When the value of this metric increases, it means more coins have started to get into profit. This leads to holders becoming more probable to sell their coins in order to harvest their gains.
At very high values of the indicator (more than 95%), the price of Bitcoin has usually approached a top as profits are realized.
On the other hand, when the metric moves down, it means more coins are entering into the red. Below certain low levels, investors may capitulate to cut their losses. However, when more than 50% of the supply is underwater, bottoms have historically formed.
The 70% level seems to have been significant historically as bulls had to defend it twice in the past two years. The first instance was shortly after the COVID crash, between May 2020 to July 2020.
The other instance was 2021’s mini-bear period between May and July. The bulls came out on top during both the periods after a while of sideways movement.
The report notes that the medium-term outlook of the price likely depends on how the market responds to the level this time. If more of the supply enters underwater, those in the red may finally capitulate.
On the other hand, a bullish reversal can bring more Bitcoin into profit and prevent these holders from selling here.
At the time of writing, Bitcoin’s price floats around $42k, up 0.5% in the last seven days. Over the past month, the crypto has lost 8% in value.
The below chart shows the trend in the price of BTC over the last five days.