Bitcoin network momentum looks at the price and the daily value of transactions facilitated by Bitcoin’s blockchain in terms of BTC.
According to the creator of the Bitcoin Network Momentum indicator, Phillip Swift, the daily value of transactions in terms of BTC is a leading indicator regarding what cycle the market is in. Swift categorises three phases from the BTC value of daily transactions:
- Early Bear Phase (the value of daily transactions in terms of BTC drops),
- Late Bear Phase (value of daily transactions in terms of BTC rises), and
- Bull Phase (the value of daily transaction reaches a minimum value for the price to rise).
The difference between long-term holders and short-term traders can explain the cyclical patterns of daily transaction values and the price of bitcoin. Short-term traders trade on exchanges which typically transfer BTC off-chain and are responsible for short-term price discovery while long-term holders purchase bitcoin on-chain so their activity is captured by on-chain transaction data.
Price lags behind the rising daily transaction values in the 'late bear phase' since short-term traders are more sensitive to price changes and are selling, while long-term holders step in and see it as a buying opportunity.
The volume from buyers eventually stabilises the price. More and more buyers enter the market until a healthy level of the value of daily transactions is reached. Eventually market participants realise things are looking good for bitcoin and the 'bull phase' begins.
The Bitcoin Network Momentum indicator, displayed below, can be found here and shows that network momentum needs to rise significantly before highlighting a new bull cycle.
Looking at the chart of the value of daily transactions in BTC below, we see that the current value is close to 100,000 BTC (low by historical standards), which means the Late Bear Phase is yet to occur. For the price of bitcoin to enter a sustained uptrend, the value of daily transactions is required to increase first.
The healthy level of the value of daily transactions during previous bull markets was 220,000 BTC for the 2016-2017 bull run and 150,000 BTC for the 2012-2013 bull run. As more bitcoins are circulating over time, the healthy level required for a bull run has risen over time.
You can find the Bitcoin Network Momentum as a custom indicator on TradingView here.