collapse of FTX, formerly one of the largest centralized cryptocurrency exchanges in the world, the Bitcoin Reserve Risk indicator fell to a new record low of 0.000729. It has since recovered to around to just above 0.0010.
According to Glassnode, Reserve Risk is “used to assess the confidence of long-term holders relative to the price of the native coin at any given point in time”. Reserve Risk is “a long-term cyclical oscillator that models the ratio between the current price (incentive to sell) and the conviction of long-term investors (opportunity cost of not selling)”.
The conviction of long-term investors is encapsulated in Glassnode’s “HODL Bank” index, which represents an accumulation of unspent “opportunity cost” accrued by HODLers the longer they refuse to sell. Reserve Risk is thus defined as the current Bitcoin market price divided by the HODL Bank index score.
Glassnode says that when confidence is high and the BTC price is low (meaning a low Reserve Risk score), the risk/reward of investing in Bitcoin is attractive. Meanwhile, in the converse scenario when confidence is low and the price is high (meaning a high Risk Reserve score), risk/reward is unattractive.
According to one crypto analyst who recently commentated on a number of bullish on-chain indicators, including the Risk Reserve indicator, “conviction amongst long-term Bitcoin holders doesn’t get better than this”.
What Does the Recent Risk Reserve Bounce Means For BTC Price?
In light of the recent rally in Bitcoin’s price, the Risk Reserve score has naturally risen. Historically, a bottoming of the Risk Reserve indicator after it has reached depressed levels has coincided with the start of new Bitcoin bull markets. At least, that seems to have been the case in 2020, 2019, 2015 and late 2011.
If history is anything to go by, the Risk Reserve is thus signaling that the Bitcoin price could see exponential upside in the coming few years. The Risk Reserve indicator can be added to a list of others also flashing bullish long-term buy signals.
CryptoQuant’s Profit and Loss (PnL) Index, an index constructed from three on-chain indicators relating to the profitability of the Bitcoin market, recently crossed back above its 365-Day Simple Moving Average (SMA) after a prolonged spell below it. “The CQ PnL Index has given a definitive buy signal for BTC,” CryptoQuant note, before stating that “the index crossover has implied the start of bull markets in past cycles”.
Meanwhile, as discussed in a recent article, an increasing confluence of indicators (looking at eight pricing model, network utilization, market profitability and balance of wealth signals) tracked in Glassnode’s “Recovering from a Bitcoin Bear” dashboard are suggesting that Bitcoin could be in the early stages of recovering from a bear market.
Elsewhere, analysis of Bitcoin’s longer-term market cycles also suggests that the world’s largest cryptocurrency by market capitalization might be in the beginning stages of a near-three-year bull market. According to analysis from crypto-focused Twitter account @CryptoHornHairs, Bitcoin is following exactly in the path of a roughly four-year market cycle that has been respected perfectly now for over eight years.
Additionally, a widely followed Bitcoin pricing model is telling a similar story. According to the Bitcoin Stock-to-Flow pricing model, the Bitcoin market cycle is roughly four years, with prices typically bottoming somewhere close to the middle of the four-year gap between “halvings” – the Bitcoin halving is a four-yearly phenomenon where the mining reward gets halved, thus slowing the Bitcoin inflation rate. Past price history suggests that Bitcoin’s next big surge will come after the next halving in 2024.
But First… Macro Risks
Optimism that Bitcoin has bottomed has grown significantly since the start of the year, not least amid Bitcoin’s roughly 40% price rally. But traders have a big week of macro events, many of which have the possibility of triggering short-term volatility, to navigate before declaring victory that the new bull market is here.
The Fed issues its latest policy announcement on Wednesday ahead of the ECB and BoE on Thursday, and ahead of the release of the official January US jobs report on Friday. US ISM PMI survey and JOLTs data out this week will also be worth watching, as will earnings from US tech behemoths.
Will the Fed Spoil the Bullish Party?
The main event will of course be the Fed meeting. The US central bank is widely expected to raise interest by a further 25 bps on Wednesday, taking the Federal Funds Target Range to 4.50-4.75%. A 25 bps rate hike will thus come as no surprise and shouldn’t move markets at all. What matters to markets is the outlook for interest rates.
More specifically, how many more rate hikes will there be? And how long will interest rates be held at the restrictive terminal rate? Markets seem to be taking the view that, after Wednesday’s hike, the Fed will only lift interest rates by 25 bps one more time (in March) and will then start cutting interest rates in late 2023.
That seems to be based on the bet that 1) US inflation (price and wage pressures) will continue to slump back towards the Fed’s 2.0% target and 2) the US will enter a recession later this year – meaning the Fed will have the room and desire to start cutting interest rates to support the economy.
But strategists are warning that markets are underestimating the Fed’s resolve to raise interest rates and hold them at restrictive levels for longer. According to popular pseudonymous macro-focused Twitter account The Carter, the Goldman Sachs US Financial Conditions Index (FCI) is now at its lowest level since September 2022.
The Carter thinks that, as a result, “there will be blood on February 1”, with Fed Chairman Jerome Powell to “re-tighten financial conditions by forcefully addressing rate cuts (i.e. bets on rate cuts)… head-on”. That would hit crypto hard, in the short-term at least (a possible 10% drop?).
Other strategists agree. Crypto asset management company Wave Financial’s head of treasury Nauman Sheikh commented to the crypto press that “there is a strong possibility that in the press conference, Powell will be more hawkish and re-tighten financial conditions”. “For that reason, we could see a healthy short-term correction in crypto and all risk assets,” he added.
Meanwhile, Pepperstone’s head of research Chris Weston warned that financial conditions have eased sufficiently that Fed Chair Jerome Powell might want to label the extent of easing as “unwarranted”. Weston thinks this would push risk assets like tech stocks and crypto lower.
But as noted in a recent article, Bitcoin option markets continue to show a bias toward investor positioning in anticipation of further upside in the short to medium term. Perhaps they are about to be wrong-footed.