Key Insights:
Santiment suggests monitoring average wallet gains to avoid buying market tops.
Those who bought BTC at ATH recently due to FOMO have been caught in a bull trap.
It also showed how a smart DCA strategy could increase profit margins with just one metric, MVRV.
A lower MVRV ratio indicates that markets have reached a bottom, and DCA at this stage helps avoid bull traps.
A simple analysis by Santiment revealed that despite Bitcoin making an ATH on 17 Dec 2024, the average unrealized return (sum of profit and loss) of active accounts (measured over the last 30 days) was actually minus 1.9%. This negative yield occurred when Bitcoin had rallied more than 200% this year.
This is the lowest profit level for average investors since the start of the current bull rally in the second week of October, despite BTC being near an ATH (less than a week).
It also revealed that many buyers in the current market have bought Bitcoin near the recent all-time high of $108.2k. This desperate buying, or FOMO buying, creates a bull trap for investors. The trap forces them to hold higher levels (when the market corrects) or exit with a loss.
To counter this, Santiment suggested a smart way to average your buying cost over time using a simple metric called MVRV.
Santiment suggests that since all markets are a zero-sum game in the short term, as long as Bitcoin's net average returns lie in the negative territory, we have a golden opportunity to buy BTC.
However, as opposed to the prevalent strategy of buying when the market tends to go up, Santiment suggests keeping a look at the MVRV ratio.
MVRV stands for Market Value to Realized Value, a metric used to measure the total profits and losses in any crypto, here Bitcoin, since the dawn of its existence. A high MVRV ratio means that there are many unrealized profits in the market, and it may soon witness a sell-off. Conversely, a low MVRV ratio suggests buyers have realized their profits/losses, and markets may have reached a local bottom.
A high MVRV ratio indicates the presence of a high number of short-term traders. In such times, the price tends to be a bit more volatile than its long-term average and hence, is not suitable for investment at that stage. This agrees with Santiment's suggestion to buy Bitcoin in a low MVRV ratio zone.
Dollar cost averaging at low MVRV ratio zones could not only prevent a bull trap but also helps you remain in profit regardless of market volatility and bull traps.
Fear of missing out is a mass behavior in which those who had missed a market rally earlier tend to buy at higher and higher levels to compensate for their past mistake (of missing out).
This has been typical market behavior near market highs. It is mostly an emotional reaction, and this emotional buying traps investors in a situation called a bull trap.
A bull trap is a situation in which an investor buys a crypto at a market high. When profit booking corrects the price, the investor is trapped with a high average buying price. As a result, they are either forced to hold the crypto and wait for the prices to return or are forced to sell it at a loss. Below is a typical bull trap.
Bitcoin's Nov 2021 Bull Trap (in Yellow)
CoinMarketCap
Though it is often difficult to detect a bull trap, investors and experts have been using the MVRV ratio for several seasons to identify potential zones where prices are more likely to correct.
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